• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / U.S. Equity

Is Sanity Returning to Shipping Rates?

Maybe we shouldn't go that far, but a dry-bulk recovery could be in the works.
By JIM COLLINS
Mar 28, 2016 | 06:00 AM EDT
Stocks quotes in this article: NM-G, SLTB

It's the stealth rally no one's talking about ... well, except for me in Real Money. Ha! Hubris aside, I cannot help but note that the Baltic Dry Index (BDI) rose again Thursday, with the headline index at 405. As I mentioned in these columns, I believed the BDI's plunge to a level of 290 on Feb. 11, the lowest reading in the measure's 31-year history, was not sustainable. Ships were trading at daily rates that were well below their daily operating costs. The BDI just could not have stayed at those levels without wiping out millions of tons of steel value.

As I mentioned in Thursday's column, that date was the recent bottom for the S&P 500, and not coincidentally marked the bottom for the freight index.

While the BDI measures the average of each day's fixing prices for the four main dry bulk ship classes (Capesize, Panamax, Supramax, Handysize) in the physical market, there are also freight derivatives, known as forward freight agreements (FFAs), that trade based on the underlying BDI index values.

So, if we go back to February, every loafer-wearing, jargon-repeating hedge fundie from Stamford to Cos Cob was predicting that China was going to exit the face of the Earth, which would bring us $20 oil and destroy the major end user of the commodities -- coal, iron ore grains -- shipped via dry bulk ships. They acted on those predictions by shorting the futures contracts underlying the commodities.

They had a good run in the first six weeks of 2016, but, man, have they been taking it in the shorts for the past six weeks. And that's what's really happened to shipping rates, oil futures and so many other commodities and commodity derivatives ... and what spurred the bounce-back in the S&P 500. "Paper" short trades have been covered and commodity derivative prices have been allowed to rise to levels that more accurately reflect the economic cost to produce them.

Supporting data for my "removal of shorting hedgies" theory comes from Bloomberg (quoting eVestment) and its report Wednesday that hedge fund flows dropped 80% in February. Ouch! February is typically a month of inflows for hedge funds, but last month's paltry $4.4 billion inflow paled in comparison to the $22.6 billion average for February 2010-15.

So, with speculative pressure removed, the freight rates could return to normal levels ... but we're not there yet. At Wednesday's cash fixing levels, Capesize rates ($2,005 per day) are well below daily operating expenses, and Panamax rates ($3,673/day) are as well, by my figuring, with the smaller Supramax boats ($4,897/day) just getting near a break-even daily level.

So, as I mentioned in my first 2016 column on dry bulk, it continues to make no sense that a Capesize -- which can hold 180,000 deadweight tons -- would trade at a 60% discount to a Supramax that holds about 60% less cargo.

It's a dislocated market, and until it returns to normal I'm looking to get into the dry bulk space for a mean reversion trade.

The Series G preferreds of Navios Maritime Holdings (NM-G) have performed well since I named them my Real Money top pick, and it's nice to be on the leaderboard with some of the great RM stock pickers.

In addition, I have been adding to my exposure to shipping this week with another fixed-income name. I've been buying Scorpio Bulkers' exchange-traded 2019 7.5% Senior Notes (SLTB) for my clients' portfolios. Scorpio is more leveraged to a dry-bulk recovery than even industry titan Navios is, and Scorpio management has made all the right moves -- selling old ships, canceling and delaying several new builds and even raising $63 million in a common equity offering that priced March 17.

I love to be senior in the capital structure (notes vs. preferreds) and I love the fact that Scorpio has been taking all the necessary steps to increase liquidity and thereby improve creditworthiness of the SLTB notes, which currently yield 12.5%.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Collins was long NM-G and SLTB, although positions may change at any time.

TAGS: Investing | U.S. Equity

More from U.S. Equity

Stock Market Continues to Defy Conventional Wisdom

James "Rev Shark" DePorre
Jan 22, 2021 5:04 PM EST

Concerns about the action being overheated remain, but rotational action keeps the momentum going.

Jim Cramer: 3 Big Takeaways for Investors From Bank Earnings Calls

Jim Cramer
Jan 19, 2021 7:00 AM EST

The consumer continues to de-leverage at an extraordinary pace -- and the ramifications of this are extraordinary.

Wednesday's Woe, Biden's Plan, U.S. Dollar, J&J Vaccine, Trading Intel

Stephen Guilfoyle
Jan 14, 2021 7:22 AM EST

We are going to live again. You will dance in the aisle at some concert whose performer I have never heard of, and you will cheer for your favorite team in person again.

Federal Realty: Undervalued Dividend King With a High Yield

Bob Ciura
Jan 13, 2021 1:17 PM EST

There is a reason that there are just 30 Dividend Kings in the market.

Amid New Market Highs, Psychology and Valuation Warnings

Guy Ortmann
Jan 13, 2021 11:30 AM EST

Eager crowd buyers juxtaposed with actively selling insiders always raises a yellow flag.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    I discuss price targets in my Saturday column.
  • 07:54 AM EST GARY BERMAN

    Friday Morning Fibocall for 1/22/2021

    SPX (Long-Term View) The 1/21/21 NEW high @ 3861...
  • 11:16 AM EST CHRIS VERSACE

    Worst Stocks to Buy for the Biden Presidency

    Biden's take on the minimum wage, likely moves on ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login