DryShips' 1,500% Rise Looks All Wet

 | Nov 16, 2016 | 2:31 PM EST
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DryShips Inc. (DRYS)  is up 1,500% since the election -- and no, that's not a typo -- but a recent rally in the dry-bulk-shipping sector brings two thoughts to mind for me. One is courtesy of Wells Fargo Securities, which said in a note Wednesday: "The first word that comes to mind when we see this kind of performance in dry bulk/containerships: Transitory." The other thought is from that great thespian W.C. Fields: "There's one born every minute."

Frankly, this week's rally in DryShips, Euroseas (ESEA)  , Scorpio Bulkers (SALT)  and a host of dry bulk shipping names is divorced from reality. Granted, there's been a Trump-based expectation that trading activity will revive under the incoming administration (even though our president-elect has been critical about the benefits of global trade). And in general, there's been a risk-on trade that's gripped transportation, infrastructure and defense. It's also true that dry-bulk shippers had been trading at what Wells Fargo called "depression-level" depths in its research.

But what's really transpired for the stock is a bit of financial engineering that proved to be an almost-too-fortuitous bet on the president election's unexpected outcome. Through reverse stock splits, DRYS recently took its inventory of shares down from around 27 million to just 1 million now. This was followed by a short-covering episode of nearly unprecedented dimensions. Which wrought more short-covering. Which in turn wrought even more short-covering. Part of the reason for the feverishness of the stock's current short squeeze is that there simply aren't enough shares to cover the short plays.

What you can't do now is pile into the stock in the hopes of playing this conflagration while it lasts. That's because the Nasdaq halted trading in DryShips shares on Wednesday after the stock waged another 55% spike in premarket trading.

So right now, the game has been suspended -- which might be a little paternalistic on the part of market overseers, but is the best favor they can bestow upon retail investors who've clearly participated in a huge way to DryShips' run-up. (Of course, those same market overlords are also doing a big favor to the market-making firms that clearly allowed institutional clients to engage in a massive bout of the kind of naked-short plays that drive corporate honchos to bourbon.)

What's the best thing to do in these circumstances? My advice: ring-fence your portfolio from anything connected to shippers.

Don't try to go long DryShips, which you can't currently do anyway because the stock is halted. Remember that this game will end at some point, and the velocity of DryShips' downdraft promises to be as hysterical as its updraft has been. Also bear in mind that as recently as August, DryShips looked like a prime candidate for bankruptcy proceedings, as it's currently negotiating with creditors to avoid that worst-case scenario. That's not a pedigree that generally attracts a 1,500% rally.

Financial engineering, bankruptcy risk and an unprecedented short squeeze are just the kind of fetid pool that retail investors shouldn't swim in. Consider yourself warned.

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