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 (NASDAQ:DRYS), TBS International (NASDAQ:TBSI), Eagle Bulk (NASDAQ:EGLE), Genco Shipping (GNK), Diana Shipping (NYSE:DSX), Kirby Corp (NYSE:KEX), Navios Maritime (NYSE:NM), Excel Maritime (NYSE:EXM), and Safe Bulkers (NYSE: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.