Futures Shock

Freight Indices Steam Toward Recovery

12/24/02 - 12:57 PM EST


To turn an old Wall Street adage on its head, money walks, ship talks. Or something similar: Economic indicators, such as freight rates, tanker rates and other transportation tariffs, are useful because they are wholly devoid of speculative content.

No one will book an ocean freighter on a hunch, and that can't be said for much of market analysis.

While macroeconomic data, as reported by the government and various industry groups, continue to paint a mixed picture at best, ocean freight rates, as represented by the Baltic Dry Freight Index, a topic visited in this column before, have been rising sharply since August. This index is available on Bloomberg as BDIY Index, or you can register at the Baltic Exchange Web site.

The Freight/Rate Spread

Bond traders always are surprised at how often their market gets it right. While the stock market is supposed to be more forward-looking, I will beg to differ. As too many of us have found out the hard way, stock investors will chase a dream past the point of silliness, but bond traders have to be more circumspect.

After all, their goals more often are current income and capital preservation as opposed to growth, and oftentimes their upside is limited simply to getting their money back.

With one notable exception, the present, note yields have done a remarkable job of leading changes in the Baltic freight index over the past decade.

The Great Note-Boat Divergence of 2002
Source: Bloomberg

The present situation, in which the freight index is shooting higher, without note yields having moved higher first, is unique. It suggests that in the absence of an external force, note yields should have been moving higher months ago. Implicit in this observation is the risk of bond yields shooting higher at the first sign of this force's demise.

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Howard L. Simons is a special academic adviser at Nasdaq Liffe Markets, a professor of finance at the Illinois Institute of Technology, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. The views expressed in this article are those of Howard Simons and not necessarily those of NQLX. As a matter of policy, NQLX disclaims the private publication of materials by its employees. While Simons cannot provide investment advice or recommendations, he invites you to send your feedback to Howard Simons.

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Futures Shock


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