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Today's Deceptive Rally in Dry Bulk Shipping

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If you thought the fiscal cliff deal was enough to jump-start stocks in 2013, just wait until you see what shipping stocks are doing.

It was a full-on market rally for shippers today, with stocks soaring. DryShips (NASDAQ: DRYS  ) saw shares skyrocket an astronomical 25% today, while many competitors also recorded strong gains. After the gloomy tide that took over the shipping industry following the recession, are shippers headed for new heights -- or should you stay away from today's surge?

Stocks and rates charging higher
An attractive bit of news drove investors into a short-term frenzy today, hoping to grab profits while shipping stocks are relatively cheap. Rates for shipping iron ore  jumped the most in the past eight weeks today, and the outlook for 2013 is that rates should keep on rising -- ostensibly driving more revenue for shippers.

What's behind the rate hike? Perhaps, unsurprisingly, it's the same force  that has dictated much of the raw materials trade in the Pacific -- China's infrastructure growth; in particular, the nation's steelmakers. China's steel industry is the world's largest and, with renewed infrastructure commitments from the nation's stimulus  program, steel companies in the world's second-largest economy are stocking up. Said companies are also adding to inventories before stormy, cold  seasons begin to hit suppliers in Australia and Brazil.

These factors have combined into a perfect storm for investors, who are piling into shippers near and far. Navios Maritime (NYSE: NM  ) rose more than 5% -- and that's on the conservative side of the industry. Eagle Bulk Shipping (NASDAQ: EGLE  ) shot up 25% to match the aforementioned DryShips. With iron ore prices expected to remain high in China for the short term, traders looking for a quick buck have spotted opportunity.

Today's deceptive rally
For the long-term investor, however, buying into today's spree is not the right move to make.

The Baltic Dry Index -- the key measure of raw material shipping prices -- is still at bottom-of-the-barrel lows. The index today sits  at a level of 700 -- down more than 50% from early January 2012, when the index was over 1,400. That's also far below what it was just in early December, when the index was over 1,000. Such a low mark indicates that the outlook for prices still isn't good, despite today's rate optimism -- the index already averaged its lowest mark  since 1986 last year.

The economy at large isn't exactly helping out shippers, either. With Europe still stuck in a financial mess, don't expect a burgeoning need of raw materials across the Atlantic. Housing has picked up in the United States somewhat, but with sequestration  up on the political docket in just a few months (again), there's no telling how hard the budget hammer will hit America's economy later in 2013.

With trade picking up as the economy begins to improve, however, things aren't all rising for shippers. Demand for fuel is picking back up, which will send prices  higher -- increasing costs for cash-strapped companies. Shipping industry consultant McQuilling Services LLC expects prices  for bunker fuel -- what shippers use to power their fleets -- to hit an all-time high in 2013.

As for China? While infrastructure spending might be picking up across the Pacific, the world's second-largest economy still faces a number of challenges of its own. China's GDP growth  has slipped significantly from double-digit highs in 2010. While economists polled  by Bloomberg predict the Chinese economy to post accelerating growth for the next six months after seven straight quarters of decline, it's tough to predict just how long stimulus spending can keep up the country's infrastructure boom. Any decline there would seriously dent shipping revenues across the industry.

Winners and losers in a struggling industry
What about major shipping companies themselves? They have plenty of ground to make up, as well. In the past, I've covered the debt-laden financial mess that DryShips is in, but there are few options that make sense in the long term for shipping investors. Eagle Bulk Shipping faces a total debt-to-equity of 183% -- far more than some of its competitors -- and the company's small size in a sector where bigger is better doesn't inspire confidence.

If you're looking for safer long-term picks in the shipping industry, consider Navios and Safe Bulkers (NYSE: SB  ) . These two sport manageable debt loads and strong dividend yields with reasonable payout ratios. It's unlikely that many shippers will provide substantial growth with the world economy still stuck in neutral, but these two stocks offer promise for income investors and those looking for safe picks.

Also, keep an eye on the likes of Aegean Marine (NYSE: ANW  ) . With fuel prices on the rise, this fuel logistics company could benefit where shippers are poised to feel the pain. The company's inventory growth speaks of increased demand on the horizon -- and analysts estimate  that Aegean Marine will report significant growth in profit this year.

An eye for the long term
Short-term traders may be going crazy over today's rally, but long-term investors know better than to engage in the frenzy. The shipping industry is still struggling to stay afloat, with higher fuel prices dragging on bottom lines. While the economy may be picking up somewhat, problems in Europe, China, and elsewhere are far from over -- and, until real global growth shows up, shippers will continue to chug along slowly. There are still good stocks in the shipping sector, but don't be caught up in today's rally. Take the time to find the best companies and invest for the future.

These shippers are up huge today, but you could be up much more over the long term. In fact, The Motley Fool wants to give you a 98.79% chance at beating the market. If you're interested in the best odds in the universe -- including more than a 70% chance at DOUBLING the market's return over the long haul -- here's some very good news for you: Motley Fool Supernova is reopening to new members for the first time ever on January 15! Get instant and free access to learn how you can get these kind of market-beating odds by clicking here now

Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On January 06, 2013, at 11:53 PM, harkvasa wrote:

    I agree that the shipping industry is still weak and may take a while before it turns around.

    However, in case of DRYS, it is alos a play on oil drilling with it's ownership of ORIG ( Ocean Rig).

    ORIG can double in price from $15 to $30 range in the next 18 months with it's strong revenue and bookings in 2013 and beyond. This could take DRYS to over $4 per share in 18 months; so DRYS at $2.15 per share is a strong value play.

  • Report this Comment On January 31, 2013, at 9:53 PM, imacg5 wrote:

    Those nice revenues and backlog have yet to produce good earnings for ORIG. The management fees and other charges from Georges private management company are oppressive. The interest and finance charges are huge.

    DRYS owns 65% of ORIG shares and has yet to trade at 65% of the ORIG market cap. George has sold off millions of shares of ORIG without any benefit to DRYS shareholders.

    The horrible moves by George Economou have left DRYS with too much debt, and charter rates that are lousy. Then they have the new build ships that are likely to be cancelled because they were bought even after the glut was obvious and the lack of financing was evident. DRYS has to give cash to the buyers when they sell a newbuild on order. Heck of a way to do business.

    DRY Bulk ship values continue to fall, and the Bankers holding the notes don't care what ORIG is worth because there are no cross defaults.

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