I can see for miles and miles. With The Who set to tour again this summer perhaps Commerce Secretary Wilbur Ross was channeling their famous 1967 hit when he noted this morning that the U.S. and China were "miles and miles" away from a trade deal. The markets were shrugging off those comments in Thursday trading, and it is true that the friction on trade can be as difficult to parse for market analysts as the U.S government shutdown.
So, to try to measure the impacts of these exogenous factors, market participants will do three things:
- Buy and sell stocks wildly based on rumors and media reports.
- Repeat verbatim the negative comments regarding those two exogenous factors from CEOs on quarterly earnings calls.
- Actually analyze data.
If you read my column, you'll know I concentrate much more on number 3 than numbers 1 and 2. I would caution you that news flow can be very, very unreliable when it comes to non-public developments. If you are trying to trade stocks based on rumors about the shutdown or trade wars, I can only wish you good luck.
On point number 2, I can only note that having spent almost all my adult life listening to quarterly conference calls, CEOs will always look for any excuse to provide external factors relating to company performance. "This weak quarter was not our fault..it was the weather!" That one's my favorite, but there are many, many more. So any CEO blaming the shutdown or the trade friction for a weaker 2019 outlook is merely playing the expectations game, and trying to set the bar lower among analysts. As most CEOs are compensated heavily in stock of their companies, it makes sense for them to do so.
I have heard Mr. Ross speak at several shipping conferences, a sector through which he is intimately acquainted via the private equity investments of his firm W.L. Ross and Co. So he knows as well as anyone the sensitivity of that sector to global trade flows. If the trade war had impacted economic growth, it would be reflected in the market rates to ship dry cargoes, such as coal, iron ore and grains.
If you have been reading my RM columns for the last five years you know that I follow the Baltic Dry Index closely. The BDI is a terrific indicator of global economic health, and that indicator has been flashing red of late.
After hitting a one-month high of 1,406 on December 17th, the BDI has fallen steadily in the past month, and it was quoted at 982 in this afternoon's London fixing. The BDI is quite volatile owing to the nature of its subject matter -- cargoes are sent on full ships, so demand is comprehended by boatloads, not individual units -- but this move has been telling, in my opinion.
As, always, I drill down inside the headline numbers, and the difference in the Baltic sub-indices (classified by ship size) are also telling. While the Baltic Capesize Index has performed relatively well, falling "only" 22% since December 17th, the Baltic Panamax index has fallen 36% during that time period.
Capesizes are massive, with cargo capacity of at least 150,000 deadweight tons, and thus are used almost exclusively for the major bulks, coal and iron ore. China is the largest importer of both those commodities. Given their size and the fact that they cannot fit through the Panama Canal (hence the name "Capesize") Capesizes are suitable for longer journeys -- Brazil to China, for instance -- that also require longer lead times.
So, the better indicator of marginal economic demand is seen in the Panamax subsector. Like Capes, Panas carry coal and iron ore as well as grains, but their smaller size and canal-worthiness means that they are also used for shorter journeys and often on shorter notice.
So, when Panamax rates decline sharply, that shows that shipping managers -- folks at the vanguard of global trade -- are worried. While there are some seasonal factors at play in the freight markets owing to winter in the Northern Hemisphere and the imminence of the Chinese New Year (the Year of the Pig begins February 5th,) I believe the sharp move downward in the BDI, and especially the BPI, is a sign that trade between the U.S. and China trade has in fact slowed.
That's a negative not just for shipping stocks -- I am completely out of the sector at the moment, even though it is one of my favorites to trade -- but for any company that depends on U.S.-China trade. That, of course, would include the vast majority of companies in the S&P 500, so investors need to be careful here, and listen when Wilbur Ross speaks.