2009: Watch the Baltic Dry Index

In 2009 investors will be scanning the globe for signs of economic recovery or deterioration. Among the many tools they should be watching in order to gauge the strength of global trade is the Baltic Dry Index (BDI). The Baltic Dry Index measures shipping rates for dry bulk carriers that carry commodities such as coal, iron and other ores, cocoa, grains, phosphates, fertilizers, animal feeds, etc. In short, the BDI is an excellent proxy for global trade.

In the chart below, note how the BDI peaked after the S&P 500 index did in 2007 and bottomed after the SPX last month. The BDI may not be a leading indicator, but it is an important way to confirm whether moves in global equities are being reflected in an increase in global shipping. If the BDI fails to rally in 2009, be skeptical of any rally in stocks.

For those who are interested in following stocks of some of the leading dry bulk carriers, a good place to start is with Diana Shipping (DSX), DryShips (DRYS), and Excel Maritime Carriers (EXM).

[source: StockCharts]

Comments

[Ricard:]

Does anyone know of the 10 year, 20 year, and 30 year average levels for the BDI?

2008 Dec 31 01:35 PM

[BrianSJ:]

www.imarex.com/home/bd...
There is a recently-started BDI futures. Accuracy yet to be proven I suspect but may be of interest.

2008 Dec 31 02:46 PM

[Briggsy:]

Check out SEA as a tradeworthy etf in this space.

2008 Dec 31 02:55 PM

[Short Trade...:]

The way the BDI tanked was amazing. I think that it is an excellent indicator of where the world economy is going. Obviously things don't look good for the moment.

Jan 01 06:46 AM

[long_on_oil:]

The best kept little secret in shipping is TRMD. If they pay the same dividend in 2009 they did in 2008 the current yield is over 11%. A great shipping company with fantastic management that has been in business since the 1800's.
I own TRMD and DRYS and I am going to switch my investment in drys to trmd because of the dividend and mainly the management of TRMD.
I have owned DRYS through all this volatility and after reading the recent annual report, the connection to cardiff and the way drys is being used, scares me.
The highs of DRYS are much higher than the highs of TRMD but the volumes of DRYS is what is suspicious. On the recent comback DRYS daily volumes were far greater than the outstanding shares, now something is rotten there.

I would appreciate a comment from any of you shipping experts out there, since I am a novice at investing in shipping companies (1.4% of my portfolio).

Jan 01 08:49 AM

[Zachary Sch...:]

The severe weakness in the BDI may offer strong opportunities in shipping names. But not every shipper is created equally. Some leveraged and aggressive companies have gotten hit much harder than competitors with long-term contracts and manageable debt levels.

Ironically, the aggressive players that survive (I think we will see a handfull of bankruptcies in this sector) will actually be the fastest to rebound. This is because of A) their lower current prices, and B) a more drastic change in analyst assumptions due to the business model - or leverage.

The temptation is to chase dividend yield and quite honestly dividends are an important part of owning shippers. However, due diligence is in order because many will not be able to maintain current dividend policies.

In short - the area is ripe for significant profits in 2009. However, there are a few land mines that must be avoided.

Happy New Year and best of luck to all in 2009.
Zach
zachstocks.com

Jan 01 09:47 AM

[elliot_mllr:]

For those interested in the BDI and therefore dry bulk ship owners, you might want to look at Safe Bulkers (SB), which became a public company about six months ago and is listed on the NYSE. The extraordinarily high dividend appears safe for this year but in 2010 SB has to finance newbuilds coming on stream. I believe that the high yield is aberrational and caused among other things by SB's recent entry onto the public market and lack of extensive coverage by analysts.
However, for my money (literally as well as figuratively) the highest caliber ship owner is not a dry bulker or a tanker company but a container ship owner, Sea Span Corporation (SSW). Sea Span's management ia class act and is shareholder friendly. The company has 35 vessels on the water with an average charter tenure outstanding of 7 years and the first expiration about 5 years away, . Moreover these are chartered at rates about 25% below the going TCE rates of about six months ago so the repricing on expiration should not be painful. The most recent ship, delivered in December, has a 12 year charter. In addition, Sea Span has 33 newbuilds under construction all of which are chartered for 11 or 12 years from delivery, which will occur over this year (its 2009 now) and the next two. Its charter parties are among the best lines. Two are controlled bu the Chinese government, one is a large and highly solvent Japanese line and two (Maersk and Happag-Lloyd) have each been around for 100 years or so,throughthe Great Depression and two world wars. A trust controlled by one of the insiders recently filed a 13-G indicating that it had acquired a 5.1% position in the company, which is both a vote of confidence and a smart buyer picking up shares at bargain prices. The distribution is $1.90, for a yield of about 20%, and about 80% of that is a tax deferred return of capital. The only concern is that between now and 2011 the company has to pay about $900 million for its already-chartered newbuilds, and Sea Span has said that it will not dilute the common shareholders by an equity raise this year or next. The $900 million can be raised by one or a combination of the following: borrowing against 15 vessels that are currently unencumbered, joint ventures, sales-leasebacks, funding from insiders based on shares the dividends of which are subordinate to the common shares publicly traded, etc.

Jan 01 10:46 AM

[secmaven:]

A miniscule uptick in the Baltic Dry Index has already caused an meteoric rise in the price of shipping company stocks! Dryships moved from 3 and change to over 12 in six trading days. There is a ton of hot money looking for any sign of hope in any industry no matter how meaningless that sign may be for long term prospects. It is difficult to be an investor and not merely a trader in this market.

Jan 01 12:33 PM

[einstein p ...:]

The dry bulk and oil tankers seem primed for a rebound and it could be a very sharp rebound.

Some names in dry bulk I like are PRGN, EXM, GNK, NMM, SBLK, and OCNF --- although EXM is my largest position. All of them pay very high dividends with the exception of SBLK, which cut the dividend in half recently and paid the balance in stock, and OCNF, which eliminated the dividend altogether. OCNF paid about $2.88 a year in dividends. I was tempted to sell, but didn't as OCNF had reported a terrific Q3 and was using the money to pay down debt and seek out acquisitions. If the company did not find ships to buy, they would have a lot of cash on hand which in turn would make them an attractive takeover target. With the US and China pouring trillions of dollars into infrastructure and credit starting to thaw, this may be a great opportunity for yield and growth.

FRO and NAT seem like good bets if you want exposure to oil tankers. The companies pay high dividends and are well managed. Tankers are being used to store oil. I'm of the opinion --- albeit a minority --- that oil will not remain low for very long due to a series of geopolitical events combined with stronger than anticipated demand. Althought the oil tankers are attractive at these levels and I own them cheaper, I prefer the American and Canadian oil and natural gas Trusts.

Sea Span is a terrific company and it's well priced at these levels. That said, it's my least favorite area in the shipping business. Sea Span is a container company. As such, it is much more directly leveraged to the consumer than other shipping companies and consumer discretionary spending will not rebound in 2009 --- especially if oil prices start to climb and take the rest of the commodities higher. People need food and energy more than a new pair of jeans.

Happy New Year.

Jan 01 12:54 PM

[notsosmart:]

i have done very well with FRO & NAT.price is great @ he moment. i have no connection to wallst or these co's except as a stockholder.

Jan 01 02:47 PM

[drmbowen:]

You'd be better off with GNK as your shipping sector hold. It used to lag to a very predictable degree behind DRYS, but going forward for all the obvious reasons will now run first. And, it pays a higher div than TRMD.


On Jan 01 08:49 AM long_on_oil wrote:

> The best kept little secret in shipping is TRMD. If they pay the
> same dividend in 2009 they did in 2008 the current yield is over
> 11%. A great shipping company with fantastic management that has
> been in business since the 1800's.
> I own TRMD and DRYS and I am going to switch my investment in drys
> to trmd because of the dividend and mainly the management of TRMD.
>
> I have owned DRYS through all this volatility and after reading the
> recent annual report, the connection to cardiff and the way drys
> is being used, scares me.
> The highs of DRYS are much higher than the highs of TRMD but the
> volumes of DRYS is what is suspicious. On the recent comback DRYS
> daily volumes were far greater than the outstanding shares, now something
> is rotten there.
>
> I would appreciate a comment from any of you shipping experts out
> there, since I am a novice at investing in shipping companies (1.4%
> of my portfolio).

Jan 05 01:36 PM

[Mad Hedge F...:]

Great call. If you are not a captain on a bridge somewhere, ready with orders to repel boarding pirates with fire hoses, you might be forgiven for being unaware that the Baltic Dry Shipping Index ($BDI) has gone up an unbelievable 20 days in a row. This market for bulk cargo charter rates made investors seasick last year when the near complete shutdown of international trade and a cessation of credit took the index down a mind boggling 94%, from 12,000 to 650. At that level, the market was pricing in a probability that no ship would ever sail anywhere again, and that the global fleet would permanently rust at anchor. A slow thawing of credit has drawn in some hot money that has taken the BDI back up to 3,400, a handy 560% gain in six months. It has also been matching the revival of commodity markets tick for tick. The chart below looks like crude with a turbocharger. In additional to being a favorite topic to impress friends with at dinner parties, the BDI has also become a favorite of the “green shoots” crowd as proof that the world is not going to end after all. After so many things have had great runs, there are a lot of charts that look like this now (Crude, FXI, etc.). This one is just the most extreme.

May 29 07:33 PM