Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of dry bulk shipper DryShips (NASDAQ:DRYS) were sent nearly 7% higher following a 6.7% rise in the Baltic Dry Index, or BDI.
So what: The BDI is a basket of various ship sizes and routes around the world based on market daily spot rates. Within that index are the Capesize ships, the biggest and most profitable type of dry ship vessel. The section of the index specific to this ship size rose 12% and staged the biggest one-day rally in 2014, climbing $1,822 to $16,897 and tipping well into the black for most operators of Capesizes, including DryShips.
Since its last earnings release and conference call in mid-February, DryShips has been looking for what it calls an "imminent market recovery." Then, CEO George Economou mentioned that the volatility in recent historical shipping rates, as well as the rise in market asset prices (for used and new ships), was evidence that dry shipping rates would make a sharp recovery. With those rates heading higher over the last two weeks, it gives Economou and DryShips some credibility for what appears to be a good call. This gives the market further confidence in Economou's middle- and long-term forecasts for a sustained recovery.
Now what: DryShips has been in preparation for this expected rise in spot rates by invoking a strategy that allows its fleet to be exposed to these daily fluctuating rates, as opposed to fixed-rate, long-term contracts. The company has recently stated that it has over 9,000 "spot days" available in 2014 and another 11,900 in 2015. Economou stated that "DryShips is uniquely positioned to take full advantage of the imminent market recovery."
It's vital to DryShips that the rates continue to leap upward. The company is leveraged very deeply in debt with interest payments that have been making its dry ship fleet bleed red ink. Its creditors have given the company a temporary stay of execution for several quarters, and if rates continue to rise sharply, DryShips will be in a better position to negotiate better terms and lower interest rates. Fools should continue to monitor rates closely.
Could this make costs for DryShips fall off a cliff?
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.