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Goodness, look at the Baltic. Hope springs eternal

Globe and Mail Update

Hurrah! The Baltic Dry index finally rose – not once, not twice, but for three days in a row.

Which raises two important questions: What the heck is the Baltic Dry index? And why should you care?

The index, which is published daily by the London-based Baltic Exchange, measures the cost of shipping commodities such as iron ore, coal and grain on 26 major sea routes.

Because it rises and falls along with demand for raw materials used in industries such as steel making and construction, the index is seen as a leading indicator for the global economy. And in that regard, this week's gains offer a glimmer of hope in an ocean of otherwise dismal data.

Over the past three days, it has risen 28 points, or 4.2 per cent, rebounding from a string of 13 consecutive declines. It is still down 94 per cent from its peak last May, before the credit crisis erupted into a full-blown panic, but at least it has stopped falling, which means there may be hope for the global economy yet.

Not a lot of hope, mind you, but some.

Let the bulls out?

Shipping rates aren't the only thing rising. So is investor optimism.

According to Investors Intelligence, a U.S. research firm that tracks sentiment among investment newsletter writers, the proportion of bulls rose to 25.3 per cent last week from 23.1 per cent the week before – the first gain in four weeks.

The number of bears, meanwhile, fell to 46.2 per cent from 49.5 per cent.

Before you get too excited, remember that sentiment is a contrarian indicator. In other words, when everyone is feeling optimistic, it's usually a sign of a market top. But when people are miserable, the market may be closer to a bottom.

Considering bears still outnumber bulls by roughly a two-to-one margin, we'd say there's still plenty of pessimism out there.

I predict lots of predictions

It happens every year at this time: Analysts who have absolutely no idea where the stock market will be a year from now insist on tossing out predictions, which are almost always wildly bullish.

Take David Kostin, chief investment strategist at Goldman Sachs. As the economy stabilizes, credit markets improve and home prices bottom, he sees the S&P 500 rising to 1,100 by the end of 2009 – a 22-per-cent gain from yesterday's close of 899.24. But first, he said the index could fall to about 750 in the first quarter – down about 17 per cent from current levels.

Only slightly less bullish is Brian Belski, U.S. sector strategist at Merrill Lynch. In a report , he predicted U.S. stocks “will likely achieve double-digit percentage returns in 2009.” Based on projected dividends, he sees the S&P 500 ending 2009 at about 1,000.

But even that “could be too low, judging by market performance in other periods following recessions,” he said. “The S&P 500 typically returns about 20 per cent from an eventual price trough to the end of the recession, and generates annualized returns of 31 per cent until its eventual price peak.”

And then there's CIBC's Jeff Rubin, who yesterday cut his 2009 target on Canada's S&P/TSX composite index by 1,000 points to 11,000. Still, that's more than 27 per cent higher than yesterday's close of 8,634.

These forecasts all have one thing in common: They're essentially guesses, although they're dressed up with economics and earnings models that give them a scientific veneer.

We can say one thing with certainty about the stock market: Over long periods it rises. In the short term, however, it is an entirely unpredictable beast, no matter what the investing pundits say.

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