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A Huge Opportunity in This "Left for Dead" SectorBy
Tuesday, October 30, 2012
John Fredriksen just made the biggest bet of his career...
Just weeks ago, John called the bottom in the shipping industry. He's backing his call by spending $11 billion to add more ships to his fleet. It's the biggest bet he's ever made in an extraordinary career.
John Fredriksen is the largest owner of shipping tankers in history. In 2005, Fredriksen's fleet numbered more than 500 ships. That was eight times larger than that of legendary ship owner Aristotle Onassis.
Forbes magazine estimates Fredriksen's wealth at $10.6 billion, and just last month, Bloomberg Markets magazine named Fredriksen the fifth most influential person in the world.
In other words, John Fredriksen knows shipping... and he knows ship values as well as anyone in the world. I believe buying ships alongside him could produce huge returns in the next few years. Here's why...
Overseas Shipholding Group is the largest oil tanker company in the United States. It owns over 100 ships. It has been in business since 1948. In the last 30 days, its stock price has fallen by more than 80%. And its bonds now trade for less than 35 cents on the dollar. The rumor is, Overseas is about to declare bankruptcy.
Overseas is not the only tanker company with problems.
On July 2, one of Japan's oldest shipping companies, Sanko Steamship, filed for bankruptcy. Sanko has been in business since 1934.
Then two months ago, on August 3, Stephenson Clarke Shipping, Britain's oldest shipping company, filed for bankruptcy. Stephenson has been in business since 1730.
Between 2008 and 2011, 22 shipping companies filed for bankruptcy. This includes General Maritime, the second-largest U.S. owner of oil tankers, which filed for bankruptcy in November 2011.
In the first six months of 2012, shipping companies have laid off 32,877 people, according to the U.S. Bureau of Labor Statistics.
What's causing this depression? It's supply and demand. There are too many ships and not enough demand for shipping services. During the boom years of 2003-2007, shipping companies enjoyed good times... so they ordered a huge amount of new ships. They ordered more than what they needed, in anticipation of growth continuing for a decade. But the credit crisis and resulting recession smashed the shipping industry's hopes. Those new ships have no jobs.
If the ships are not moving cargoes, they don't generate cash. If they don't generate cash, their owners can't pay for fuel and interest, and they go bankrupt.
And that's the situation we have today. Money is fleeing the shipping industry. Banks are retracting their lines of credit to shipping companies. Bankruptcies are soaring, and lease rates have hit rock bottom. And the crisis is crushing the stocks of shipping companies.
For example, from January 2011 to October 2011, Overseas Shipping Group (OSG) went down by 86%. During the same period, Genco Shipping (GNK) went down by 86%, and Excel Maritime (EXM) went down by 93%. Even Frontline (FRO), one of the most successful shipping companies of the past 20 years, didn't escape. Frontline's stock is also down 89%.
When's the best time to invest in a cyclical "boom and bust" industry?
In theory, you should buy at the point of maximum pessimism, because that's when things are cheapest. But in practice, it's very hard to identify that point. It can always get worse.
So the right time to buy is when things go from "bad to less bad." You can identify this point, because things get slightly better. And that's what's happening in the shipping industry. Lease rates have started to rise.
AG-East and AG-West are lease contracts based on shipping routes heading east to Asia and west to the U.S. and Europe that trade like stocks on an exchange.
AG-East has risen by 5.8% off its 2012 low, and AG-West has risen 4.5%, according to Fearnleys, an expert in shipping rates.
The Baltic Dry Index (BDI) is the Dow Jones Industrial Average of the shipping business. The BDI shows the average rate that shippers are paying to ship their goods. This index shows that the level of lease rates made a new seven-year low last month and bounced 32%.
Simultaneously, the Cass Freight Index, which measures the volume and amount spent on freight shipping for U.S. shipments, grew 4.4% in August over the same month a year ago. That's good and a confirmation that the bottom is in and lease rates are now rising.
In short, things have been terrible in the shipping industry for years now. They still are terrible. But there are signs that things are going from bad to less bad. Legendary shipping investors like John Fredriksen are buying right now.
If you're a speculator who looks to buy extremely cheap assets, it's time to start looking for bargains in shippers.
Good investing,
Paul Mampilly
Further Reading:
"Bad to less bad" trades are a Steve Sjuggerud favorite. Back in July, he told DailyWealth readers about a rare "buy" signal on gold. His play is up 17% in just three months. And one of his favorite ways to play a "bad to less bad" rally in housing is up 53% in about 20 months.
Market NotesYOU CAN'T SAY WE DIDN'T WARN YOU! We just checked our investment "leaderboard." And you can't say we didn't warn you about the guy at the bottom... clean energy.
Over the years, we've warned readers about the dangers of clean energy stocks more than a dozen times. Most clean energy firms are such terrible businesses, we say they are "perfectly hedged." They are able to lose money in both good and bad economic times. Their stocks are able to stink in both bull and bear markets.
One of the highest profile plays here is the PowerShares Clean Energy Fund (NYSE: PBW). As an easy, "one click" way to go long solar, wind, and various other clean energy companies, this fund has drawn in hundreds of millions of investor dollars over the years. Never mind the fund's major component, solar energy, has a big problem called "night."
At DailyWealth, we monitor more than 100 investment funds to keep track of the market. Measured by two-year performance, PBW is the worst performer, down 59%. Regular readers aren't surprised... and you can't say we didn't warn you!
– Brian Hunt
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