Transportation indexes

It is not rocket science to work out that the ‘financial’ crisis has now spread to becoming a global economic crisis that has threatened thousands of jobs and businesses.

This is the problem that is facing stock pickers at the moment – if the problem was limited to a bit of a bit of ‘shock and awe’ as the markets tumbled, then you could feel pretty confident going in and buying some shares at what look like low price to earnings ratios and then sit back waiting for a rebound.

But what if the problem is deeper? What if all these people who are losing their jobs as the stock market shock starts to wear off?

Every time somebody loses their job, it is one more person that does not have a means to pay off any accumulated debt – be it cars, houses, credit cards or other personal debt. What looks like a good price to earnings ratio in 2008 would certainly not be applicable if clients have begun hauling in their spending and hoarding their cash going into 2009.

The reality is that economic activity has fallen off a cliff and nobody really has any idea when it is going to get restarted again.

Looking at a couple of trading boards, an interesting theory has been put forward – tracking the transportation and logistics indexes as a proxy for economic activity.

I thought I would start with the Baltic Dry Index because A) It has been in the news quite a lot recently and B) Being a Grindrod shareholder I’ve heard a lot about it in recent months:

Baltic Dry Index:
In a nutshell, the Baltic Dry Index (BDI) helps ascertain global freight rates based on demand for commodities, how much fleet supply is available to meet the demand and market sentiment for the global shipping industry.

Wikipedia simplifies it saying: “Every working day, the Baltic canvasses brokers around the world and asks how much it would cost to book various cargoes of raw materials on various routes (e.g. 100,000 tons of iron ore from San Francisco to Hong Kong, or 1,000,000 metric tons of rice from Bangkok to Tokyo)”

Local shipping company Grindrod has seen its share price absolutely decimated in recent months as many investors have tried to correlate that performance of the BDI with the anticipated earnings for the shipper.

While this isn’t exactly the case, you can see how much emphasis big firms have placed on using the BDI to track overall market sentiment.

Looking at the graph, you will see some correlation between the two.



Dow Jones Transportation Average
The Dow Jones Transportation Average (DJTA) is the oldest US index. The index includes 20 companies involved in the railroad, shipping, airline and trucking industries.

You can find the constituents here - http://www.djindexes.com/

Below I’ve printed out a graph for the last three years.

What I found interesting was that despite many consumers (retail, commercial and industrial) having slammed on breaks in the last few months, there seems to be a bit of sideways movements in both these indexes, which may indicate that a more ‘real’ level of economic activity has been found.

I am a big believer that historical data doesn’t necessarily point to what is going to happen going forward, but I think building in tools like this to review the ‘bigger picture’ might be very useful in making some investment decisions.

Anyone else using these tools or done any back-testing on this data?