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BDI Points the Way Higher

|Includes: EGLE, Euroseas Ltd. (ESEA), EXM

The Baltic Dry Index is an industry index of averaged shipping rates charged by marine firms who ship bulk dry cargo.  We watch BDI because when it goes up, shippers of iron ore, coal, and other bulk dry goods are getting increasing freight rates.


Let's take a look at the chart. On the weekly chart, BDI has now completed a week by pushing above its recent peak in early March. If this were a stock, and subject to supply and demand in a normal sense, then it would be sensible to view this as a breakthrough, and with a major upside potential in store. In fact, this is exactly how a large segment of the traders in the market view the situation! My opinion is that this is idiotic. BDI breaks the rules all the time, especially with its tendency to streakiness. How does this work? BDI keeps increasing as long as there are more customers asking for bids than there are available ships of the right size. But, as soon as there are just a few more ships available than customers, the rate begins falling. Clearly, this is not a normal market commodity!

But, we want to take advantage of the miscalculations of the market. If the breakthru results in a greatly enhanced expectation of rises in the BDI, which so far seems to be the case, then it is time to pile on the subject stocks and ride them to a nice profit.

Like the buyer of an overpriced used car, the market does not like to be reminded of reality when it is in a bad mood. Reminders of reality are earnings reports, which recently have pulled stocks down instead of up, even on good earnings (E.G. EGLE). The rule is simple - buy shippers, sell before earnings, buy again on severe pullbacks. Again, it is the irrationallity of the market, expecting that this month's BDI will immediately impact this week's earnings.  Or is it "buy on rumor, sell on news"?  Who knows.  Either way, we can expect a rise before earnings, a selloff of indeterminate size, followed some time later by a buying opportunity.

On the calendar this week is earnings for TNP before market Monday, DHT before on Tuesday and PRGN after, and EXM, SB, and ESEA after market on Friday. I am holding all of these except SB and TNP. Note: as an exception, I hold some DHT June 5 calls, which I obtained at such low cost ($0.10) that I intend to hold them through earnings.


My favorite this week is ESEA. It has fine fundamentals, reduced exposure to debt, and has already declared its dividend this quarter, though a modest one. Remember to sell at least half your stake before earnings, and good luck!

by Skymist