Not Getting Better

In late July last year, not long before the stock market delivered a major “warning shot” with its sharp decline in August, we wrote about the transportation sector in Transportation Sector in Trouble – What are the Implications?. As we noted at the time, the sector seemed to send a potential “economic red alert”.

 

ghost fleetThe famous ghost fleet near Singapore

Photo credit: Richard Jones / Sinopix

 

What was at the time a long-lasting divergence between the Dow Jones Industrial and Transportation Averages, has in the meantime turned into a complete rout of transportation stocks. At the moment the Transportation Average is rebounding from severe oversold conditions, but the fact remains that this former upside leader has become a downside leader.

 

1-TRAN      After topping in late 2014, the Dow Transportation Average has suffered a sharp decline – click to enlarge.

 

In recent days we have come across a few other data points and charts in this context, some of which we show below. Yesterday Zerohedge reported on a sharp decline in orders for trucks, which jibes with what we are seeing elsewhere.

The charts below are a bit of an eclectic collection, but they are all making the same point: global trade continues to be in trouble. First two charts from China, the first one of which we have already shown in a recent Bill Bonner missive, namely the Shanghai containerized freight index (a price index).

 

2-containerized freight indexChina containerized freight index has been in a relentless downtrend last year. Lately it has been moving sideways at a low level – click to enlarge.

 

The next chart shows the China railway freight index. Apparently China’s national railway company is set to reports its first ever operating loss this year, as railway cargo volumes have collapsed 11.9% year-on-year in 2015 to a new five year low. In Q4 2015 the decline accelerated to 13.4% y/y.

 

3-railway freight index chinaChina’s railway freight index – at a five year low.

 

In the US, transportation-related data obviously don’t look quite as dire as of yet, but the trends are clearly nothing to write home about. Late last year the y/y change in truck tonnage finally turned negative after slowing down all year long from a late 2014 peak:

 

4-Truck tonnageUS truck tonnage, y/y growth rate – after a peak in late 2014, the annual rate of change has steadily slowed and finally turned negative in late 2015 – click to enlarge.

 

The CAS freight index of shipments has showed negative growth for quite a while already – and although the pace of the decline has slowed a bit lately, the y/y change rate remains in negative territory. A brief period of positive readings in 2014 has been replaced by another bout of weakness throughout last year:

 

5-CAS Freight IndexCAS Freight Index, shipments – y/y rate of change. Weak throughout last year – click to enlarge.

 

Note that for the first time in the “recovery”, the CAS freight index has failed to deliver even a single positive growth reading in 2015.

 

An Incredible Collapse

However, the by far most stunning data points continue to be delivered by the Baltic Dry Index (BDI), which has been utterly annihilated. This index shows the cost of dry bulk shipping and once reached the lofty level of 11,793 points in 2008 – in concert with the peak in oil prices. Today it stands at a mere 303 points (not a typo), down 97.5% (!).

 

distrAlang – where ships go to die

Photo via smpworld.com

 

One has to keep in mind that the BDI not only reflects the decline in trade and the weakness in commodity prices and shipments, but also an oversupply of ships. As so often happens, a great many ships were ordered right at the peak of the cycle. In short, the BDI indirectly tells us that apart from the shippers themselves, the ship-building industry is in major trouble as well. This in turn redounds on all those supplying the shipyards, such as steel producers, which in turn is bad news for iron ore producers, and so forth.

 

6-BDIThe spectacular collapse in the BDI – the RSI recently fell to just 5.16 points, which is pretty unique. The index should soon bounce again, but the fact that it has declined so dramatically certainly gives one pause – click to enlarge.

 

Conclusion

In hindsight it is clear that the “potential” economic red alert has turned into an actual red alert. Global trade remains under pressure. As Charles Dow famously reasoned, when production and transportation of goods begin to diverge, as has been evident in the growing gap between the Dow Industrial and Transportation Averages since the end of 2014, the economy as a whole will soon be in trouble.

By now most of these data points and indexes are so extremely stretched to the downside that some sort of relief bounce seem likely in several of them – as noted above, a strong rebound in transportation stocks has in fact recently begun. However, we doubt that the larger trend is going to reverse just yet. That will likely take a lot more time.

 

Charts by: StockCharts, Shanghai Shipping Exchange, wallstreet.cn.com / National Bureau of Statistics, St. Louis Federal Reserve Research

 

 

 

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