DryShips (DRYS) - Reality Strikes Back

What has been so interesting about this market is watching so many names run up on nothing but thesis. The lemmings have taken to oil as if its a global thermometer - if oil is up $1 that day, then ALL of the world's trade is coming back! The market is anticipating great things in 6 months. If it's down $1 - then the complete polar opposite. Look at the past two days as a great example - complete Schizophrenia - sell everything! No - buy everything! Baltic Dry Index up 2% - all daytraders pile in! Baltic Dry Index down 1% - global growth is dead! It is amazing how this short term thinking and 1st grade logic has completely overwhelmed the market - it increases more each year - but the past 6 months have really taken the cake.

Speaking of... I've been taken aback by the "strength" in dry bulk shippers - as with many "thesis" the past year+ it's a bunch of people trying to "anticipate" something that is not there. A year ago people were piling into housing stocks anticipating the eagerly awaited "spring 2008" housing recovery. Then last summer people were piling into technology stocks since "they are a safe haven and immune from slowdown". Lately, it's been Obama this, Obama that - blah blah blah. Those are three among hundreds of "thesis". That's why I use that word so much - again, the thesis does not have to be correct; as long as enough people believe it - the stocks can react. Even if the thesis is proven very wrong 6 months later.

To wit - we've been pointing out all the struggles in the shipping industry; however we have been using this little known arcane science called: facts. Facts are the complete opposite of thesis. And the problem in the stock market is you rarely make money on facts - you make money (in the short run) on thesis. Shipping rates hit zero? No problem! Nowhere to go but up! Buy dry bulk shippers! [Jan 16: UK Telegraph - Shipping Rates Hit Zero]

Investors shunning debt? No problem! The chart says I need to buy! Thesis! Nov 3: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens]

Letter of credit scarce? No problem! Doesn't fit my thesis! Buy buy buy! [Oct 31: Credit Tsunami Swamps Trade]

So that works... until facts overwhelm thesis - as they have over and over and over on all these false pretenses the past 18 months. The question is timing and risk assessment - to play the thesis game you have to be prepared to wake up and get slapped across the face one day when that ugly thing we call "facts" shows up on your doorstep. Facts such as DryShips (DRYS) suspending dividends, cancelling vessel buys and the like. But not to worry - things are fine; the Baltic Dry Index will be up 0.00004% in a day or two and this will all be forgotten. Because as you know when BDI is up 0.00004% that of course singals global growth is back! (thesis!)

• Greek bulk carrier Dryships Inc (DRYS) suspended its quarterly dividend, cancelled previous agreements to acquire vessels as it strives to cut costs and forecast fourth quarter earnings below market estimates.
• Dryships shares fell more than 22 percent to $11.21, in trading before the bell on Thursday.
• The company said lower freight rates and a frozen credit market was forcing it to reduce capital expenditures by over $1.5 billion as it set plans to dispose of three capesize newbuilds and cancel previous agreements to buy nine vessels. A Capesize is the largest type of ship that can haul dry bulk commodities like iron ore, coal and grains.
• The company forecast a net loss of $380.6 million to $431.4 million, or $6.89 to $7.81 per share, on time charter equivalent revenue of between $184.2 million to $208.7 million.

Darn facts.

Essentially DryShips is a great proxy for this market as a whole - it's levitating on "hope" and "turnaround in sight" - then reality comes and kicks it in the teeth.

2009, the year of ping pong between hope and reality.

No position