Posts Tagged ‘dsx’

Cantor Raises Price Target for DSX

January 8th, 2010 Michael McDonough Comments off

Cantor Fitzgerald raised the price target for Diana Shipping (DSX) to $18 from $16 based on higher rechartering assumptions.  Cantors presently holds a ‘Buy’ rating on DSX.  DSX is one of the few shippers within the dry bulk space on which I hold a relatively constructive view.  Compared to other shippers the company has a healthy balance sheet, and is well position to take advantage of distressed asset prices.  In fact the company recently initiated a two year expansion program with its purchase of a new vessel.

Source: Bloomberg & Capital Link

Shipping rates over the near-term will likely remain volatile. Why? China.  China still holds a disproportional influence over shipping rates, and when a single player holds that much sway, volatility is inevitable, especially when that player is China. Therefore, anyone closely following the shipping sector needs to be very aware of what is happening in China. The secondary driver is of course a tug-of-war between a growing supply of ships and gradual increments in global demand for the service. Over the long-term, shipping rates should remain volatile through-out the year, but on average remain relatively subdued.


Is a Falling Greenback Leading to Smooth Sailing for Shippers?

September 18th, 2009 Michael McDonough Comments off

I have received several inquiries regarding the recent divergence between the BDI and my dry bulk shipping index (DBSI), and thought I should touch on the subject.  First and foremost I believe that a large portion of the divergence can be explained as a US dollar story.  Also, recent weakness has been mostly isolated to larger capesize vessels, which means shippers with low or no exposure to that sector have been somewhat buffered.  Prior to the global financial crisis, a weakening dollar helped lead to an unprecedented surge in commodity prices and shipping rates, this had a direct positive impact on shippers’ asset values and rates.  As the crisis hit investors around the globe became more risk averse and flocked into US government debt.  This liquidation of risky assets caused a massive retrenchment in commodity prices and a significant rally in the US$.  Now however, as investors again grow less risk adverse, the value of the greenback has begun to depreciate, and with it we are again seeing a rally in commodity prices and flows back into riskier assets.  However, unlike the prior example we have not seen, and are unlikely to see, any significant appreciation in shipping rates over the near-term, more on this later.  But, speculation over what some believe may be a V-shaped recovery have potentially over-valued some assets that could experience a possible sell-off, leading to a interim increase in risk aversion and an appreciation in the dollar.  Don’t get me wrong, I do believe the overall global economy is improving, however, I feel it will be at a more measured pace with some volatility, and in this context I believe some debt spreads and equity markets could be overvalued.  This is especially true in the shipping sector.

Source: Bloomberg & Capital Link

Source: Bloomberg & Capital Link

The chart below overlays my DBSI with the inverted US$ index, and as you can see the correlation over the last few months has been very significant.  This relationship also explains why the DBSI has largely been ignoring declines in the shipping rates.  At least over near-term, it appears that a bet on the sector essentially equates to a bet against the US$.  As I mentioned yesterday, another reason the temporaneous breakdown in the relationship between shipping rates and the DBSI is shippers’ higher proportions of fixed long-term contracts, reducing the sensitivity to the BDI, however, this also limits upside.  In conclusion, an appreciating greenback will only move shippers’ stocks up so far, without a corresponding increase in shipping rates, which is not on the horizon.  Therefore, with the bleak outlook for shipping rates combined with the potential for what I believe could be another market correction before growth returns on a more measured pace, I would be hesitant to place any long positions on the sector at current values.

Source: Bloomberg & My Calculations

Source: Bloomberg & My Calculations

As an aside:  FBR Capital Markets, this morning published a bearish report on the dry bulk sector due what they believe will be relatively few order book cancellations.  The company said, “After our recent meeting with the largest and most advanced shipbuilder in China, China Shipbuilding Industry Corporation (CSIC), in Beijing, China, we reiterate our Underweight position on the dry bulk industry. CSIC confirmed our thesis that there will be fewer-than-expected order book cancellations.”  My DBSI returned some recent gains yesterday falling -1.1%.  The index is still realizing a weekly return of 9.1%


US Railroad Activity Not a Bright Spot for Shipping Rates

September 2nd, 2009 Michael McDonough Comments off

As seaborne shipping acts as the bridge for global trade, the US’s railroad and trucking systems are the backbone of domestic bulk transport. It goes without saying that at some point the majority of goods imported to or exported from the US likely find themselves traveling on a rail car or truck before reaching their final destination. Therefore, I wanted to analyze those sectors for any potential relationship to the BDI. Step one in this process, was finding an appropriate indicator to compare railroad activity against the BDI. This step was straight forward as the Association of American Railroads (AAR) publishes a weekly report measuring railroad freight volumes by company. In the chart below I graphed the BDI against the number of cars on line for CSX on a weekly basis.


Source: AAR & Bloomberg

As you can see from the chart above the correlation between rail car volume and the BDI over the past year has been very significant., and in some cases railroad activity actually led the BDI. One possible cause for this relationship is coal. Nearly one third of US railroad volumes are coal shipments, and in 2007 36mn tons of this coal was exported. Given the relationship between the BDI and railroad volumes, diminishing railroad activity in the US is yet another factor painting a macabre picture for the shipping industry. On a year to date basis coal and grain railroad shipments are down 9.3% and 22.4%, respectively. Metal and ores, which make-up only about 3% of US railroad volumes are down over 50% year to date.

But, in order to fully grasp the implications trucking and railroads may have on shipping it is critical to understand the supply and demand factors driving the sectors along with the outlook and physical linkages between the sectors. I could open a dialogue on this immediately, but will wait until after an upcoming industry conference I am attending where I should have the opportunity to speak with the management of some major US railroad and trucking companies. Expect an update on this come mid-month.

P.S.  I apologize for not having any real-time updates today, as I am in the process of relocating offices.


Consumer Confidence Disappoints, Shipping Stocks Suffer

June 30th, 2009 Michael McDonough 1 comment
As I highlighted in my column on on Monday shipping stocks will be highly susceptible to any major economic news impacting market’s views on the long-term outlook. This mornings consumer confidence number was proof of that, tumbling to 49.3 compared to 54.8 last month. Both the present situation index and the future situation index declined. Most of the recent gains stemmed from increases in the future situation component, which fell this month to 65.5 from 71.5. The present situation index slid to 24.8 from 29.7. The drop was likely fostered by concerns over business conditions and the employment situation.
The recently high betas in the shipping sector over macro data are rooted in the hope that once Chinese demand begins to diminish for dry bulk goods, increases in ex-China demand will offset, or even more than offset, the decline in Chinese imports. But, in order for this to occur it needs to be clear that global economies, especially the US, are on the road to recovery. Any data supporting or opposing this view will significantly impact trading in the shipping sector Nevertheless, today’s data may give Thursday’s crucial payroll number even more ammunition in the event of an upward or downward surprise.

In other news the Case Schiller Home Price Index came in slightly above analyst’s expectations showing a decline of only 18.1%.

Shipping and Mining Stocks

Source: Google (12:42PM)

FFA Market Rises

June 26th, 2009 Michael McDonough Comments off

Forward Freight Agreements (FFAs), especially for capesize contracts, appreciated significantly today leading to strong trading in the dry bulk sector.

Source: Imarex


Source: Imarex

Market and Sector Performance:
Source: Bloomberg, my calculations, Capital Link Shipping