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Are Analysts Being Fooled By The Data?

by: Cam Hui October 13, 2008 | about stocks: BNPQY.PK / C    
Cam Hui

Cam Hui

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The Baltic Dry Index has been falling for the past three months, and has been in free fall for the last month. I had originally interpreted that as slackening world demand, particularly by China,  indicating a worldwide economic slowdown.

Now a report from Naked Capitalism suggests that shipping volumes have seized up because of the financial crisis:

I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet.

He says if he takes his BNP Paribas (BNPQY.PK) letter of credit to Citi (C) today for short term funding for his vessels, they won't give it to him. That means he can't ship goods, which means that within the next 2 weeks, physical shortages of commodities begin to show up.


Readjust growth expectations?

If this condition of inability to ship because of problems within the inter-bank credit market is widespread, then we have a case of analysts getting fooled by the data. The steps taken by the authorities to ease these conditions could then spark an enormous rally in the markets, in equities and especially in commodities.

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This article has 7 comments:

  •  
    Oct 13 07:06 AM
    Citi would give him the credit I bet you. Citi wants the Economy to move too. This stand still helps no one.
    Reply
  •  
    Oct 13 10:26 AM
    Cam:
    Excellent point you raised. I do believe it's the freezeup in credit and NOT decreased demand for goods that has pounded the BDI. Just look at today's release of the latest surplus numbers from China. The September trade surplus widened to a record balance. Would this be happening if China's economy was grinding to a halt? I think not. The idiots today were projecting that China's GDP would slide to 4% growth in 2009. This is an absolutely preposterous number that is competely offbase and without any substance to back it up. If that were allowed to occur there would be massive civil unrest and disturbances. The powers-to-be in Beijing would simply not permit it to happen. Major economic stimulus measures are already underway coming out of the Olympics. China will grow at 10% this year and slightly less (9.5%) next year.

    Yank
    Reply
  •  
    Oct 13 07:35 PM
    Cam,

    Respectfully - why would a ship owner get involved with shippers problems of letter of credit.

    Owner leases (charters) his ship to carry cargo. He collects freight for the cargo, either daily basis (time charter) or per tonne basis (voyage charter).

    Owner spends his cashflow to pay the bank (mortgage) pay the operating expenses (including crew wages) and fuel, if vessel is leased on voyage charter.

    Shipper - ships the goods and the receiver receives the goods. So the payment for the goods are not ship owners responsibility.

    May be I am missing something.

    Reply
  •  
    Oct 14 04:23 PM
    Shipping relies heavily on the availability of credit to remain healthy. Demand for goods is part of the equation, but its the credit markets that have hammered the BDI so much over the past few months. The consumer part of the equation is coming, but likely not here yet.
    Reply
  •  
    Oct 14 08:54 PM
    Don't believe all of the rumors you read in blogs...

    whoever wrote that line "I heard from a friend who heard from his father"... understands Letters of Credit as much as Sarah Palin understands Fannie Mae...

    A Letter of Credit is, in it's most simple explanation, an escrow account for international transactions so that money isn't released until an order is fulfilled correctly. Banks would always accept them because it means money will be deposited in their accounts.

    If this guy is talking about short term funding for his vessels, he is probably referring to his "Line of Credit" from the bank... which is completely different.

    If the line of credit is what they are talking about then the Baltic Dry index is actually more of an indicator than you think... if he can't sail, there is less capacity and shipping costs should go up... but that isn't happening.

    Yank... if you can't trust the US gov't statistics (which you shouldn't), why do you believe you can trust the Chinese gov'ts economic statistics? The very fact that China is doing a major economic stimulus proves that they are not hitting the 10% GDP number... which are you going to believe, government statistics or your eyes?
    Reply
  •  
    Oct 15 10:04 AM
    Do you suppose that the ship owner dips into his pocket to pay cash for the millions of dollars in fuel for the ship or might a short-term loan to pay for the fuel until revenue is received for the shipment result in a higher ROI? I suspect that short term loans are used to pay for both fuel and insurance expenses, and possibly payments on the ship itself. Otherwise ship owners would face crippling gaps of several months between revenue receipts and have to keep a lot of cash idle on their balance sheets in order to pay bills. Construction companies operate in the same way - even using loans to make payroll since it can be years before a project's full revenue is received, but costs are due daily.

    One might think this is a counterargument to the author's point. After all, if this critical financing becomes unavailable, wouldn't we expect to see much of the supply of ships idled as the owners are unable to borrow in order to buy fuel, insurance, etc? This reduced supply would raise, not lower prices, right?

    If shipping rates are falling, one the following must be true:

    1) demand for shipping is falling.
    2) shipping supply is increasing.
    3) there was or is an inefficiency in pricing.
    4) shippers have cut their prices due to reduced real or anticipated input costs (oil).
    Reply
  •  
    Oct 25 02:37 PM
    BNP Paribas is one of the strongest banks in Europe. See www.delit-d-initie.com...
    Reply
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