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rofgile (99.10)

Baltic Dry Index now up 40% over the month. Also, 11-10-09 a bust, any more dates..?

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November 12, 2009 – Comments (4)

The Baltic Dry Index has been soaring over the last month, from a low at the end of September (2100) to over 3500 presently.  That is a pretty huge change, which is only starting to be reflecting in the stocks of Dry Bulk Shipping companies such as EGLE, PRGN, NMM, etc.  EGLE, a personal holding, rose almost 20% over this last week, but could go much higher.

The Baltic Dry Index has been called "one of the purest leading indicators".  It represents the current yearly contract rates for the dry bulk shipping vessels.  Right now, it doesn't track 1:1 with the actual rates that shipping companies are locked into, as most shipping companies get rates that are below spot rates and also have been getting shipping contracts shorter than a year.  Both of those facts, combined with an increasing BDI trend, are very positive for these companies.  With shorter contracts than a year, many shipping companies will soon be able to lock in higher priced contracts and boost their margins.  And, it suggests that the sector as a whole may have hit it's low point already.  As a leading indicator, the BDI reflects increasing global activity in demand for bulk shipping - particularly reflecting resource usage.  Dry Bulk is shipping of raw materials that can all be tossed into a huge bucket - think coal, corn, soy, rice, iron ore, aluminum.  A rising BDI could be a signal that companies like AA, X will be having higher revenues soon.

Most industrialized nations reported positive GDP growth in the 3rd quarter, so this rise in the BDI tracks well with other indicators of increasing industrial activity.  I expect this rise to continue through the 4th quarter, and begin to stall in the early spring as the recovery slows.  

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Also, Alstry's scary prediction of 11-10-09 again proved to be empty.  

My prediction: Alstry makes more vacuous date predictions for a future collapse, and doesn't admit that he was wrong when those also fail.

I hope you all aren't investing based on "Failstrynomics".  Hmm.. "Failstry"... I think that's not a bad term.  In honor of the last two failed predictions, I'm using "Failstry" in my blogs during the next month.

 -Rof out. 

4 Comments – Post Your Own

#1) On November 12, 2009 at 10:20 AM, Counterparty (< 20) wrote:

Shipping is a great sector, but you really have to cherry pick as a lot of companies in this sector have too much debt and overcapacity.

Of course the best known is DRYS, but the above mentioned issues also apply to them. On the other hand in the longer term they will benefit from venturing out into offshore drilling.

If you're looking purely at the shipping segment then you have to say that from a perspective of balance sheet, P/B and revenue growth, DSX and FREE are probably among the best sector picks.

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#2) On November 12, 2009 at 10:25 AM, brickcityman (< 20) wrote:

A note on PRGN...

 

According to earnings release they are fully booked for next year.  So I don't see how they would benefit much from rises in the baltic dry index at this point?  Surely it will help raise prices for out-years contracts, but given the tendency towards shortsightedness in the market I fear this may make PRGN appear to be an underperformer....  That is unless of course they use this period to grow their fleet, which is entirely possible if not likely.

 

Thats said I hold a position in PRGN.

 

My sense is that smaller, more "risky" players like OCNF might stand to benefit more from recent upticks since they do not have their capacity filled up yet for next year and by extension also have less of their charters filled for the outyears.

 

I hold and have recently added to a position in OCNF.

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#3) On November 12, 2009 at 10:36 AM, IIcx (< 20) wrote:

actually all shipping sectors are up today -- http://shipping.capitallink.com/ 

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#4) On November 12, 2009 at 11:28 AM, rofgile (99.10) wrote:

brickcityman:

 That's a good point, that those companies which are fully booked for the a whole year may lag behind BDI increases.  However, many of these "fully booked for a year" companies, actually have less than year contracts, and so may get positive effects sooner.

 Stock-wise, the whole sector will rise if a couple of early performers do well.  Even terrible choices like DRYS will go up if others in the sector do.

 -Rof 

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