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The Baltic Dry Index (BDI) Is Breaking Down To New Lows

July 28th, 2014

shippingMichael Lombardi: Earlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)

Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.

We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.

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At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.

But there are two blatant threats to companies in the key stock indices and the profits they generate.

First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more negative quarter of GDP for the U.S., and we are in a technical recession. We’re already halfway there!

If the U.S. economy does not improve, companies on key stock indices will have troubles selling their goods and services, and their corporate earnings will suffer. It is that simple.

Next, the global economy is in trouble here in 2014. The Baltic Dry Index (BDI) is breaking down to new lows. The BDI suggests demand in the global economy is reaching multiyear lows—since the beginning of the year, the BDI is down 65%.

Baltic Dry Index Chart

Chart courtesy of www.StockCharts.com

An economic slowdown in the global economy affects the corporate earnings of companies in the key stock indices because they earn a massive amount of their revenues from overseas.

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NYSE:DIA, NYSE:SPY


 

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