October wasn't an easy month to own FreeSeas Inc. (NASDAQ:FREE), NewLead Holdings Ltd (NASDAQ:NEWL), DryShips Inc. (NASDAQ:DRYS), or any maritime shipper for that matter. They were all down rather sharply after heroic runups in September. DRYS fell 22% last month. NEWL slumped 41% in October. FREE gave up 44% of its value last month. What happened? After all, these same stocks were among some of the hottest names in September. In simplest terms, what happened here is what happens all too often... the market "got it right" in terms of the premise, but overdid it. Now that the dust is settling though, the undertow is kicking in again, but this time at a more reasonable/sustainable pace.
At the heart of the runup and subsequent pullback from DryShips, NewLead Holdings Ltd, and FreeSeas - and again, most of the dry goods shipping stocks - is the Baltic Dry Index... a measure of the change in prices to charter a dry-bulk-carrying vessel. These prices have been depressed for years, with the index falling from more than 11,000 in the heydays of 2008 to the 900-ish area for the better part of the last year and a half. A funny thing happened in June, though. Demand for shipping services finally caught up with the supply, and companies like NEWL, FREE, and DRYS got into a position (at least in investors' minds) where they could start to charge what they needed to charge to remain profitable rather than flounder at the mercy of companies that ship dry goods. Between late-May and late-September, the Baltic Dry Index had run from 812 to 2084, with most of the industry's stocks finally getting on board with the runup beginning in September.
It would, in retrospect, be the exact worst time for any of those names to offer hope to patient investors. Since then (through the middle of last week) on the heels of almost sixteen straight days of declines, the BDI has fallen back to 1480, and dragged DryShips, NewLead Holdings Ltd, and FreeSeas lower with it.
Fast forward to today... well, late last week anyway. It was subtle, but on Thursday and Friday last week, the Baltic Dry Index inched higher, from that 1480 mark to 1525. It's not a huge leap, but it's the biggest and best two-day stretch we've seen from index in more than a month, and it may well be a sign that the "ebb" portion from the ebb and flow pattern is now complete, and the index's true direction - a bullish one - is starting to unfurl again. Translation: NewLead Holdings Ltd, DryShips, FreeSeas, and all the other stocks that are subject to the Baltic Dry Index's movements are 'buys' again, as this bigger-picture rebound continues to materialize.
And just for the record, yes, there are more underpinnings to the Baltic Dry Index rally than just a little fortuitous volatility, for reasons described here. Several other supportive clues are finally falling into place as well.
As for how it all happened (the BDI's explosive rise in September and subsequent lull in October), shipping customers can fall into the same panic trap that investors can. Fearing a rapid and sustained rise in the cost of charter rates, many companies locked in still-good prices in September while they felt like they were at palatable levels. That flood of "better sooner than later" buying, however, is largely what pushed shipping prices up as far as they went. After a month of it, these customers finally realized that while the shipping market is getting better, it's not in meltup mode. That's when prices started to ebb. The basic long-term pillars of the rise, however, remain in place, which makes NEWL, FREE, and DRYS "buy on the dip" kinds of stocks.
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