After a thrilling two-week rally in the stock market during
early September, shippers began to fall. They had been enjoying a
nice rally on the general premise of economic recovery, market
stabilization, and rising materials prices. But suddenly on
September 17th, the shipper sector broke, and leading names fell -
plummeted, actually, at a much faster rate than the modest pullback
in the general market would have implied.
With shippers today generally on the rise again, it is
worthwhile to look at the reasons for the
mid September breakdown.
What was the number one reason? I would have to say it was the
Baltic Index, which quantifies the prices shippers get for new
contracts. It had stabilized at near 2400 in early September, and
then began a robust rise, only to suddenly stop short. It began
falling, slowly at first, then accelerating. By the 17th it was
clear that the BDI was tanking, and the shippers as a group
followed. The timing of the movements of BDI seemed to be the key.
A market advance which coincides with a BDI advance is a powerful
motivator for the depressed shipping stocks. The "robust rise" of
early September triggered the sector advance. Few sectors snowball
as readily as the shippers. Within days, shippers were moving to
recent highs, but the BDI reversal stopped the process
Of course, the negative press didn't help either.
The blogs were heavily negative on the shippers, pointing to the
newly delivered ships and declaring that we need fewer ships, not
more, in current economic conditions. Finally, Navios (
) picked that moment to float a new stock offering, diluting their
stockholders. The market knows that new offerings are one of the
traditional signs of an overbought stock - in a sense, it is the
ultimate in "insider selling".
How does today's rising shipper sector compare to September
Well, the BDI is finally responding positively this time, passing
2800, rising 5 days in a row, and rising even faster than in early
September. The chart also shows an even more key fact - the BDI is
not only rising but is above its 200-day moving average; in
mid-September at the time of the shipper retreat the BDI was well
below its 200-day ma. No doubt, there is a lot of money on the
sidelines which won't come back into the market until we have a
rising BDI above its 200dma. That alone can explain a lot of the
listless behavior of the shipper stocks in the past few months, but
clearly the situation is different today. Sentiment is higher, with
positive blog stories and upgrades. The sector is riding a more
optimistic wave, and any key event could set off an upside stampede
- a large earnings beat, a raised or reinstated dividend, or an
The four stocks I am highlighting here are the key names I am
Today, Diana Shipping (
) became the first of the shippers to pull strongly above its Sept.
17 high. It was followed within minutes by Eagle Bulk Shipping (
). I note with some satisfaction that DryShips (
) is not a leader here - "satisfaction" because market karma
dictates that those names issuing the most new stock should not be
the first to benefit from a sector recovery, and indeed, that may
be the case, DRYS being held back along with FreeSeas (
), Navios Maritime Holdings (
), and others who resorted to dilution as a remedy.
TBS International (
) has an interesting chart.
See how the "stick" part of the candlesticks are long at the tops
during the mid-Sept peak? This can be visualized as a price region
in which there was heavy selling or shorting, each day forcing the
price down after initial gains. The zone from 9.50 to about 9.85
represents a region which, once traversed, can lead to increased
short-covering. TBSI has a short ratio of over 3.5, and the fuel
which is the short positions could potentially power the stock
higher very quickly - perhaps another dollar in just a couple of
days. Given continued BDI strength, I feel we could see TBSI at $11
by early next week. The options are cheap, too.
Paragon Shipping (
) is one of the best "sleeper" plays in the shipper segment.
As the leaders pull higher, we can expect to see this tiny but well
run company move up in price quickly and quietly. Yes, they are
still paying a dividend.
If you want to participate in the shipper rally, take your eyes
off DRYS, and start watching the new leaders.
Disclosure: I am long TBSI, GNK, EGLE, PRGN, and ESEA.
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