Tuesday, March 20, 2012

Mean Reversion Pair Trade: Baltic Dry vs Brent

We've mentioned on a couple occasions that we don't put much stock in Mr. Gartman's equity calls (see, for example, the performance of the Horizons AlphaPro Gartman Fund). It's a different story in commodities where he exhibits what computer modelers call 'forecasting skill'.

From the Wall Street Journal Europe's The Source blog:

Brent, BDI, Remain Unreconciled
The Baltic Dry Index gained infamy back in 2008.

As financial crisis rampaged out of the dealing rooms to savage the real economy, this indicator of bulk shipping rates and, some say, global growth prospects, leaped off a cliff. On the May 20, 2008, the index was at 11,793 points, the highest level since its birth in 1985. By Dec. 5 it had collapsed 94%, to 663.

Shipping was suddenly big, grim news, and market analysts who’d never been closer to seafaring than a cruise round the Mediterranean started talking like old salts.

Now, however, investment writer Dennis Gartman is getting a little worried about the BDI for another reason. He points to its long, positive link with the price of oil. From 2006 to the middle of 2008, he wrote, the BDI and Brent crude were almost perfectly correlated, as they were again from July 2008 and into 2010.

However, what we have seen more recently is ‘the great divorce.’ Brent has continued to rally, moving to $90, and then $100, and then $125 a barrel, while the BDI fell to new lows, falling below 1000 in recent weeks....MORE