Pub quiz for shipping aficianados . . . and others

Me and the boys bombed heavily at a recent pub quiz when visiting our pal ‘Farters’ Parters – the flatulent monk from old Luton Town for a catch-up last week. Parters combines religious instruction at a monastery located just off the M1 by Watford Gap services with boozing and brawling in Luton town centre most evenings. It seems that forgiveness is abound at his local, ‘The Three Legged Doberman’ – located on the vacated site of an old C&A (ahhhh, now I miss my grey ‘Clockhouse’ ski jacket on a cold winter’s day!). One of the questions that we failed on was naming a song from an extract of the lyrics. We thought that it was from a Wham! tune, but it turned out to be from the National Anthem of Great Britain. Oh well.

When my head was beginning to clear on the back seat of the early morning Mega Bus back to Airdrie, I got to thinking about what sort of questions I might pose on freight that people should, and naturally assume that, they know the answer to. So here’s one that I came up with: Starting in 2012, what is the average premium for the Capesize market over the Panamax (based on average 4 T/Cs)? Come on, you all know this one right? To be fair I didn’t and I was quite shocked at the answer, which I will give you at the end of this piece. Now no cheating, no smart phones allowed. Just guess. It will surprise you a little bit I am sure.

I’ve been rattling on over the past few weeks about the use of relative values in freight trading. I won’t do the whole spiel for a 50th time, but I will show you this table again though.

Capesize Panamax Supramax
09/05/2016 320 456 562
22/04/2016 377 497 571
08/04/2016 313 461 554
22/04/2015 254 267 445

I showed it to you before, but in case that you have forgotten how it works, let me remind you quickly. This is an index of vessel values versus forward earnings (using the FFA curve). Due to some other stuff I am doing (which I promise to explain later) I have recalibrated the index figures for ease of comparison with some other stuff. The magic number is now 500 – whereby over 500 and it is better to buy the asset and sell the forward curve, under 500 and you are better off selling the asset and buying earnings (this is for a typical 5-year old vessel).

This index movement shows that while it is becoming more attractive to buy a Cape, ultimately the Supra remains by far the most attractive to own steel. Now it should not be assumed that means the Capesize sector is not interesting. This shows that it is more interesting to own the earnings, rather than the steel. If you want to go long, then Capes might be the place for you. Might be . . . but more evidence is required.

So let’s have a look at the relative values of earnings for the three ship types above. You will now see why I’ve recalibrated the index numbers above to 500 being the ‘tipping point’. Now the below graph shows you a couple of notable things once I’ve explained what you are looking at. I have calculated the standard deviation of the differential between Capesize, Panamax and Supramax average timecharter rates (as commonly published) and used an index scale of 0-1,000 to represent any given freight value against another, whereby 500 points on the index is the long-term average for that spread. Now please remember that this is not the standard deviation of the forward curves, it is based on the timecharter physical spot rate. So what you are able to do using my little ‘tool’ is to add any combination of the two and index it based on its standard deviation from its mean. With this in mind I applied it to the current FFA forward curves and it looks like this:

ffaratio

Apologies for the appalling quality of the image. If you want a better look at it, plus (and I really think I shouldn’t do this) I will also send you a copy of the spreadsheet so that you can play around with the data to see what it looks like at various rates and times. Note that all of the rates are below the magic 500 mean. It is telling you that the larger the ship the lower the comparable rates are. It is also telling you that the larger ships (specifically the Capes) are in the outer reaches of standard deviation as ratios. In short, it’s telling you that Cape earnings compared (in particular) to Supramax earnings are extremely undervalued going forward.

Today, yes you can say what you want about rates in absolutes. In fact today’s spot rates, when turned into the Relative Ratio Index is just 65 for C/P, 51 for C/S and 135 for P/S. A figure of 1 on the index is the furthest negative deviation from the mean that the rate pair has ever gone, and 1,000 is the highest. I’m certainly not in the ‘smartest in the room’ camp, but even I know that my chances of buying something at a tenth of its long-term average is a better deal than selling it, right? Oh, and there is time. Q4 looks good, but so do your odds out to 2019.

It might be time to get the dusty book out with all of your positions in it and just have a quick check that you are not the wrong side of this. Could you spot this from the FFA forward curves? Possibly, but see them below:

Presentation2

Well, it’s not the same. Can you see it perfectly? Not really (and that’s not just due to the shocking image quality!). It would imply that q4 on 2016 would be the worst place to do the spread. Using the RRI method we are trying here then it is a different story. In some senses that is a great relief because then at least all the work and effort means that we are showing something different and not visible to the naked eye.

It also dovetails neatly into what the vessel values versus earnings index is telling us, namely that shorting earnings of Capesizes and/or going long on a physical ship might actually be getting the base and the apex of your book the wrong way round.

This little back of the cigarette packet analysis does at least demonstrate that there is a lot more information to be had from looking at the prices of things in relative terms than just absolutes. In addition, one can test a current book, not just one with FFAs or ships or period tonnage, but it can be applied to bunkers, voyage, even marketing. In terms that even a dumbo like me can understand, once it has been compared, calculated and indexed then a trade at an index value of 500 is a coin flip, but otherwise you can start to establish what the chances are that a trade you are about to do will increase your probability of overall success. Or are you potentially adding more old tissues to an already blocked drain?

By the way, the answer to the question earlier is that the Capesize timecharter rates have averaged a 7% premium to Panamax, 32% premium to Supramax and Panamax a 26% premium to Supras. Is that what you expected? Probably you did as you are the smart kids, right?

 

Bad Zeke, Leicester City and games of chance

So quite a few remarkable events have been occurring over here in the UK (although Airdrie has remained practically unmoved by the events I am about to outline for you). Her Majesty Queen Elizabeth II registered her 90th birthday the other day (gawd bless ‘er!). What an achievement that is too. Her tips for longevity? Long holidays, never carry money and have endless privilege and flunkies to do your bidding. Now there’s a shock! I do like the rule about only talking to her if she talks to you, surely the easiest way to win an argument.

As is usual on a Friday, me and the boys were sat round a wobbly table at the Airdrie Working Men’s Club, getting a couple of rounds of Heavy in during the world’s least aptly-named happy hour. Old Zeke was sipping away on his pint when he looked up at us and said ‘Do you know that on average the Queen gets sent two human turds a week in the mail?’ We all registered our disgust through murmurs and grunts. ‘I know, I know’ he said. ‘I’m just wonderin’ who it is that sends her the other one?’ he mused wistfully. Cue utter silence.

This is Airdrie? Right, you lot. Who keeps sending me these Richard III's?
This is Airdrie? Right, you lot. Who keeps sending me these Richard III’s?

The second thing of note over here (but strictly speaking nobody here in Scotland gives a haggis’s hind legs of course) is that Leicester City, a 5000-1 shot won the Premier League football this week. Had you been over here at all then undoubtedly you would have been bombarded with chat about little Leicester City producing the impossible to win the biggest league prize of them all (at least that’s what the sponsors of this particular prize call it). Not since unheralded small town club Nottingham Forest won the same league back in 1978 has this been achieved.

Errr, hold up a minute! So basically, while it is a pretty rare occurrence for a team like Leicester to win the league, are you telling me that this sort of thing has happened before? Well, yes. Of course it has. Not just in England, not just in football, but in plenty of other events, trophies, tournaments and lots of other things besides. For example, would the Danish readers think it impossible for a totally unfancied team lift a major trophy? Or the Greek readers for that matter (who will of course remember the incumbent Leicester manager as the same man who took them to defeat against the mighty Faroe Islands in his previous job).

As much as I love to natter on about my adopted favourite sport, I will try to bring it to a freight-related point. The point is this: I was fortunate enough to be sent a presentation from a well known shipping company the other day. Firstly, I would like to comment that it was visually the single dullest thing I have ever seen. Secondly, while it has all the usual trapping of plausibility of a shipping presentation, it simply didn’t scan. In fact, it was the perfect shipping presentation all round then!

All good shipping presentations should have at least three of these graphics.
All good shipping presentations should have at least three of these graphics.

The opening slide was the ubiquitous graph of the average time charter rates from the Baltic. This is then split into some random and arbitrary periods according to whatever conclusion that the Powerpoint is lumbering towards. It’s usually four periods, sometimes three, never actually explained as to why they are chosen. Pick a place, draw a line, write some stuff.

However, what really caught my attention was this: a large red oval drawn around the market of 2008 and next to it, in large angry red letters (in default font of course) it read ‘THIS WILL NEVER HAPPEN AGAIN’. Now that is a bold, bold prediction. And it is statistically entirely incorrect. What is more, it actually only happened eight years ago. Not 30, not 50, not 100. Just eight years ago. It’s not like the market has taken a technical leap forwards. Structurally it is exactly the same as it was then.

It would seem that the power of analysis is better served by taking the greatest statistical show-stopper in the demonstrable history of the market and just say ‘forget it’. First question is why on earth any analyst at a company that owns ships is not dissecting those years, when everyone could make money in shipping, to try to find at least an electrical pulse to indicate what lessons could be taken away from them. No. Better just to say ‘I can’t explain it so let’s just say no more about it. Did I mention China yet? Here are some charts about China.’

it turns out that statistically the person who made up the quote about lightening is a bit of a plonker.
It turns out that statistically the person who made up the quote about lightening is a bit of a plonker.

How does this loosely relate to the two things previously mentioned that happened in Britain over the past week or so? Let’s look at the Leicester miracle firstly. They nearly got relegated last season, which adds plenty to the story. However, in order to save themselves from relegation when they were considered about as irredeemable as a ticket to a Prince concert, they had to hit form that would have been worthy of champions to avoid relegation. They did it and avoided the drop. So one would think that the question would not have been whether Leicester could play like champions, as they had already proved they could, but whether they could sustain it over a season. They could. They could, just like Nottingham Forest did in 1978. Yep, just like it had been done before. Frankly to suggest that something that has actually already occurred cannot possibly happen again, particularly when nobody truly understands how it happened to the extent that they themselves could not recreate it, well that’s just plain wrong.

Secondly, take note freight forecasters of the world. Now that Leicester have won it gives carte blanche to all manner of ridiculous predictions and forecasts. Here are a couple, 2008 rates will be repeated at some point in the next 30 years. China’s economy will have a soft landing. Tanker rates will stay good for at least the next five years. Actually people are using two of those three already. How about there being a shipping company in the FTSE 100 before 2030? If anybody disagrees (as plainly in theory they could all be nonsense) then just remind them to ‘Look at Leicester’.

The final thing that struck me about the statistics is that of the Queen’s weekly mail. Now, we know that Zeke is one of them, could the other one be sat in your office as you read this? Statistically unlikely, but you cannot say for sure that they are not.