URSABLOG: Delivering Momentum

 

The key to successful trading is to buy low and sell high. Simple isn’t it? We have the data and we should be able to do it because shipping is such a cyclical market that even such a simple tool as regression analysis should be able to point us towards when things are cheap and when things are expensive. Why does it go so wrong sometimes?

In my experience the obsession with asset play obscures the real reason why Greeks are good at investing in shipping. It drives me crazy when I see market reports that say:

“Best Ship” (68,000 dwt built 2005 Shingong) sold at US$ 7.85 mill. N.B. these owners bought this ship three years ago for US$ 5.65 mill so have made a tidy 40% profit.

I want to ask these brokers:

“Tell me something: what were the terms of the sale to the current owners, and the survey position then? What is the survey position now? Is BWTS fitted? What works have been done in the meantime? What has the charter income been during this period? What were the operating costs? Was there finance? If so, how much?”

And so on. But of course they cannot answer all of this, or in fact they are not interested in this, because they see ship sale and purchase as a winner/loser, profit/loss activity. I know that I am just grumbling and complaining, and maybe over-thinking it, and the brokers that write this rubbish may (or may not) sell and buy a lot more ships than I do, but it seems to me that reducing the ship sale and purchase market to simply ‘trading’ is missing the point.

For example, I think, as my clients know, that now is a good time to buy bulk carriers. In my view, prices are low enough historically to justify an investment for the right ship, especially when you consider that the prospects for next year are good. If it helps, here are some numbers to fall back on, specifically looking at supramaxes/ultramaxes:

1)     Prices are not at a historical low, but they are below the median of the last ten years or so:

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2)     Freight rates are not high, but they are in a good place, and not that volatile

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3)     Values compared to freight rates are lower than usual.

This is a small, and as yet underdeveloped graph I have invented, inspired by the Fantasy Premier League transfer market. I compare performance (timecharter rates) and ship value. I think it’s instructive as a trend:

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I think that this needs a bit of work, and my assumptions may be incorrect, but generally if you bought when the index was above the average line, you were doing well.

4)     The order book is at its lowest for ten years (and longer):

“At 63.4 million DWT, the dry bulk order book is at its lowest level since April 2004 and 34.7% thinner than twelve months ago.” BIMCO

 

5)     The world economy is set to boom once we come out of coronavirus restrictions (see how the stock markets rose once the good news about the Pfizer vaccine came out)

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6)     Next year will be better than this year, obviously. Full stop.

This happens to be my opinion. But in a conversation that I had yesterday with a client of mine where we agreed that all this was more or less likely, he also said:

“Yes Simon, and that is what I am afraid of. Everyone agrees with us.”

Which suddenly takes us out of the world of numbers and graphs, carefully constructed and presented, into the world of the real market place, where psychology and emotion, and gossip and rumour, combined with greed and cunning – not to mention politics and statecraft – all come into play.

Another friend today introduced me to the concept of momentum investing, which was new to me and I don’t think he knew much about it either. According to Investopedia:

Momentum investing is a trading strategy in which investors buy securities that are rising and sell them when they look to have peaked. The goal is to work with volatility by finding buying opportunities in short-term uptrends and then sell when the securities start to lose momentum.

This sounds a bit like asset play in the shipping market, and within it some reasons why the seeds of value destruction are contained in this strategy. How many times has your broker told you that you should buy because prices are rising? And how many times have they predicted that prices will keep on rising into the sunlit uplands of a strong market? And how many times have they been right?

Now obviously asset play in the shipping market is not as simple a game as in the stock markets, mostly because there is a distinct lack of liquidity. If you think, for example, that now is the right time to buy a ten year old supramax, how long would it take to buy one, let alone take delivery of it? A few weeks to get a signed MOA, a couple of months to take delivery, COVID-19 permitting. And, even more interesting, how long would it take to sell the ship when the rise in prices ‘start to lose momentum’? Will there be buyers for the ship at that particular time? And why are they buying at that time? What do they see that we don’t? Add into this mix that ships cost millions of dollars, and provide employment for many people, at sea and onshore. I am fond of saying that ship sale and purchase is not a ship supermarket, but neither is it a stock exchange. It is the sale and purchase of significant physical assets that earn money by being employed, mostly by other entities. So the decision to buy or sell is not always a simple one based on whether the market is going up or down.

But more than this, deciding to buy and sell does not just depend on numbers, whether it’s the Baltic Dry index, FFAs, rising or falling exports of commodities in one area compared to rising or falling imports in other areas. It is also about politics and pandemics, unexpected or long overdue events, and people’s reactions to them.

The reason why my friend brought up momentum trading was because an article on Bloomberg caught his eye. There is such a thing as the ‘Bloomberg US Pure Momentum Portfolio”, and this week it crashed, because the market was surprised by news of a possible vaccine. The scale of this crash was something that should only happen every 1.09e+048 years, which is a figure with far too many zeros after it to consider, but probably larger than the total number of particles in the universe. According to JP Morgan it’s the single biggest move for momentum on record, although a similar thing on a slightly smaller scale happened earlier this year.

Hold on, you may ask, I thought these things aren’t supposed to happen? Or if they do, only once in a few trillion squillion years. Well you would be right.

My friend highlighted the following comment:

Market moves that aren’t supposed to happen keep happening.

So much for the Efficient Market Hypothesis.

The reason why we don’t know when to buy or sell is because we don’t know what’s gong to happen, and no-one is immune from that unfortunate condition. In fact if everyone else agrees with us it signifies nothing except that everyone agrees else with us. My client is probably right to be cautious, because his experience has taught him that when everyone agreed with everyone else, something unexpected – the thing no-one had predicted – happened. But of course, this does not mean that on other occasions, predictions, even ones that everyone agreed with, will not be correct. These accurate predictions are probably not commented on because they are so mundane.

So back to the point. Anyone with a curious mind will pick holes in my arguments easily, and just as easily set up counter-arguments:

1)     Just because prices are low, doesn’t mean they can’t go lower;

2)     Freight rates are stable, but we are about to head into the dreaded first quarter, when rates are usually lower;

3)     Interesting, but buying in the second half of 2019 didn’t help you in the first half of 2020;

4)     The order book can be reinvigorated very quickly if the market improves strongly. There is a lot of slack capacity out there.

5)     The IMF is not known for the reliability of their forecasts

6)     Just because 2020 was bad, doesn’t mean that 2021 can’t be worse.

So, it turns out, I have overthought it, and talked myself into a circle, and like many of my clients, have no clear way forward. On reflection however, because it is difficult and unclear I think it’s even more important to think seriously about buying ships now. The coming weeks will make some things – US election, freight market direction, trade policy, COVID -19 development – a little bit clearer. And my counterarguments have further counterarguments against them, and so on, and there is no broad argument to suit all people. I think there are many people out there who want to buy but cannot find the right deal or the right ship to spark some interest. Well that’s where us brokers come in, so instead of trying to fit the market into the opportunity, I will continue to try and find the right opportunity for my clients, and their actions – or lack of them – will set the market. This is, after all, how it should be.

Simon Ward