Shipping signals are confused

Some investors swear by the Baltic Dry Index as a leading indicator for the global economy, but the indications have been hard to interpret given all the other noise out there.

News that the Baltic Exchange’s dry index — which measures the cost of transporting coal, iron ore, gain and other raw materials — is down 36% over the last month should be shocking. In fact, if this is an accurate indication of where global industrial activity is going, we should get the bomb shelter ready.

However, people have yet to run for the exits because this closely watched index is also known for giving off a lot of short-term noise. Or as the big bank analysts put it, “the drivers are rarely clear-cut.”

What we know:

* Demand for some shipping vessels has slowed down due to conflicting strategies in the steel industry and trouble in Vale’s (VALE) iron ore shipping network. These are short-term factors, not a secular trend.

* Supply of new shipping vessels has increased dramatically. Big ships are coming online and biting into the whole pricing equation for established fleet operators. These are industry factors and have nothing to do with commodity demand or pricing.

* Fleets are being run more efficiently. The number of idle vessels out there is down 11% over the last month, which indicates each ship is making more runs, multiplying its effective ability to meet overall market demand. Again, this is meaningful to the index but not its predictive ability.

* Sentiment has been gloomy in the face of the euro crisis and question marks about China.

What we still do not know boils down to whether that gloomy sentiment has spilled over into a real commodity buyers’ strike. If so, then yes, the index is flashing a bright red signal. But without firmer visibility into the fundamental trend behind the noise, the index just is not going to give us much help.

Until then, we have to rely on other metrics to tell us when commodities look like a buy and, once we know where commodities are headed, whether to buy into the shipping companies — and if so, which ones. SEA, the shipping ETF, is your one-stop portfolio here. Look at that recent spike: