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The 2009 turnaround in this
industry is one that you'll tell your grandkids about...
This year, the bear market and the credit crisis have
clobbered shippers. The unfolding global recession has reduced demand, and
a severe shortage of letters of credit -- a vital part of
international trade -- has left goods waiting at the docks.
The Baltic Dry Index (BDI), a measure for what it costs
to transport by sea, peaked in May 2008 at an all-time high
of 11,793. Since then it's lost over -90% of its value, and
now sits at a low not seen in more than two decades. Shares
of the shippers themselves are also down, on average by more
than -50% on the year.
 Why the drastic moves? The Baltic Dry Index and
shipping stocks are ultra-sensitive to changes in demand. This is because the supply of ships available for shipping
takes a lot of time and money to increase. Large container
ships can take two years and cost $150 million or more to
build. When a lot of people want to ship things, it pushes
the price up quickly because there's no more room on the
ships. But when too few people want to ship, it pushes the
price down just as fast.
Both of these scenarios happened in 2008. In the first
half of the year, demand pushed the price of shipping up to
record highs. Today, weakened demand has ships now renting
at a rate that barely pays for their costs.
On top of weakened demand and tight credit, a
disagreement over the price of iron ore between Chinese
steel makers and Brazilian iron ore miners caused a dearth
of ore shipments. Losing this valuable trade route lightened
loads and hit shippers hard.
To combat the downturn, some have lowered their
shipping speeds to save on fuel. Others have turned to
letting their boats idle. And while many companies in the
industry are faltering, several have gone bankrupt.
So in this sort of environment, why do I think 2009
will be a banner year for shippers?
The companies going bankrupt are providing a glut of
ships. Used ships, which until recently sold at a premium
because of the time it takes to build new ones, are now
selling at a significant discount. Last week, a 1998 46,000
dwt bulk carrier sold for $18.5 million. In June, a 1983
30,000 dwt bulk carrier went for $20 million. Today's buyers
are getting newer ships with larger hulls for less.
 The shippers that survive the next
few months will be in a fantastic position to expand, buy up
ships, and take over routes. These are the companies that
will provide exceptional returns when the shipping crisis
ends, which, judging by the +25% rise in the Baltic Index
over the last two weeks, may be happening sooner rather than
later.
International trade is not going away. Globalization
has already made every country in the world reliant on the
goods and natural resources of others. Even the
months-long tiff between Brazil and China over iron ore was
resolved last month when reality set in. Unless we stop
eating, building, repairing, computing, wearing clothes,
driving cars, and so forth, trade will pick back up and
continue to expand.
Trade is not going away, and neither is maritime
shipping. There's no better way to move
most goods. Trucks are limited to countries connected by
land and air transport is far too pricey to make it
economically viable. Ninety percent of world trade is done
by ships.
When looking to play the rebound in shipping companies,
there are several things you want to take into
consideration. Most importantly, you want to make sure they
have enough cash to survive several months or more if the
current conditions continue. The more cash, the better. Companies with fat coffers won't need to raise capital to
buy excess inventories of their failed and faltering
competitors at bargain rates. If you can spot one with a low
P/E and a high dividend yield, it will sweeten the deal.
That said, pay attention to debt levels compared to
their peers. While the shipping industry, in general, is
heavily leveraged, some of these companies are so overloaded
with debt they may soon capsize. The industry average for
debt is about twice their trailing twelve month revenue. Companies with less debt than the average are the safer bet.
I'm not the only one that thinks the shipping sector is
poised for a comeback. Paul Tracy, editor of the
StreetAuthority Market Advisor, recently cited the rebound
in shipping rates as Prediction #3 on his list of "11 Surprising Investment
Predictions for 2009." Paul states that "The
'bounce back' investment of the year will be shipping
stocks. After plunging -94% in 2008, these stocks are
ripe for a monster rebound..." Paul has pinpointed his
two favorite ways to cash in on the shipping rebound --
including one stock yielding 23.2%.
Along with a historic rise in shipping, Paul makes
several other bold investment predictions in this report,
including:
A scarce metal needed for the defense industry will see its
price soar after the violence in Africa cuts off supply.
President Obama will pour billions into rebuilding the
nation's highways, bridges and other ailing infrastructure.
Three construction companies' revenues will skyrocket.
A new way to cash in on nanotechnology may make early
investors rich. Some people are calling this the
"opportunity of the century."
These are just four of the 11 investment angles that
Paul's research team believes will trigger explosive profits
for investors in 2009.
Visit this link to read Paul's predictions report in
its entirety right now.
-- Anthony Haddad
Staff Writer
StreetAuthority Investor Update
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