The Participant 8/20/15: Shipping & Oil

by Jason Kelly

Thursday, August 20, 2015



Consensus holds that the global economy is in trouble. For a front-line look, let’s turn to shipping companies. They move goods around the planet and are therefore directly affected by supply and demand. How have they fared recently? What are they saying?

Top shipping companies include Kirby (KEX $69) with a $3.8B market cap, Matson (MATX $41) with a $1.8B, and Seaspan (SSW $17) with a $1.7B. Kirby is a Houston-based operator of domestic tank barges. Matson is a Honolulu-based ocean freight carrier. Seaspan is a Marshall Islands-based operator of chartered vessels, which it leases to container liner companies. Their stock trajectories have been very different this year: KEX -14.7%, MATX +16.4%, SSW -8.2%. In the past year, even farther apart: KEX -42.2%, MATX +50.7%, SSW -26.7%. What is this hodgepodge telling us?

On July 30, Kirby Chairman Joe Pyne said on the Q2 conference call: “During the 2015 second quarter, marine transportation tank barge fleet experienced consistent levels of demand and high equipment utilization. In the inland tank barge market, utilization remained in the 90% to 95% range. We experienced good customer demand for equipment during the quarter; however worries about future crude oil volumes and some market uncertainty continued to make it difficult to secure better pricing on contract renewals. … The lower oil prices we are seeing will be with us for a while.”

CEO David Grzebinski added: “[S]ince the second half of 2014 we believe the number of barges moving crude has fallen 30% to 40% … The decline in crude oil prices is not having the same impact on contract pricing in the coastal market that we have seen in the inland market … [W]ith a dip in … West Texas Intermediate crude below $50 a barrel here in late July, any recovery in the business has likely been pushed out further into 2016. As such, we continue to look at further cost reductions for this business in preparation for a more prolonged pressure pumping market downturn.”

On August 4, Matson CEO Matthew Cox said on the Q2 conference call: “Matson’s core business has performed well in the second quarter of 2015 led by continued demand for our expedited China service … Looking to the balance of 2015, we continue to expect a multiyear recovery in Hawaii and anticipate modest market growth for the year.” The CFO added that the company’s higher second-half outlook is “driven by expectations for a better volume in Hawaii, continued premium freight rates and high utilization in China,” and slight volume growth in Guam, and a modest profit at SSAT, a terminal joint venture. The company is also optimistic about acquiring the Alaska segment of Horizon Lines.

On July 29, Seaspan CEO Gerry Wang said on the Q2 conference call: “Our operating fleet achieved 98% utilization for the quarter, including our seven scheduled dry-dockings, and the fleets continue to generate stable cash flows from long-term time charters. … [W]e expect tonnage growth of about 6% to 8% for 2015 and around 5% in 2016. Major operators continue to manage supply through scrapping, deployment, slow steaming and idling of ships.” The CFO added: “Revenue increased $25.3M or 14.5% for the full quarter … Adjusted EBITDA for the quarter was $169M, a $38M or 29% increase.”

Ben Nolan at Stifel mentioned that box rates have “come down quite a bit” and asked how shippers usually react to that. Wang replied that the typical response would be a focus on cost reduction, which usually leads to larger-ship charters, and Seaspan is seeing that. However, he said carriers are being helped by “very favorable tanker prices” due to oil being cheap, and by the strength of the US dollar, in which Seaspan conducts all of its business and which provides a profit boost when converted into other currencies.

The baltic dry index, which tracks an aggregate price across 23 shipping routes to determine the cost of moving raw materials by sea, is down just 2.8% in the past year and is up 75% since the beginning of June. It’s been moving mostly sideways for four years.

What’s the takeaway? Most trends look typical, with the exception of cheap oil. The low price of oil is resulting in less shipment of oil-related products, of course, but the financial impact is being partially offset by lower fuel costs. It’s not clear that cheap oil means the global economy is in trouble, however, because the rising supply of oil is more responsible than falling demand for the price change. What the shipping industry shows is plenty of business activity being filtered through the effect of a strong dollar and inexpensive oil.



From Note 29 sent to subscribers last Sunday morning, with data as of Friday, August 14:

Will this be the week that finally delivers our desired $120 exit price from our Oil -2x (DTO $112.85) hedge? … All we need is a 6.3% gain — exactly what we got last week. That means about a 3.2% drop in the price of WTI, which would put it at $41.14 per barrel. … The price of oil did top out at $60 as our thesis specified, and did head back down toward $40 as we thought it would. It’s almost there now, and getting there should send DTO to $120, where we’ll fully exit the position.

If China’s economy has slowed enough to damage demand for its currency, is a global recession on the way? Not necessarily. Remember from past letters that only 1% of US economic output is based on trade with China. That one point dismisses the notion of a direct connection from China to the developed economies of the world. Does activity in China affect others? Of course, as all parts in the system affect others. Is the effect great enough to reduce growth to zero or cause contraction in other economies? No.

The world’s largest restaurant chain, McDonald’s (MCD $99), has indigestion. After its last slump, about 15 years ago when critics wrote it off as not being a growth company anymore and alleging it could never become one again because eating habits had moved beyond burgers, McDonald’s developed a turnaround plan and recovered beautifully. From 2004 to 2011 it delivered average annual global comparable sales growth of 5.6% while increasing operating margin by 15 percentage points to more than 31%. Its stock price rose 300% from the beginning of 2004 to the end of 2011, and it paid a dividend the whole time. It’s a company that knows its business, has seen every kind of threat, and is capable of recovering from setbacks. It’s experiencing one now, and its stock price has gone nowhere for three years. Can it regain its stride?

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The following summarizes Tom DeMark’s July 27 forecast for Chinese stocks.

Chinese stocks will decline by an additional 14% over the next three weeks as the market demonstrates a trading pattern that mimics that of the US crash in 1929, according to Tom DeMark, who predicted the bottom of the Shanghai Composite Index in 2013.

The benchmark for mainland stocks will sink to 3,200 after plunging 8.5% Monday to 3725.56 in the worst selloff in eight years, DeMark said on Monday. …

The Shanghai gauge had rebounded 16% from its July 8 low through Friday as officials went to extreme lengths to support stocks. … China Securities Finance hasn’t pulled support for equities and the government will “continue efforts to stabilize market and investor sentiment,” China Securities Regulatory Commission spokesman Zhang Xiaojun said in a statement after the close of trading Monday. …

“The die has been cast,” DeMark … said by phone. “You just cannot manipulate the market. Fundamentals dictate markets. … Markets bottom on bad news, not good news. You want to have the last seller sell. We got good news at the recent low. The rally is artificial. … Lip service and intervention like that — it’s false. There’s a certain way in which the market unfolds. The only thing the government could do is to postpone it.”

Disposition: Immediate-Term Bearish
Shanghai Composite on 7/27/15: 3726
Shanghai Composite on 8/17/15: 3994
Change: +7.2%
Judgment: Wrong

To see this call in The Z-val Zone, please visit:

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Background: The term “z-val” is a shorthand introduced in the book, “The 3% Signal,” for “zero-validity forecasters” and “zero-validity environment.” The latter phrase was coined by Nobel Prize winner Daniel Kahneman in his book, “Thinking, Fast and Slow,” where he wrote that “stock pickers and political scientists who make long-term forecasts operate in a zero-validity environment. Their failures reflect the basic unpredictability of the events that they try to forecast.” This is why stock market forecasters are proven to sport an accuracy rate of about 50%, same as a coin toss, yet they continue forecasting.

You can peruse the growing collection of tracked forecasts in The Z-val Zone at:

Seen a forecast I should track? Send me the link in a reply to this note.



One of my favorite old hotels in Tokyo is the Hotel Okura near the American Embassy. Whenever I visited the embassy over the past 13 years of living in Japan, I stepped into the Okura for its elegance from a bygone era. Its polite workers, some wearing kimono, were a joy to interact with. Its high-ceilinged lobby was always welcoming, with an orchid motif on one wall and chairs made to look like plum blossoms. Sometimes, I’d set my briefcase down and just sit in one of those chairs and listen. Well-dressed guests spoke politely with each other. They came and went in shiny cars with doors opened by gloved doormen.

That bygone ambience is about go by. In preparation for the Tokyo Olympics in 2020, the Okura will be torn down and replaced by yet another modern hotel/retail/office monstrosity, indistinguishable from many predecessors around the city. Kimono will give way to pantsuits.

I’ll arrange for one last lunch at the Okura’s irreplaceable terrace restaurant, look out on the garden, and question why nothing is venerable anymore.

Yours very truly,
Jason Kelly

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