It's "sink or swim" time for the shipping stocks.
The stock market is at a new 52-week high. But the shipping sector
can't seem to get off the bottom. It's a strange development, given that
many analysts claim the economy is bustling along. Worldwide shipments
of coal, iron ore, and grains are at record-high levels. Yet the cost of
shipping those goods is at a one-year low.
That's pressuring the share prices of the shippers.
Take a look at this chart of the Baltic Dry Index (BDI)...
The BDI displays the cost of shipping dry goods overseas. It's an
excellent indicator of economic demand. After all, if the global economy
is really picking up steam, the demand for dry goods and the cost of
shipping them should be increasing.
But it's not. In fact, the BDI peaked last June at about the same
time the Fed ended its original quantitative easing program. Then prices
Rumors of a second round of quantitative easing caused a bounce in
the index in August. But those gains are gone now – even as the stock
market continues to rally on the promise of an improving economy.
Something isn't right here. The stock market is either too far
ahead of the economy, shipping prices are too far behind, or some
combination of the two. To correct this situation, we'll need to see
stock prices decline, shipping prices rise... or some combination of the
Stocks have avoided a correction so far. But it's just a matter of
time before the bearish divergences take their toll. Many of the stocks
with extended gains are going to get hit hard, and investors will be
reminded that even the Fed can't guarantee forever-rising stock prices.
The stocks with the least risk at this point, however, are the
shipping companies. The shipping sector hasn't participated in the stock
market rally because the shipping stocks trade in relation to the
Baltic Dry Index. With the index at its lows for the year, shipping
stocks are near their lows as well... which makes the sector compelling
from a valuation standpoint.
Indeed, it's hard to imagine stocks like Excel Maritime (EXM) or
Diana Shipping (DSX), which trade at just two and eight times earnings,
respectively, getting hit much harder.
Nonetheless, if the economic bulls are right, the BDI is destined
to move higher and the shipping stocks have the most to gain. If the
bears are right, the shipping stocks have already suffered and there
won't be nearly as much downside as most of the other market sectors.
If you're looking for a low-risk, potentially high-reward trade to
kick off 2011, you'll be hard pressed to find one better than the
Best regards and good trading,
Weight loss is a big deal this time of year. But ironically, the first
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Weight Watchers and Nutrisystem... See when you can make the most off
Americans' New Year's resolutions here: