Sunday, October 21, 2007

A Near Term Top in Dry Bulk Shippers?

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Let me preface this entry by saying I have no position in the dry bulk shippers, so by association one could paint me with "I missed the boat" (oh, puns are so fun). With that said, I partook in a similar mania in late 2005 with the oil tanker stocks, many of which skyrocketed for the same reasons the dry bulk shippers are increasing today - global growth, unquenched demand for more and more crude, great economies of Chindia demanding more crude. Well all those factors have proven to be true but the stocks dropped precipitously from their highs and never fulfilled the potential that was being discussed back then.

With that said, back in early October I mentioned a potential near term top in the Macau casino names as Steve Wynn cashed out.

I am harking back to other very shrewd people and did a Google search on Sam Zell and Steve Schwarzman, and found a blog entry by The Peridot Capitalist back in June 2007 during the IPO of Blackstone Group (BX).
  1. Zell sold his stake in Equity Office Properties (EOP) - which turned out to be the peak for the commercial office market.
  2. Schwarzman sold his stake in Blackstone Group (BX) - which turned out to the peak for the private equity boom (ask shareholders unfortunate enough to buy a stake in BX near $38, current price $26, after falling to $21)
  3. Is this the next one? If one man knows casinos its Wynn. Is he saying, hey people - yes I realize 1.3 billion gamblers will arrive on our shores soon enough but this valuation you gave my company is a bit over the top and frenzied.
Zell, Schwarzman, Wynn, and Corbin Robertson? Who the heck is Corbin Robertson? He is the Chairman of Quintana Maritime (QMAR), which this past week announced a plan to 'evaluate strategic options' for his company. Read: looking to sell? (maybe).

Now, I don't know a thing about Mr. Robertson and if he holds a candle to the trio of other company leaders I mentioned above. But with all the momentum in this sector; did you notice 2 sector upgrades this week alone - one by Bear Stearns, and another by Jeffries, is there anyone left to jump on this bandwagon? Even good ole Cramer jumped on the heavily sagging bandwagon this week with his picks of Diana Shipping (DSX), Paragon (PRGN), OceanFreight (OCNF). What, no DryShips (DRYS) - THE momentum stock in this sector? Cramer!

Much like the Macau casinos I don't think this is the 'end' of the dry shippers, and the underlying fundamentals *do* look strong for the mid to longer term. In fact, much like the casinos, at lower prices the dry bulk shippers would strike my fancy. But my question is to a near term top, and potential pullback from here. Since Wynn sold, Wynn Resorts (WYNN) is down 11%, and Las Vegas Sands (LVS) is down about 13.5%. So far those short term calls look pretty spot on.

Since everyone knows the positives lets look at the other side of the trade
  1. Everyone is bullish on the sector - who is left to drive these stocks to new highs? Where will the new buyers be coming from?
  2. Many stocks are not near any major technical support, after extended runs post Fed cut.
  3. While the global growth story is a 20-30 year play, there will be dips along the way. With the US increasingly looking to be going into recession or at least "barely there growth" for the foreseeable future, to believe the great emerging global powers won't be affected is pollyanna at best. Yes they have a growing middle class, and yes they are far more insulated than they were 5, 10, or 15 years ago. But to think the country which perfected consumerism slowing down, won't affect trade partners (and thus potentially slow down growth albeit short term) is nonsenical.
  4. Can/will oil tankers be converted to dry bulk shippers to take advantage of the enormous rise of the Baltic Exchange? More supply of ships = lower prices. Longer term (since the ship building cycle is so long i.e. years) more supply will eventually hit the market, but the near term seems pretty safe. With that said, is it "that tough" to retrofit oil tankers for dry bulk if the pricing in the 2 sectors is so variant? (I am no shipping industry insider so I ask that as an open question)
So once again, I have no position but I am posting the other side of the trade; near term. Generally smart men who are industry veterans see valuations far different than we do, and by judging the trio I named above who sold at peak prices, could this be yet another case?

SA/SS

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