Baltic Dry Index Signaling a Market Bottom?

The stock market is forward looking; hence we hit the 741 level on the S&P in late November, anticipating the dismal economic numbers ranging from retail sales, jobless claims, the ISM, and GDP slowing. However, ahead of the market is the Baltic Dry Index, which is closely tied to global economic activity and was falling rapidly much before the market began to sell-off last summer. This was the indication that forced me to begin selling calls on highly valued stocks and buying puts on many of the Industrial and Commodity related names.

The group most closely tied to the performance of the Baltic Dry Index are the Dry-Shipping stocks (SEA is a new ETF for this group). Some of the main components include DryShips (DRYS), TBS International (TBSI), Eagle Bulk (EGLE), Genco Shipping (GNK), Diana Shipping (DSX), Kirby Corp (KEX), Navios Maritime (NM), Excel Maritime (EXM), and Safe Bulkers (SB). This group sold off sharper than any other group with moves never seen before, like DryShips (DRYS) falling from highs of $110 in May to a $3 price tag in November.

Reasons for the massive liquidation in these names can be tied to global economic slowdowns (less demand for shipping), frozen credit markets (industry requires heavy doses of financing for high fixed cost ships), and the bubble bursting in the commodity space. The rapid liquidation of these shippers had many of these stocks trading at less than 3x next year’s earnings (although uncertain, still an unrealistic valuation), while maintaining gross margin rates of greater than 85%. Unless the world was coming to an end, there was no reason to place this type of discount on these shares.

Now credit markets are thawing and alleviating major concerns with many of these names, and economic recovery is seen to happen in late 2009 or early 2010, depending to whom you talk, but once again, the markets are forward looking and this group was the first to bottom.

As these stocks bottomed a technical reversal pattern emerged on the majority of these names, an inverse head and shoulders. While the pattern has now developed on these names, many are just now breaking through the neckline, a technical buy signal, and although some of these have rallied more than 150% off the lows, they are still far from a fair valuation, and great gains can still be reaped.

Disclosure: no positions

Comments

[Dag:]

If you look into the balance sheet of these companies especially the debt side you will see that there is no equity nleft. Prices for dry bulk vessels have collapsed lately and are now in the range of $25-35m per ship versus $150m we saw this summer. Using these latest transaction prices to value the ships and subtracting the debt there is negative equity for DRYS, GNK and EGLE

Also the "e" in p/e '09 x3 is very uncertain, most drybulk names will say that their fleet is on contract and have contract coverage of i.e. 90% for 2009 hence earnings should be stable. BUT drybulk names are going belly up every day (Armanda Shipping today) due their contracts are broken. I wouldn't buy any of these names given the uncertainty and economic outlook in 2009, last time we saw a bear market in shipping it lasted 8 years.

Jan 06 10:04 AM

[Jonas:]

Drybulk is going up. All major companies had stock of raw materials for at least 6 months, witch they bought at a very high price. All these companies are liquidating their stocks and stopped buying raw materials. These stock are becoming depleted! Raw materials are going up like a rocket pretty soon! As raw materials are low, and the horizon is in sight, companies are beginning to place new orders, withc will max up within 1 or 2 months. If you have the possibilety to look into warehouses, you'll see a big difference with last summer.

PS: Armanda Shipping leased their ships, and had contracts running without demand. They did not have any ships of their own, and could not get credit without activa.

Jan 06 11:32 AM

[Ricard:]

I second Richard Collins's comment. EXM just paid a .40 dividend in December, so they haven't discontinued it yet. Trading at nearly half tangible book. Bought this one nearly a month ago. Wish I bought it at $3.

Jan 06 12:38 PM

[Ricard:]

BS Detector,

Have YOU done any research into these companies? My "couch potato" "lazy bastard" radar just went off there.


On Jan 06 09:09 AM BS Detector wrote:

> Inverse head and shoulders, eh? I call it a "Fat Bastard Turtle
> Head."
>
> Have you done any research into any of these companies, such that
> you might find any of them to be any better than any other? Or are
> you one of these witch doctors who doesn't believe looking beyond
> the chart can yield additional useful information?

Jan 06 12:39 PM

[Vox Rationalis:]

Ricard -

I'm not the one who wrote an article basically saying that ALL dry bulk shippers are going up because of the orientation of the moon and Venus in the seventh house.

Anyway, the answer to your question is - a little. I decided that the sector deserved a flyer and I have a position in SBLK, because it was in relatively good financial shape and it was not very much higher priced that EXM, which has significantly more debt. While trailing PE is of questionable value generally and very little value in the current economy, in the dry bulk shippers it means nothing at all. What matters is survivability. Some of these companies are not going to make it, and the survivors are going to be in good shape in a smaller market. So financials are quite important here than.

Naturally, SBLK has been hit like everybody else, and because it also last quarter paid out a dividend (which I don't like), its cash position isn't as strong as I would like. However, its debt burden is smaller than most if not all of its competitors, it has pretty high contracted utilization, and it will have very good cash flow last quarter and into 2009.

Naturally, it's been outperformed by... just about everybody. Sigh - such is life.

Jan 06 01:56 PM

[auto44:]

I doubt anything will be going up like a rocket anytime soon.


On Jan 06 11:32 AM Jonas wrote:

> Drybulk is going up. All major companies had stock of raw materials
> for at least 6 months, witch they bought at a very high price. All
> these companies are liquidating their stocks and stopped buying raw
> materials. These stock are becoming depleted! Raw materials are going
> up like a rocket pretty soon! As raw materials are low, and the horizon
> is in sight, companies are beginning to place new orders, withc will
> max up within 1 or 2 months. If you have the possibilety to look
> into warehouses, you'll see a big difference with last summer. <br/>
>
> PS: Armanda Shipping leased their ships, and had contracts running
> without demand. They did not have any ships of their own, and could
> not get credit without activa.

Jan 06 04:09 PM

[auto44:]

You strike me as a very smart person. Would like to see you ease up a little with the angry sarcasm. Thanks though for your insights.


On Jan 06 01:56 PM BS Detector wrote:

> Ricard -
>
> I'm not the one who wrote an article basically saying that ALL dry
> bulk shippers are going up because of the orientation of the moon
> and Venus in the seventh house.
>
> Anyway, the answer to your question is - a little. I decided that
> the sector deserved a flyer and I have a position in SBLK, because
> it was in relatively good financial shape and it was not very much
> higher priced that EXM, which has significantly more debt. While
> trailing PE is of questionable value generally and very little value
> in the current economy, in the dry bulk shippers it means nothing
> at all. What matters is survivability. Some of these companies are
> not going to make it, and the survivors are going to be in good shape
> in a smaller market. So financials are quite important here than.
>
>
> Naturally, SBLK has been hit like everybody else, and because it
> also last quarter paid out a dividend (which I don't like), its cash
> position isn't as strong as I would like. However, its debt burden
> is smaller than most if not all of its competitors, it has pretty
> high contracted utilization, and it will have very good cash flow
> last quarter and into 2009.
>
> Naturally, it's been outperformed by... just about everybody. Sigh
> - such is life.

Jan 06 04:15 PM

[hammondholt:]

I bought EXM when it was 5 and traded, but sold too early. Bought after Karen Finerman mentioned it as an "interesting" valuation, with a good div.

I'm watching the dry (and wet) shippers -- I agree with the oversold and no one will stop eating or using oil premise; there are some interesting articles about oil companies renting VLCC and ULCC and parking oil off-shore until oil prices rise -- the one's I like are hitting their resistance. But Knightsbridge and GMR, FRO I am looking at, but haven't bit yet.

So as a trade, I wait to see if they break thru or bounce back. Haven't done all the research today on these names to make a good call. But now that 920S&P is support, and Obamamania is a forward looking phenom, I'm thinking they'll push upwards. But it's only partial technical and partial tea-leaves on my part.

Jan 06 05:40 PM

[evsteve:]

Hmmmm... I wonder what exposure any of these companies have to Armada Shipping... if you don't know who the hell Armada is, then you shouldn't even be investing in these stocks. Furthermore if you are not aware of the disastrously oversupplied condition of the dry bulk market, then you are clueless to he fundamentals. DRYS will die, and probably EXM, EGLE, and probably NM will too. It's only a matter of time.

Jan 06 07:40 PM

[Ricard:]

LOL, fair enough...good luck with SBLK. Thanks for your point of view.


On Jan 06 01:56 PM BS Detector wrote:

> Ricard -
>
> I'm not the one who wrote an article basically saying that ALL dry
> bulk shippers are going up because of the orientation of the moon
> and Venus in the seventh house.
>
> Anyway, the answer to your question is - a little. I decided that
> the sector deserved a flyer and I have a position in SBLK, because
> it was in relatively good financial shape and it was not very much
> higher priced that EXM, which has significantly more debt. While
> trailing PE is of questionable value generally and very little value
> in the current economy, in the dry bulk shippers it means nothing
> at all. What matters is survivability. Some of these companies
> are not going to make it, and the survivors are going to be in good
> shape in a smaller market. So financials are quite important here
> than.
>
> Naturally, SBLK has been hit like everybody else, and because it
> also last quarter paid out a dividend (which I don't like), its cash
> position isn't as strong as I would like. However, its debt burden
> is smaller than most if not all of its competitors, it has pretty
> high contracted utilization, and it will have very good cash flow
> last quarter and into 2009.
>
> Naturally, it's been outperformed by... just about everybody. Sigh
> - such is life.

Jan 06 11:40 PM

[Joe Kunkle:]

BS Detector

As for my witch doctor ways, well they resulted in nearly 400% gains in 2008, how did the fundamental techniques work out for you?

And, TBSI is my favorite of the group (GNK as well), but I've already stolen 800% gains in the call options, so I am trimming back

Jan 07 08:27 AM

[Joe Kunkle:]

BS Detector

As for my witch doctor ways, well they resulted in nearly 400% gains in 2008, how did the fundamental techniques work out for you?

And, TBSI is my favorite of the group (GNK as well), but I've already stolen 800% gains in the call options, so I am trimming back

Jan 07 08:28 AM

[Dag:]

Agree dry bulk stocks looks oversold but for a reason, in tow years time the dry bulk fleet will double (no one know how big cancelations will be) which will continue to put pressure on the rates. Key is to see what the values of the ships are; today a capesize vessel built in 1997 was sold for $27m. Using this price tag for the dry bulk fleets of GNK, EGLE and DRYS will put equity in negative territory. Agree dry bulk stocks looks oversold but for a reason, in tow years time the dry bulk fleet will double (no one know how big cancelations will be) which will continue to put pressure on the rates. Key is to see what the values of the ships are, today a capsize vessel built in 1997 was sold for $27m. Using this price tag for the dry bulk fleets of GNK, EGLE and DRYS will put equity in negative territory.

Correct Armanda shipping leased their vessels from other operators such as DRYS at rates around $40k/day, but now they will have to be re-chartered at current rates ($10k) which will slash earnings massively.

Jan 07 09:36 AM

[Chris B:]

The dry bulk shipping industry will rise or fall based on the Baltic Dry Index. That's the bottom line and anybody telling you that they will rise or fall for any other reason has the burden of proof on them. Let's see a regression equation comparing the correlation of prices over the past 6 months with the BDI versus before-the-fact technical analysis predictions.

Jan 07 11:33 AM

[Vox Rationalis:]

"...in tow years time the dry bulk fleet will double (no one know how big cancelations will be) which will continue to put pressure on the rates..."

Don't think so. The economic incentives for entering this market are greatly reduced, capacity scrapped in October alone was greater than for the previous two years combined, and companies are walking away left and right from contracts to buy and build new ships (e.g. DRYS, NM).

"Key is to see what the values of the ships are; today a capesize vessel built in 1997 was sold for $27m."

This is an extraordinarily thin market, understandably distressed, with very few "comps" to try to determine a market price. I would no sooner assume a single sale is representative than assume a house is worth no more than what the foreclosure next door sold for.

Jan 07 12:17 PM

[Caltorguy:]

If some of these companies do go bankrupt, it will pay to own some of the ones that are able to stay afloat (haha!) since there will be a capacity squeeze when global trade invariably picks up again. I own a bit of DSX, and their balance sheet appears okay, and they have also suspended their dividend just to be safe. Unless we see a Great Depression type collapse in trade (which was exacerbated by protectionism), trade and shipping will come back in a big way by 2010.

Jan 07 12:33 PM

[Vox Rationalis:]

> As for my witch doctor ways, well they resulted in nearly 400% gains
> in 2008, how did the fundamental techniques work out for you?

I think that means "yes, I'm a witch doctor, and I've got a voodoo doll with your name on it."

> And, TBSI is my favorite of the group (GNK as well), but I've already
> stolen 800% gains in the call options, so I am trimming back"

Why is this one your favorite? Did it exhibit a voluptuous curves pattern?

Jan 07 03:31 PM

[Ray Lopez:]

Baloney. November 4th the SEA index was higher than today (January 7). Too early to call a bottom in the Baltic Dry Index.

Jan 07 04:44 PM

[Ryan Freund:]

LJ24 said:

"BS Detector
As for my witch doctor ways, well they resulted in nearly 400% gains in 2008, how did the fundamental techniques work out for you?
And, TBSI is my favorite of the group (GNK as well), but I've already stolen 800% gains in the call options, so I am trimming back"

I hope that lasts for ya LJ24, but something tells me you're gonna get burned very badly at some point in the near future.

Jan 07 05:15 PM

[patio:]

Well, now they are even more "oversold"...


On Jan 06 01:56 PM zeronimo wrote:

> Shipping industry/sector is bullish. Stocks in this group are cheap
> and oversold and people are jumping to buy.
>
> Track and research the shipping stocsk here:
> www.synergeticstocks.c...
>
>
> Read related article here:
> www.synergeticstocks.c...

Jan 07 05:23 PM

[poor&unempl...:]

BDI will make all time high by end of 2009, I will be billionaire and media will compare me to Warren.

If not life will go on for this poor and unemployed!

Jan 07 09:33 PM

[User 265729:]

Wow Joe... Should have waited a day to publish this one! But that's the nature of this economy. I'll bet you Paulson was doubled over laughing today with his buddies thinking about how dumb the American public is. Paulson must be thinking that ther's ten suckers born every minute and they all watch CNBC, CNN Money, ABC, NBC, CBS and Bloomberg. Soon we'll be able to buy stocks in HYPE -- that's the only index that will be up for the next 10 years.

Wake me up when the Baltic Dry gets near the break-even point of 3,000 then we'll talk. MAYBE we'll talk -- if the rise isn't due to inflation or a spike in oil prices...

Jan 07 11:05 PM

[sr9web:]

DSX

Less debt
More charters
Less spot
Great MGMT


On Jan 06 09:09 AM BS Detector wrote:

> Inverse head and shoulders, eh? I call it a "Fat Bastard Turtle Head."
>
>
> Have you done any research into any of these companies, such that
> you might find any of them to be any better than any other? Or are
> you one of these witch doctors who doesn't believe looking beyond
> the chart can yield additional useful information?

Jan 08 01:54 AM

[bones33:]

Too bad the dry bulkers aren't hauling BS.

Jan 08 02:08 AM

[David White:]

The Baltic Dry Index was up again today. DRYS regained most of what it lost in the retracement yesterday. EXM looks like it should do well if the BDI keeps going up as expected. Apparently the credit easing is helping the people buying the shipments. Also the iron miners should have new iron ore price agreements with the Chinese, Japanese, and Korean manufacturers soon. This should mean the shipping business should increase shortly. The iron ore prices this year are expected to be about 40% less than last year's price agreements. No wonder the Chinese have been holding off buying iron ore (i.e. at last year's prices). They will be buying more coal too (as it is used in making steel) once they ramp up on the iron ore. Keep in mind that the Chinese stimulus package had a lot of infrastucture money in it. Plus they still have to be working on rebuilding from last year's major earthquake. This should all benefit shipping.

Jan 08 10:44 AM

[David White:]

EXM has 4 cpaesize vessels to DRYS 5. However, EXM has 14 Kamsarmax vessels (about 82,000 dwt), while DRYS has none. EXM has 21 panamax (about 65,000 dwt) to DRYS 31 panamax vessels. EXM should be in a better position to capture a greater portion of the iron ore, etc. trade. This would be especially true of bauxite, as the Kamsarmax is the biggest ship that can load at the biggest bauxite port in the world, port Kamsar in Equatorial Guinea. This aside, these Kansarmax vessels shoudl also be appealing to the Chinese as they are bigger than Panamax. Therefore they cut down on port fees and port congestion. These are very significant factors in the over crowded Chinese ports. They are likely to become even more significant as the world pulls out of recession. EXM is well positioned to benefit from China Dry Bulk trade. In fact Robert Maltbie wrote an article that recently appeared on MarketWatch touting EXM as one of the likely huge upside winners in the January 2009 Obama stimulus led rally.

Jan 08 11:05 AM

[David White:]

I should have added that China's iron ore and coal supplies have naturally been dwindling since they have obviously been waiting for the new iron ore price agreement. China should have to do more shipping in the near term, even without this new agreement in place, although it is expected to be soon. Certainly there will be a spike in activity once the new iron ore agreements are reached. This all means that the Baltic Dry Index should rise over the near term. This should be tremendously beneficial for shipping stocks.

Jan 08 11:11 AM

[David White:]

I should also have pointed out that the Capesize sub index in the Baltic Dry Indices has been the sub index that has been rising most quickly recently. This is yet another reason EXM do well in the shipping industry going forward. No one is going to catch them in size quickly with the credit market in the state it is in. EXM's 2-3 year outlook appears better than any other shipper in the large ship market. I have cited the large ship comparisons below (from Yahoo Finance Profiles).

EXM: 4 Capesize, 14 Kamsarmax, 21 Panamax
DRYS: 5 Capesize, 31 Panamax
GNK: 5 Capesize, 6 Panamax
DSX: 13 Panamax
SB: 11 of a combination of Kamsarmax, Panamax, Post-Panamax
SBLK: 3 Capesize, 1 Panamax
NM: 1 Capesize, 5 Panamax
ESEA: 3 Panamax
TBSI: 0

I hope this is helpful information.

Jan 08 11:43 AM

[Vox Rationalis:]

For the record, SBLK now has 4 capesize, no panamax.

Jan 08 02:04 PM

[Dag:]

Prices on ships do differ but these ships have the same measurement etc so failry easy to compare. Prices on cape size vessels seems to be ranging $30-35m compared to +$150 7 months ago. So if you borrowed money to buy or order ships at $100-150m with rates at 100k/day vs today 10k and operators are going bust is not to hard to understand that companies with high leverage are in trouble since they can neither sell or or re-chart without bigg losses.


On Jan 07 12:17 PM BS Detector wrote:

> "...in tow years time the dry bulk fleet will double (no one know
> how big cancelations will be) which will continue to put pressure
> on the rates..."
>
> Don't think so. The economic incentives for entering this market
> are greatly reduced, capacity scrapped in October alone was greater
> than for the previous two years combined, and companies are walking
> away left and right from contracts to buy and build new ships (e.g.
> DRYS, NM).
>
> "Key is to see what the values of the ships are; today a capesize
> vessel built in 1997 was sold for $27m."
>
> This is an extraordinarily thin market, understandably distressed,
> with very few "comps" to try to determine a market price. I would
> no sooner assume a single sale is representative than assume a house
> is worth no more than what the foreclosure next door sold for.

Jan 10 01:06 PM