Recession - Dry Ships

The Dynamic Wealth Report
December 26, 2007

A Recession?  Not Yet...

“You have to be an idiot not to realize we are in a recession.”, he said.   John was a small business owner I met at a conference a few weeks ago. Clearly, hard times were at his doorstep.  His sales were slowing and he stopped hiring new people.  To him, a debate on recession was wasted hot air . . . we were already there.

These days you can’t turn around without hearing talk of an impending recession and subsequent stock market collapse.  Bill Gross, the world famous bond fund manager for PIMCO, all but said we're in a recession.

He's encouraging the Federal Reserve to lower interest rates to stave off the impending doom.  Of course, I assume everyone realizes the bonds he owns would be worth a heck of a lot more if the Fed follows his advice.

We're caught in an interesting cycle.  The Fed is nervous about a slowing economy.  The economists of the world believe the economy is already slowing and they blame banks for the credit fiasco.  The banks blame mortgage companies who in turn point a finger at the real estate market. Believe it or not the real estate industry is blaming the consumer.

If only the American consumer would get out and buy the homes they can’t afford everything would be great.

Those who yell and scream at the top of their lungs about how we're heading for a recession are trying to make people fearful.  One of the popular comments is that we are “due” for a pullback in the markets.

Personally, I don’t believe that markets follow a clock or a calendar. When was the last time you looked at a stock and said, “Well I’ve held this one for 23 months, time to buy something new”?  It just doesn’t make sense.

One major data point some pundits are mentioning as a sure sign of coming recession is the recent fall in bulk shipping stocks.  The theory goes something like this: 

Our economy is based on the buying and selling of goods.  These goods need to be moved from location to location . . . from the producer to a distributor and eventually to a consumer.  A key indicator for the health of the economy is the movement of goods.  So it goes to reason that as shipping companies go, so goes the economy.

In today’s market there are a handful of companies that specialize in transporting goods.  Several are in shipping.  They basically have ships for hire.  These fleets of dry bulk oceangoing vessels carry items like coal, iron ore, grains, bauxite, phosphate, fertilizers, and steel products just to mention a few.  If you need to move several tons of a product you call them up and rent their boat by the day.

Look at a recent chart of one such company, Dry Ships (DRYS).

Over the last 3 months the stock price has collapsed, falling from a high of $130 to around $70.  This market activity gives rise to thoughts that the business is struggling.  People think this could be a leading indication of a recession.

I don’t believe it.

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Two reasons.  Just because one company’s stock price is falling doesn’t mean the whole industry is suffering.  TBSI, a competitor of Dry Ships, is actually up over the last few months.  Secondly, I think the stock got ahead of itself in October.  Look at this second chart.



This tells a very different story.  Clearly the price got out of hand in October.  Over the course of a few weeks the stock moved up almost $40.  Now it is falling back into line.  Despite the recent fall, Dry Ships is still up more than 200% for the year!

So, despite the fact that the shipping industry is having some near term issues, I don't think you can point to that as a surefire sign of impending recession.  Despite all of the turmoil in the markets and the near collapse of the real estate and the mortgage industries, the markets have survived and prospered.

As of today, the Dow is up almost 8.7% and the NASDAQ an impressive 12% for the year. 

Now, does all this mean everything is fantastic and we will definitely avoid a recession?  No.  But I think the chances of a major recession and stock market fall are not as great as many would have you believe. 

•   Soybeans ($11.81 per Bushel)

Soybeans continue to move higher continuing an uptrend that started back in October.  The market is up significantly from the beginning of the year when prices were at the $6.60 level.

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