Before there were dedicated 24-hour sports networks, ABC would broadcast “Wide World of Sports” every Saturday afternoon. The tagline for that show: “Spanning the globe to bring you the constant variety of sport… the thrill of victory… and the agony of defeat… the human drama of athletic competition… This is ABC’s Wide World of Sports!”, seems as if it could apply to today’s financial markets without too much editing, “Spanning the globe to bring you the constant variety of economic indicators…the thrill of finding an indicator you can believe...the agony of finding out you can’t…the human drama of trying to make sense of all of the cross currents of information…these are today’s financial markets.”
In my effort to “span the globe” in search of information indicating whether this recovery is lasting or temporary, I thought we might look at those things that span the globe. Well, span might be a bit overarching, but at least those things that criss-cross it frequently. These would be the massive container ships carrying raw materials in one direction and finished goods in the other.
One of the main indices for shipping activity is the Baltic Dry Index (BDI), the “dry” here meaning not “wet” which really means anything that is not oil. The problem is that what was a very accurate indicator of global commerce is being watered down by the supply of new ships that were ordered when it looked like the world would continue on its path to ever higher consumption.
Given the lag between order and launch, those ships are hitting the water at a time of less than peak demand. “What you’re witnessing is a huge number of ships ordered during the peak of the market in 2007-08 being delivered now due to the usual lead times involved,” was how Amrita Sen, a commodities analyst at Barclays Capital in London put it. Because of this Plamen Natzkoff, a dry bulk freight strategist at Citigroup in London, believes that the BDI “will be less responsive to shifts in demand as the oversupply of vessels becomes more pronounced.”
Interestingly, as the fog rolls in on the BDI, Genko Shipping has decided to carve out a piece of itself and offer 16.3MM shares of an entity it will call Baltic Trading (BALT) at about $15 per share. This equity is meant to mimic movements in the BDI and if the IPO is successful, BALT will use the $245MM raised to buy six big bulk carriers which will ply the planet's oceans in search of spot shipping assignments. The entity will have no debt so its shares are designed to more accurately reflect changes in global shipping rates.
To the extent that BALT will provide a lighthouse of information on the dark waters of global commerce data there is a risk that folks might not like what they see.
Shedding some of its own light on shipping, A.P. Moller Maersk AS (AMKAF.PK) recently reported its first loss since the company floated its first boat in 1904. “The loss was significant, but 2009 was an extraordinary year with historically low rates and low demand,” was how CEO Nils S. Andersen put it. Nils went on to say that he expected Maersk to turn “a modest profit” in 2010, emphasizing his view that “shipping is not a commodity” and that Maersk “wants to provide superior service based on customer needs.” These are wonderful sentiments but the BDI and BALT could make for some rough seas in convincing people of such.
There are no CDS traded on Maersk and there are no good substitutes within the CEC universe as all of the names there represent air and ground shippers. It should be noted, however, that the CEC strategy is currently long 10 of the 11 stocks in that sector with the exception of YRC Worldwide (YRCW) which is more of a story stock at this point given its brush with bankruptcy caused by outsized pension obligations.
As for shipping in general, needless to say it would be a good thing if all those ships “spanning the globe” pulled into harbors of profitability.
