URSABLOG: Fundamentally Misleading

Yesterday afternoon I found myself together with two colleagues from URSA Shipbrokers at the Marriott Hotel in Athens as guests of Simpson Spence and Young at a presentation they were giving. The main reason I went was to see Dr Roar Adland, SSY’s new head of research, talk about the prospects of the dry bulk market. I have respected Dr Adland’s academic work for some time, as well as his ‘to the point’ LinkedIn interventions, popping the balloons of some of the hype surrounding the more excitable analysis out there (or the media reporting of it). Having come back to the dark side of shipping (he was an FFA trader with Clarksons before leaving for academic research) I was keen to hear his take. But it turned out that it was the other two presentations – on the technical analysis of FFA trading, and the new emission rules and carbon allowances for ships calling in EU ports – that gave me food for thought.

That we were there at all must have something of an oversight from SSY’s point of view. Perhaps the left hand does not know what the right is doing there, but I would never usually expect to be allowed to go to a competitor’s presentation on whatever subject – let alone eat their food or drink their wine – without being thrown out, or at least being stared at very hard. Or perhaps we are too insignificant for them to care. But nevertheless there we were, eager to grasp whatever pearls of wisdom would be cast our way.

Dr Adland’s presentation was as expected: detailed, insightful, throwing in a couple of things I hadn’t thought of, and delivered in a measured and assured way. For the record, SSY’s summary for the future of the dry market is “limited downside, promising [potential] upside, but no megacycle coming.” The words in [brackets] are my disclaimer. I am not entirely in agreement with this view, mainly as I think that it’s always a mistake to limit a downside, but I understand where SSY are coming from.

I will leave the whole emission/carbon trading issue for another time, mainly because it will probably need more than one blog to even get my head around it, but also because it is very unclear – as the panellists admitted – how it is going to work. But the presentation on technical analysis in the FFA market was the most illuminating and perplexing, and worrying, as it made me challenge my own assumptions of what drives market sentiments.

Forward Freight Agreements (FFAs) have been around for a long time, and are used to hedge freight positions in the future. I won’t go into full lecture mode here, but regular readers will know how sceptical I am of their predictive role: I will never call them, wittingly at least, ‘futures’ because all they are – in my point of view – is the price of what buyers and sellers of such contracts can agree on at any given time for a closing position at some point in the months or years ahead, for their own reasons and motivations. As hedging tools I will leave it to those involved in moving stuff around (charterers) to justify themselves, but again – and I hope they agree with me – they are not doing it to forecast the freight market ahead, but to lock in a position that they feel comfortable with depending on their exposure to the physical freight market.

But whatever I say on the matter, FFAs are an important driver of sentiment, sometimes allied with, sometimes in the absence of, real market movements. At the risk of giving too many shipbroking companies a free namecheck today, the Braemar Screen of live dry FFA figures – albeit delayed by 15 minutes – is seductive. If it’s red, sentiment is down, if it’s green everybody is happier. The colours themselves are deeply psychological: green means go, red means stop. Green means growth, red means blood. And so on. It hits our own emotion in a way that seeing just the numbers wouldn’t. This is not Braemar’s fault of course, but even though I have long since taken the favourite off my toolbar, every once in a while I will take a sneaky look, even if only to have something to talk about.

People will ask each other what is driving the FFAs one way or the other, as though a definitive answer will give them enlightenment. A lot of the time, the answer is “sentiment”. This chicken and egg type statement (which comes first? Positive sentiment or positive FFAs?) is vague, circular and unhelpful.

After a delve into technical analysis, with candlesticks and Bollinger Curves (I’m not sure if it should be in capitals or not, but in reverence to the wine, I will keep them) and all the rest of it, the only conclusion I can come to is not only is it vague, but downright worrying if we base our assumptions of the health of the freight market on whether a number on our screen is green or red.

Many years ago, shortly after arriving in London, I made friends through my cousin with some derivative traders in London. They had recently moved from the open outcry floors to screens and I was deeply impressed with how they worked: with lots of screens to look at (a novelty then) and talking in terms of clicks (up or down) and momentum, and their eyes on the clocks for various announcements of figures essential to their markets: inflation reports, interest rates and so on. They made some serious money too, and many have retired long since, in their case probably wisely as the quants and algorithms have taken over.

But one thing that I found very interesting was that they weren’t really interested in analysing what the figures meant, or about the general macro-market moves. What they were interested in was how the figures changed the values of the derivatives that they were trading in, and how quickly, and what patterns they could pick up, and how they would instinctively react to them, immediately. Sometimes their instincts were wrong, sometimes they were right but they didn’t really care why the market was moving one way or the other, just whether or not they could jump on the trend and profit from it. I tried to make some link with my world of shipping, but it was pointless, although I think we were one of the first shipbroking offices at the time to install twin screens.

It turns out that those trading FFAs on a daily basis, the movements that we feed off, are technical only. Trevor Neil, a consultant to the BETA Group, explained to us that he would not use at all the ‘F’ word – ‘Fundamentals’ – because it was irrelevant to technical analysis. What was relevant was ceilings and floors of resistance, momentum and so on. Technical analysis means you trade on the numbers, the patterns, the movement, not the causes behind it.

This is fine as far as it goes but, as I said, it gave me pause for thought about how relevant, or more to the point, how far we should be influenced by FFAs. In a world where we are continually looking for a story, an angle, a meaning of why things are the way they are, how far can we trust FFAs to give us any answers? They are an important part of the market without doubt, but as a ship sale and purchase broker I am sometimes in need of a story to drive the pitch I am making. FFAs showing green are a tempting story, but if they are traded – at least in part – by using technical analysis, then it’s a very short term, and limited story. It’s like predicting a wet summer from April because of a passing shower.

I’m not sure what Dr Adland thinks of my thoughts on this – hopelessly naïve and uninformed I suspect – but whilst I understand both the temptation by some to read more into them than they can ever possibly provide, particularly as a forecasting tool (don’t let us mention predictive analysis) it was nevertheless good – at least for me – to learn how they are traded, and also to be reminded that whatever the resistance and momentum at play, people can still win or lose huge numbers because their decisions during trading turned out to be wrong.

I am fond of saying that the real futures market is sale and purchase, partly because it distils many fundamental elements of the market rather than just relying on price movements at any given time. In fact if the demand for shipping is derived from the fundamental demand and supply of stuff that needs to be moved around to be bought and sold, then the sale and purchase market is further derived from that, which makes it riskier, especially as it is so much more illiquid than the freight market, and certainly the FFA market.

I will try again to keep the Braemar Screen off my screen, but also remember at the same time that red is my favourite colour – football, wine, my Vespa – and is not only not to be avoided but is a force for good in the world. Whether that makes me a better broker or not is another thing altogether.

Simon Ward