“The Shipping Blues”

U.S. Markets continue to flirt with 10,000 and 1,100, shrugging off the fundamentals.

Trader’s are looking to the future; to a global improvement that will justify the unrealistic rises in the indexes. But what happens if the future doesn’t exist? A vaporous dream of hope that disappears leaving everyone empty?

Third quarter earnings are a pivotal indicator and the hopes for a holiday season, better than last year, is almost palpable on the floor of the exchanges.

Many of my articles have been cynical of the perceived recovery, the health of banks, and the rise in the stock markets. Rather than cynicism I like to view it as realism. A common sense look at what is really happening.

With many indicators moving at hyper-speed it is increasingly difficult to keep up with all of the complex elements of the economy and what affect each will have on consumers, businesses, investors, policy, and the markets. Today we’re faced with rapidly changing information. As a result I spend too much time reading, digging, watching, analyzing, evaluating, and writing.

But everything I need to know for The Shipping Blues is found on the deep blue ocean, the hard steel rails, and endless ribbons of asphalt and cement stretching across terra firma.

The best indicator of the future economy is conceivably shipping. And right now many shipping companies have “The Shipping Blues.”

What are The Shipping Blues?

The news isn’t so hot when you look at the shipping indicators like the Baltic Dry Index, load levels, rail schedules, capacity utilization, and rates.

Most worrisome of the shipping news is ‘The Ghost Fleet of Singapore’; chronicled in an astonishing article by Simon Parry for MailOnline on 16 September.

Parry’s report on the biggest, most secretive gathering of ships in maritime history is telling. ‘It is a symbol of the depths of the plague still crippling the world’s economies,’ as he describes it. At a time when massive freighters and tankers should be steaming back and forth to England, Europe, and the United States, filling Christmas stockings worldwide, a hefty 12% is ‘in irons.’

Cargo ships, anchored like hulking ghost ships in a secret Southern Malaysian harbor, have nowhere to go and nothing to get there.

The ripple effect is just beginning. Shipping brokers have seen their bonuses of the last several years disappear as commerce contracts fade. With so much space available, prices to ship goods are falling dramatically and broker’s margins are plunging with them.

The Baltic Dry Index, a measure of shipping costs of commodities, has again fallen to very low levels since its high of 11,771 in May of last year. After the May 2008 high the index fell to an unprecedented 663 at the end of December. The high this year was 4,291, reached in June, but has slid again to just over 2,200, just below the level it was when markets hit their May 9th low (2,262). It stood at 2,163 on September 25th.

Another dramatic indicator is China’s demand for Iron-Ore and Coal. Both have begun a precipitous decline since the highs in July. Coal imports to China in August slid 15% for the 2nd straight month of declines, but the most important of the two is iron-ore.

Danske Bank tracks the Chinese import of iron-ore and expects the level of imports for this month and next to fall to 48 million tons; 10 million tons per month less since the import of 58 million tons just three months earlier. The 48 million tons is a return to February levels, the first month of their historic rise in import of the raw material for making steel.

Imports fell 14% in August, far greater than the 9% it was expected to fall. The September numbers will provide a clearer picture of the current October and November expectations. A decline of 4% in September would bring into question the predictions for October and November.

As shipping on Azure seas fall so does shipping on Terra Firma. Rail and trucking companies are feeling the pinch of a slowing economy.

In the last 6 months of 2008 more than 600 trucking companies went out of business leaving thousands of trucks sitting; empty and dormant as the holiday season approached. Despite the massive decline in the number of trucks on the road, those that are still hauling competed aggressively in 2009 for the smaller amount of freight being shipped.

Figures for the first 6 months of 2009 are even more devastating. Though 2nd quarter US trucking bankruptcies were down 23% from the 1st quarter to just 370, and incredible 850 companies filed for bankruptcy in the 1st half of 2009.

The excess capacity requires existing companies to lower rates. Margins have greatly reduced with some companies losing money on shipments to keep their trucks rolling. The reduced cargo on the sea and fewer trucks hauling freight have an effect on the rails.

Fewer trains are on the rails these days. Cost reductions have forced rail companies like CSX and BNSF to add cars to trains while reducing the number of trains on their daily schedules. Fewer trains pulling slightly larger loads in an effort to save money. An article by Barry Ritholtz in June, “American Trucking Association Tonnage Index,” described the bleak landscape for both trucking and rail through the end of May, 2009.

A drive by the rail yard in Fontana, CA is a portentous site; as many as 100 powerful engines sit, no fire in their massive bellies. They’re waiting to be called into duty, pulling cargo from destination to destination keeping America’s economy moving. But it is yet another sign that America’s economy is moving very slowly.

CSX reported earnings today with a drop in profit for the 3rd quarter of 23% and an equal drop in revenue amid a 15% decline in volumes. The company foresaw a double-digit drop, but the decline was lower than the first two quarters. CSX’s earnings dropped by $87 million in the quarter.

Other shipping indicators and consequences have appeared in reports that the financial media have brushed over or ignored. Along with other indicators these facts and figures could have a numbing effect on the future global economy and an impact on the perceived recovery.

In July, Japan reported that its trade surplus quadrupled, rising 384% from last year. Exports fell by 36.5% with shipments to China, which recently passed the U.S. as their biggest trade partner, falling 26.5% while exporting 39.5% less to the U.S. in July. This story got barely a whisper from the media and a single paragraph in MarketWatch on August 25th.

Shipbuilding companies are just beginning to feel the pains of the shipping decline. With 500 ships secretly anchored in Malaysia with no cargo to ship, the obvious conclusion is: the need for new ships has evaporated. Korea’s shipbuilders are feeling the pressure to lower prices, as container shipping companies renegotiate contracts for new ships, or face cancellations. MarketWatch again had this article on September 30th, but CNBC wouldn’t touch it.

FedEx reported a 53% decline in 1Q earnings ended August 31st, year on year. Revenue decreased by 20% to $8.01 billion. A year over year decline of approximately $1.9 billion. It was a decline on top line of $239 million from Thomson Reuters expectations of $8.24 billion. Hardly a sentence on CNBC.

At a time when shipping should be at its peak—stocking for the holidays, restocking depressed inventories finally depleted after nine months of weak demand, and rebuilding for the improving economy—it is declining. Evidence exists that the economy will remain flat or, at best show small incremental improvement. With these shipping indicators the possibility exists that the economy will return to recession.

Most local business are still seeing sales decline by as much as 30% during the first nine months of 2009. This is not a good sign for the economy and indicates that recovery is being pushed well into 2010 or possibly 2011.

Shipping is a clear indicator that the markets have gone too far too fast and that the economy, globally, has not improved to the level many financial advisors, economists, government officials, and investors believe they have, and in fact may be retracing earlier declines.

Shipping should be watched very carefully for the next 3 months, especially through the holiday season, to get a ‘realistic’ picture of the direction of the economy. Everyone is hoping this preliminary indicator picks up which would offer evidence of an improving economy.

But for now, shipping companies have, “The Shipping Blues.”

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