There’s a chart you really need to see…
I actually started watching this chart about a month ago, thanks to a particular stock: Genco Shipping & Trading (NYSE: GNK).
I noticed the stock because it was making a big 15% breakout move.
I immediately took a position, volume was cooking, and I know these shippers can really move when the shorts start to cover.
Genco was trading around $2.20 at the time. Today it’s around $4.50.
I’ve taken profits and re-entered a few times. Right now, I’m holding calls on it, because I think there’s a very good chance it jumps another 25% sometime soon.
Genco’s already paid for the Christmas shopping I will do this year. Another nice bounce will cover a ski trip for me and my kids.
Twenty years ago, during my wayward youth, I was a ski bum for a couple of years in Winter Park, Colorado…
Winter Park is right over the Rockies from Boulder. If you have a Jeep, you can backroad it from Boulder over Corona Pass. In the summer, I used to ride my Kawasaki 650 over Berthoud Pass to Idaho Springs via I-70, and then into Boulder through Clear Creek Canyon. It was a beautiful ride, and it’s been heartbreaking to see the devastation of floodwaters raging through that canyon.
Now that my kids have skied for a couple years, they are ready for a big mountain. And I’d love to go back. (Maybe I can find that piece of cartilage I tore out of my knee on one of Winter Park’s famous mogul runs…)
Anyway, back to that chart…
Highways to Nowhere
It’s called the Baltic Dry Index, or BDI for short. It tracks the charter rates for a variety of dry bulk cargo ships. The ships are Capesize, Panamax, Supramax, and Handysize.
These are not tankers; these are the ships that carry commodities like coal, grains, and iron ore across the world’s oceans.
The BDI is considered a leading indicator for global economic growth. When demand for raw materials rises, shipping rates rise, too.
The Baltic Dry Index hit some ridiculous highs in 2007-2008.
If you recall, China was buying as much iron ore, coal, and copper as it could get its hands on to fuel its economic expansion. It was building highways to nowhere, ghost towns, and coal-burning electricity plants by the hundreds.
When you have government-backed expansion like that, where there is no real profit-motive or accountability, it’s no surprise that shipping rates formed a massive bubble.
The stock I mentioned earlier, Genco, traded up to $80 a share.
It’s also no surprise that shipping rates took quite a tumble once the financial crisis hit in 2008-2009…
Between 2009 and 2011, the BDI made a nice rebound as China pushed through a very large stimulus package to help its own economy. But even that bounce gave way as China was forced to reign in stimulus as a real estate bubble grew.
The situation in the shipping sector has been pretty bad for the last two years. The companies have been canceling orders for new ships and restructuring debt to keep themselves afloat until shipping rates turned up again.
And that is happening right now…
The China Connection
There’s no getting around the fact that China is the single most important catalyst for commodity prices.
I find it virtually impossible to trust Chinese economic data, good or bad. I’ve just too many instances where China’s government or a Chinese company outright lies about numbers. Again, there’s just no real accountability.
But there is one thing that China can’t lie about… and that’s prices.
When you see copper prices, or iron ore prices, or charter prices for dry bulk shippers start to move higher, there’s only one reason: China is buying.
Copper prices have been trending higher since early July…
So have iron ore prices.
And so has the Baltic Dry Index.
Bloomberg reports that the BDI has already tripled this year.
And rates for the Capesize class of ships, which carry iron ore, have gone up sevenfold to $38,397 a day.
Genco’s fleet is nearly 20% Capesize.
In 2014, coal shipments are expected to rise 13%; and iron ore shipments should be up 9%, according to ACM Shipping Group Plc, the third largest listed shipbroker.
The jump in charter rates is expected to push the entire shipping sector back to profitability next year.
Of course, some shippers will be more profitable than others. GNK is one of them.
Genco Shipping & Trading currently trades around $4.50 a share, which puts the market cap at $200 million. Its fleet is worth around $900 million and expected to do $265 million in charter revenue next year.
Of course, Genco has risk. If charter rates reverse their gains, Genco shares will get hit hard. But if rates remain steady, Genco could be a $14 stock in a year.
Personally, I like the upside story here.
But Wait, There’s More…
Yes, there’s more to this story, but just a little more.
If you’ve been worried that the entire global economy was on the verge of something nasty, and I’ll admit the recent weakness and currency problems in emerging markets has had me a bit jittery, don’t be. The rise in shipping volumes is a sign we could get some good growth in 2014.
We need to see commodity-driven emerging market economies stabilize. Stronger copper and iron ore prices can help that happen.
2014 could be a pretty good year, and it will start with the shippers.
Until next time,
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
