Article: Ghost Ships of the Recession

Shipping is a leading indicator of economic activity; BDI (Baltic Dry shipping Index) has become a buzzword of the current recession. The excerpts below are from a Daily Mail article published Sept 13 2009.

http://www.dailymail.co.uk/home/moslive/article-1212013/Revealed-The-ghost-fleet-recession.html

"The biggest and most secretive gathering of ships in maritime history lies at anchor east of Singapore. Never before photographed, it is bigger than the U.S. and British navies combined but has no crew, no cargo and no destination - and is why your Christmas stocking may be on the light side this year.
... the hulls gather rust and seaweed at what should be their busiest time of year.
Local fisherman Ah Wat, 42, who for more than 20 years has made a living fishing for prawns from his home in Sungai Rengit, says: 'Before, there was nothing out there - just sea. Then the big ships just suddenly came one day, and every day there are more of them.
'Some of them stay for a few weeks and then go away. But most of them just stay. You used to look Christmas from here straight over to Indonesia and see nothing but a few passing boats. Now you can no longer see the horizon.'
...750ft-long merchant vessel is standing absurdly high in the water. The low waves don't even bother the lowest mark on its Plimsoll line. It's the same with all the ships parked here, and there are a lot of them. Close to 500. An armada of freighters with no cargo, no crew, and without a destination between them.
...This time last year, an Aframax tanker capable of carrying 80,000 tons of cargo would cost £31,000 a day ($50,000). Now it is about £3,400 ($5,500).
...This is why the chilliest financial winds anywhere in the City of London are to be found blowing through its 400-plus shipping brokers.
Between them, they manage about half of the world's chartering business. The bonuses are long gone. The last to feel the tail of the economic whiplash, they - and their insurers and lawyers - await a wave of redundancies and business failures in the next six months. Commerce is contracting, fleets rust away - yet new ship-builds ordered years ago are still coming on stream.
...These empty ships should be carrying Christmas over to the West. All retailers will have already ordered their stock for the festive season long ago. With more than 92 per cent of all goods coming into the UK by sea, much of it should be on its way here if it is going to make it to the shelves before Christmas. But retailers are running on very low stock levels, not only because they expect consumer spending to be down, but also because they simply do not have the same levels of credit that they had in the past and so are unable to keep big stockpiles."


There's quite a bit more, mostly industry-specific. I encourage you to read the entire article.

Article: Boring Fair Value

This is an interesting article from which compares the current rally to the 1930 "hope" rally which presaged a long decline in US stocks.

Haven't We Been to this Show Before?

Caveat; I am suspicious of anyone who uses phrases like "muse wondrously" in an otherwise serious article. PJ O'Rourke can get away with it; this guy can't. Also, the author is a banker, not a historian. His degree is in public policy, not economic history.

This article by Jeremy Grantham has a more cogent view of the current market environment:

Free subscription required

If you aren't already a subscriber, go to www.gmo.com/America/MyHome/, register, then access the article "Boring Fair Value" in the site Library. Published July 2009, but still relevant.

Let your winners run

I posted the following on one of my favorite boards, on the topic of taking profits on multi-baggers or letting your money ride. This is true only from an investment perspective, when you've done significant research on your position. Speculators probably do something different. I'm not being catty; I don't understand the spec mindset.

Personally, I prefer to let my winners run, but when I keep a big gainer I also use a stop-loss order to bolster my selling discipline.

It's easy to overlook a "slow leak" in a position; I've been surprised by sales from a stop-loss order I'd placed and forgotten.

It's possible your order will trigger, and then the stock will reverse its losses. Stop-loss orders are useful when you've picked a sales price you'll be happy with, but are not concerned with selling at the absolute highest price you can get. You can also set the order to sell all or part of your position.

I'm doing exactly this with a big winner, Helmerich & Payne, HP. Bought at $7.89, it's now a 350%+ gain; the old saying "pigs get slaughtered" is echoing in my head. However, I still love the stock.

Instead of selling, I have a stop-loss order in place to sell PART of my shares if the stock drops to $31. That's a large enough gap that the order won't be triggered by ordinary market fluctuations. I'd be selling about a third of my position, which would recover my original investment, plus a little extra profit. Two-thirds of my HP position would remain invested; I'd sell that portion only if the reasons behind my original investment hypothesis changed.

This allows you both to preserve your profits in the face of irrational market pricing changes, and to capture the out-performance of stocks which have already proven themselves to be winners.

Sold WAT puts

Today I wrote 3 $50 November puts on WAT for $2.24 each. Waters makes basic (and very expensive) lab instrumentation, and provides service contracts for their instrumentation. I believe Waters will benefit from future economic recovery; these instruments are useful in quality control for many industries. In the meantime, WAT will earn more through service agreements, as companies make more frequent and more expensive service calls to help their old equipment limp along until they're able to replace it.

MDT, PCL

Today I put 5% of my portfolio into PCL (Plum Creek Lumber) at $30/share. I chose to buy now because Plum Creek has not participated in the current rally; it's above it's March lows, but is currently trading near its April stock prices. The stock has a 5% yield and I believe lumber and mineral rights are an excellent hedge against inflation.

I also wrote four October $36 puts on MDT, paying $0.85 per share. I had puts on MDT expire un exercised last month; if the stock dips in the next six weeks, I may get it at a desirable price. If not, I'll continue to write puts for it; I want the stock, but not enough to pay $38/share for it.

Aug 22 2009 Options expirations

I had several options positions expire over the weekend. Puts I wrote on PCL (Plum Creek Lumber) MDT (Medtronic) and MOS (Mosaic) all expired un-exercised. That capital is now free to be used in new trades. I plan to sit on it for a while until the market dips.

Shares of SLV were put to me; I immediately used these to write Jan2010 calls at a $17 strike price. I was paid $0.50 a share for these, for a total of $450 income on the 9 contracts. If un-exercised, my return will be 2.9% for the trade or 0.6% per month--negligible compared to puts, but acceptable for a covered call since the risk is significantly less. As detailed below, SLV is in my portfolio only to generate income via puts and calls.

I had written covered calls against VZ (Verizon) and MCK (McKesson). VZ was called away, fairly close to my $31 strike price. My MCK calls, however, had a strike of $45--when my shares were called away, I could have sold them on the open market for $56!

That's the risk of covered calls; you may not make as much money as you could have. My initial buy price on MCK was $23.70, so when it was at $44, I was happy to agree to sell it for $45. I never dreamed the price would increase so dramatically in less than two months.

Stop-loss orders triggered

Over the past week, my stop loss orders on GE, AAPL, and MRO (Marathon Oil) have triggered. These are all stocks I'd buy back when or if they drop 25--30% from their current levels.