So this week I put on my white lab coat and fired up the Commodore 64 to do a bit of number crunching. By now you have probably got the idea that I’m none too fond of shipping ‘cliches’. Some of this stuff is so full of dead wood that it could be an extra from a Ron Jeremy movie. ‘Buy low and sell high when rates are values go up’. Genius alert.
Be careful who you ask when wanting to experience ‘the Greek way’. Now I don’t want to be unfair to Greek owners, investors or anybody at all of Greek extraction, not every Greek thinks that you can only make money in shipping if you come from GMT+2 time zone. There are many many Greeks who have made their fortunes in shipping and many of the very smartest brains in the business hail from there, but you wouldn’t take guitar lessons from somebody just because he told you ‘Well me and Keith Richards are both British’ now would you? I am pretty certain a little more work goes into the planning than ‘it looks cheap’. Who knows.
However, clearly advising people to buy low, sell high would need to done by those whose faculties are being closed down faster that the University of Telex. I once got a tip from a stranger while playing a particularly abysmal round of golf. As I completed the ‘jumbo’ on my card (7-4-7) he came over and told me that ‘If you want to really improve your score you need to cut out those 3-putts’. If only I’d thought about it when I was standing over that second putt which I missed?
So, let’s have a look at what Rafa Benitez would describe as ‘facts’. The fact is that vessel values have cratered. Here’s another fact, vessel earnings have cratered. Last facts (I think these are less contentious than Rafa’s), that the values and earnings are interlinked, somehow. What is kind of interesting is that this ratio between asset values and earnings varies greatly. Going back to ‘buy low/sell high’ one might want to ask ‘what is low? what is high?’ and how do I know when low is at its lowest and high is at its highest?
Now history, for once, teaches you a little bit on this subject. It teaches you the average value over time of a vessel for example. But that is life in the bell jar and ultimately doesn’t help you to answer when is ‘low’ and when is ‘low’ not ‘low’? So let’s have a look at earnings against vessel values. I think we all agree that they are linked, but how exactly?
Well I fiddled up an earnings to values normal distribution curve for a 5 year old capesize. You’ve seen it, sort of, in a previous post ‘Mr Prospector thinks about buying capes’, but not in a normal distribution representation. Then I did the same for panamaxes and supramaxes. Now what do you use to forecast earnings going forward? Well, again you will know that I think forecasts of any kind, but especially earnings forecasts are just the devil’s work. So what is real and traceable? FFA forward curves fit the bill nicely, primarily because you can actually execute the trade rather than theorise it.
So here’s the basics. We’ve got 5 year old vessels. We’ve got the time charter index FFA curve going out for 5 years. You take the price of the ship and the combined earnings if you traded the mid-point of the FFA curve and you have a ratio of values to earnings. You can then back calculate through time what that ratio has been using two ways, first what real earnings were for the next 5 years; second what the FFA curve was on the day that each vessel was valued. Then you need to do a bit of Mr.Prospector jiggery-pokery and hey presto! I have an index for this and presented in the most boring table ever.
When the index is at 0-750 it would imply that selling a particular ship and buying FFA 5 year strip would likely be the best policy i.e. it’s a market where earnings are more interesting than assets. 750-900 and it’s starting to get interesting to accumulate assets and sell earnings. An index of 900 or higher (it will literally never get to 2,000) and without doubt you are in territory where you would buy an asset and sell the earnings, i.e. it is now an asset player’s market.
Capes rallied prolifically over the past two weeks. One would imagine that buying a second hand cape would be where the magic lies. not necessarily!
Capes appear to still be in the territory where historically more often than not you have made money from selling the ship and buying the asset. And you think about it. Had you been a seller of a cape over the past couple of months you might well feel a bit sore because earnings are much higher and the price for that asset is a little higher too. However, if you had looked at the price/earnings index that I’m showing you then you would have sold your ship all the same, but bought the FFAs so that you capture the arbitrage in your favour. Net result? You would be a couple of million dollars better off, even when you consider that the ship you sold is now worth a bit more. It’s like entering a triathlon without ever training for the swimming bit. You might well feel like you’ve nailed the cycle, but then at some point you realise that you didn’t do something that you really should have.
Noteably, panamaxes are at a level where asset accumulation looks interesting and as for supras; if you catch hold of a supra seller either buy his ship off him fast or (if you actually like him) tell him that he is just about to hand somebody free money.
What is most appealing to me about this is not the ‘absolutes’, but the relatives. You can change the age of the ships to whatever you want. You can change the duration of the return. You can change any part of it and come up with what you feel is the most meaningful exercise. There’s no need to ‘watch for a bit’ – you have years of history to analyse. You can use it for spot trading, FFA trading, asset trading, bunker trading. Just roll your sleeves up and have a go.
One thing that I have to own up to is that this is not intended to be definitive. What I mean is that OK, you want to buy or sell a ship, but is your timing historically good against the value of the ship in terms of earnings potential? One cannot separate the two, and when viewed next to each other they do start to show a different picture to the usual clarion call of the ‘it’s cheap’ – a method that so many people have ruthlessly exposed by going bankrupt. So one must finish the trade off by creating a ratio against something that is very very far from its standard deviation. And it is surprising to find out that actually it may just be the earnings.