Why Shares of DryShips, Inc. Stock Were Beached Yesterday

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  ) got anchored as much as 4.3% yesterday following a combination of negative news out of China and a dive 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. The BDI crashed by 8% on Thursday, one of the largest one-day dips in a long time. Within that index are the Capesize ships, the biggest and most profitable type of dry ship vessel. The Capesize index crashed 18.4% and staged the biggest one-day drop in rates in 2014. It plunged $4,602 to $20,472, although this figure is still up about 300% on a year-over-year basis.

A credit squeeze on the steel mills of China is to blame for the rate plunge. New strict credit guidelines are being imposed by the Chinese government on steel mills. Since Chinese steel mills have been responsible for a huge portion of world's demand for iron ore, any softness in that demand means softness in rates, especially for Capesize daily spot rates. 

Now what: DryShips has strategically positioned itself to be more exposed to daily spot rates as opposed to long-term, fixed-rate contracts. If the credit squeeze presses on and the BDI continues to fall, it will directly affect DryShips' bottom line. All things being equal, every $1 drop in rates leads to a $1 drop in the bottom line.

There are three things to watch closely over the days and weeks ahead. First, the BDI and the daily spot rates within that index. Second, the economic developments out of China especially in the area of credit and steel mills. Third, a possible change in analysts' sentiment.

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