Dryships - Reality Strikes Back

What has been so interesting about this market is watching so many names run up on nothing but thesis. The lemmings have taken to oil as if it's a global thermometer - if oil is up $1 that day, then ALL of the world's trade is coming back! The market is anticipating great things in 6 months. If it's down $1 - then the complete polar opposite. Look at the past two days as a great example - complete Schizophrenia - sell everything! No - buy everything! Baltic Dry Index up 2% - all daytraders pile in! Baltic Dry Index down 1% - global growth is dead! It is amazing how this short term thinking and 1st grade logic has completely overwhelmed the market - it increases more each year - but the past 6 months have really taken the cake.

Speaking of... I've been taken aback by the "strength" in dry bulk shippers - as with many "theses" the past year+, it's a bunch of people trying to "anticipate" something that is not there. A year ago people were piling into housing stocks anticipating the eagerly awaited "spring 2008" housing recovery. Then last summer people were piling into technology stocks since "they are a safe haven and immune from slowdown". Lately, it's been Obama this, Obama that - blah blah blah.

Those are three among hundreds of "theses". That's why I use that word so much - again, the thesis does not have to be correct; as long as enough people believe it - the stocks can react. Even if the thesis is proven very wrong 6 months later.

To wit - we've been pointing out all the struggles in the shipping industry; however we have been using this little known arcane science called: facts. Facts are the complete opposite of thesis. And the problem in the stock market is you rarely make money on facts - you make money (in the short run) on thesis. Shipping rates hit zero? No problem! Nowhere to go but up! Buy dry bulk shippers! [Jan 16: UK Telegraph - Shipping Rates Hit Zero]

Investors shunning debt? No problem! The chart says I need to buy! Thesis! Nov 3: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens]

Letter of credit scarce? No problem! Doesn't fit my thesis! Buy buy buy! [Oct 31: Credit Tsunami Swamps Trade]

So that works... until facts overwhelm thesis - as they have over and over and over on all these false pretenses the past 18 months. The question is timing and risk assessment - to play the thesis game you have to be prepared to wake up and get slapped across the face one day when that ugly thing we call "facts" shows up on your doorstep. Facts such as DryShips (DRYS) suspending dividends, cancelling vessel buys and the like. But not to worry - things are fine; the Baltic Dry Index will be up 0.00004% in a day or two and this will all be forgotten. Because as you know when BDI is up 0.00004% that of course singals global growth is back! (thesis!)

• Greek bulk carrier Dryships Inc (DRYS) suspended its quarterly dividend, cancelled previous agreements to acquire vessels as it strives to cut costs and forecast fourth quarter earnings below market estimates.
• Dryships shares fell more than 22 percent to $11.21, in trading before the bell on Thursday.
• The company said lower freight rates and a frozen credit market was forcing it to reduce capital expenditures by over $1.5 billion as it set plans to dispose of three capesize newbuilds and cancel previous agreements to buy nine vessels. A Capesize is the largest type of ship that can haul dry bulk commodities like iron ore, coal and grains.
• The company forecast a net loss of $380.6 million to $431.4 million, or $6.89 to $7.81 per share, on time charter equivalent revenue of between $184.2 million to $208.7 million.

Darn facts.

Essentially DryShips is a great proxy for this market as a whole; it's levitating on "hope" and "turnaround in sight" - then reality comes and kicks it in the teeth.

2009, the year of ping pong between hope and reality.

No position

Comments

[DaveW:]

Yes We Can!

:)

Jan 23 01:38 AM

[evsteve:]

Finally somebody who is making sense! DRYS is dying steadily.. The shipping market is completely oversupplied with tonnage and will remain that way for at least another 18 months, dragging along the bottom. With billions in debt, there is no way the company can survive. The fundamentals are just not there.

Jan 23 06:53 AM

[coprophagous:]

Dry Ships needs to be put into Bankruptcy and the huge payments made to the Chairman's freinds and family be put back into Court for the benefit of the creditors and shareholders.
Thats the only hope they have as the company will soon be insolvent with no recovery in sight for the dry cargo markets.

Jan 23 11:01 AM

[notsosmart:]

those that went into dry ships get what they deserve.all the signs were there for a long time.the games played by the ceo was a warning.

Jan 23 11:22 AM

[homosapien:]

Another worthless opinion from an "expert" with no resume. His reference to shipping rates hitting zero proves that he doesn't know what he's talking about - those rates were for container ships, while dry bulk carrier rates are tracked by the BDI, which has been steadily rising. Nothing to put into a container until its manufactured, using materials which typically come from dry bulk (ore, etc.)

Ignorance is bliss, indeed.

Jan 23 12:24 PM

[Floggingthe...:]

Fact- Dry bulk is how commodities get shipped
Fact- Iron ore contracts will be renegotiated on or before April 1
Fact- China has enough ore supplies to last until March
Fact- China is in the process of renegotiating ore contracts early based on current prices
Thesis- China is has a stimulus that will work
Fact- DRYS suspends dividend and cancels ship buys to preserve available cash
Fact- Shippers in general have considerable debt, this is necessary to build a fleet
Fact- DRYS has diversity within the company with its aquisition of Ocean Rig
Fact- DRYS has roughly half of its vessels on contract, including a five year deal with RIG for the drill (ocean rig)
Fact- DRYS was one of the last shippers with a dividend to suspend, the suspension should not have been a shock

The BDI has bottomed, ore is being bought on the spot market. Dry bulk will be back, all of the shorts will be squeezed, the sheeple will be gone, and global shipping will stabilize. I doubt back to 2008 levels, but I doubt DRYS will stay $10 long either...

Jan 23 02:18 PM

[sbear:]

Fraud by the CEO makes it a lousy proxy.

Jan 23 03:16 PM

[Turnipseed:]

Fact- DRYS CEO runs company like personal fiefdom.
Fact- DRYS is highly leveraged.
Fact- Currently excess capacity until ?
Fact- Shipping rates have been extremely volatile in last few years.
Fact- Most DRYS shareholders have lost their shirt in last year.
Opinion- This looks like a very high risk/high reward investment.
Opinion- Somebody(s) with cash is going to make a killing in shipping industry by picking up cheap ships from backrupt carriers. And with low ship cost, they will be the lowest cost shipper. So even if DRYS survives, it may be at a competitive disadvantage.

Jan 23 04:04 PM

[Timmothy Posey:]

EXM is a better value play. They're not as highly levered, and they have more shipping capacity (currently above 96%) than DRYS.

The author is right, but in the end wrong. The quote about free shipping rate has nothing to do with dry shippers. Secondly, dry shipping companies are the basis for any manufacturing to occur in the U.S. or China. These raw materials will be the first to tick up in the event of a recovery.

Jan 23 06:04 PM

[william:]

sb and nm and nmm are better than drys- less debt, newer ships, contracted out ships some 90% for 09 and 68% for 10, contracts are fully insured, both have not mentioned div reduction

Jan 24 04:35 PM

[TraderMark:]

The comments about container ships vs dry bulk (input) are entertaining. Apparently the bulls thesis is, end demand is gone (container ships) but that doesnt mean inputs cannot keep benefiting. Huh?

So essentially companies that cannot sell product are buying raw material... for why again? To stock up on inventory for the coming 'recovery'?

Jan 25 08:03 PM

[Floggingthe...:]

Look, we all can split hairs, show projections, site analyst opinions, or just play devil's advocate out of boredom. Seriously though, show of hands...who thinks that the world's consumption of goods has dried up indefinitely?
Anyone?
Bueller? right..........
Things are hard for everyone everywhere, rich and poor...
Governments, companies, and single families are all in panic mode, tight lips and tighter wallets.
The world's need for goods is still there...commercial and residential...populati... still grow during recessions, maybe more so...Grandma didn't have 18 kids out on the farm because they had money to buy gadgets and toys to occupy their time. I digress...

Bottom line: Demand will return as stimuli take hold, demand will return for end products, which will increase demand for raw materials from production companies, which brings up the BDI and dry bulk profits...

Trade the volitility and speculation, then as economies stabilize find a shipper that you like and go long...buy the fear?

Jan 25 10:19 PM

[ramisle:]

The only relationship between containerships and bulk is that they are both suffering from oversupply of ships in relation to demand. 4% of Dry Bulk shipping is done in North America, the US stimulus is a non factor. 65% of Dry Bulk shipping is Coal and Iron Ore, and the finished product will not end up on Containers.
For those that say Countries will not stop shipping, you are right, in fact, they merely moderated, and yet that was enough to tip the supply and demand balance away from shippers. 2000 more ships will hit the water in the next few years, (brs-paris.com), When you hear of a ship cancellation it is either for an order for 2011, or it is a cancellation of a deal for a ship that is nearly built. The company will lose their deposit, but the ship will be finished and sold. The ship Breakers are scrapping both single-hulled tankers and older bulkers, they can only handle so many per month.
Any Bulker with debt will have to deal with loan covenants, it doesn't mean they will go bankrupt, it means they will have to raise cash, the value of their assets, (ships) is now less than 125% of the loans against them. Stock offering is dilution.
Given the amount of new ships hitting the water, it will take a lot more demand to equal the supply. The Iron Ore miners are being asked to cut the price by 40% based on LESS DEMAND, surely you don't think they will agree to it and then ship more. The Ore negotiations can drag on to this summer, the price will be retroactive to April 1, or in this case the Chinese are asking it to be retroactive to Jan 1. China is not running out of Ore, shipping goes on, including spot ore from India, which takes less ships. (short round trip) People also thought the BDI would go through the roof when the Olympics were over!

Feb 02 05:34 PM