Market Overview

Stormy Seas Ahead For The Shipping ETF


Remember in 2007 and through the first half of 2008 before the commodities bubble burst all the attention the Baltic Dry Index was getting? The index, provided by the Baltic Exchange of London, tracks daily charter rates for dry bulk shippers moving commodities by sea. Back in the go-go days before the financial crisis, pundits talked about the Baltic Dry Index with such affinity one would have thought these stock pickers were really salty mariners.

Back then, it wasn't surprising to see stocks like Diana Shipping (NYSE: DSX) featured on the Investor's Business Daily Top 50 list. Just as one example of how bad things got for shipping stocks, Diana was flirting with $43 in November 2007. That stock closed below $8 on Monday.

Well, more problems could be on the way for shipping stocks and the ETF some dock at, the Guggenheim Shipping ETF (NYSE: SEA). Perhaps mysteriously, the Guggenheim Shipping ETF is up over 24% year-to-date. Mysteriously because the Baltic Dry Index is a real mess. It's down almost 47% year-to-date, according to Bloomberg Data.

In other words, this negative correlation between SEA and the Baltic Dry Index is odd. After all, global demand for so-called dry bulk commodities such as coal, copper and iron ore is seen wilting at the moment. That explains the plunge in the Index, but not SEA itself. Granted SEA tracks the Dow Jones Global Shipping Index, not the Baltic Dry Index and it can be said that many of SEA's 27 holdings have more of an oil than dry bulk feel to them.

That's not entirely off base. Stocks such as Frontline (NYSE: FRO), Teekay (NYSE: TNK) and Nordic American (NYSE: NAT) make a home port in SEA. Surely oil tankers are holding up better than dry bulk shippers, right? Wrong.

As the Telegraph notes the companies that build oil tankers are faced with double quagmire: Rising steel prices and falling resale prices for their ships. That doesn't even take into account oil demand that arguably isn't where it should be at this point in the economic recovery.

The Telegraph reports the average very-large crude carrier at 15-years-old had an average resale value of $78 million in July 2008. Today that number stands at $23 million. Said differently, if the owner of one of these vessels sent the ship to the tanker chop shop, the ship could be stripped and its parts and materials would be worth almost as the ship would be intact.

Add to all that two more factors: Ship capacity is expected to be about 40% higher than demand for dry bulk commodities this year. Next, Greece gets a weight of almost 8% in SEA. That's not a good thing.

Stay away from these rocky seas? Sure, but should SEA violate support at $18, another 10% of downside could be in the offing. SEA is optionable and shortable.

Posted-In: Long Ideas News Sector ETFs Short Ideas Futures Technicals Commodities Pre-Market Outlook


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