Year: 2012

DJTA, Dow Jones Transportation Average a.k.a the Rails, OSG

Hamilton

djta jul 2012

The DJTA has outperformed the Dow Industrials, it is also the older of the two. Why has it done so well when shipping companies are down so much? Simple because not that much is transported by Americans , stock listed companies, in America by water. Of the 20 companies in this index only two are classified as “maritime”. One , ALEX, Alexander & Baldwin is a Honolulu based land-owner active in agribusiness, sugar cane etc. At best it runs a few ferries between the Hawaiian islands. The other is OSG, Overseas Shipholding Group. It too has gone down like a rock but as this index is cap-weighted its significance in the index is fast approaching zero. Here are the charts;

osg 2012osg m 2012

osg s 2012

We give all three, big , medium and small. We are 100% confident about the big picture, it is nearly there. We are not certain about the triangle , it may not be wave 4 but just part of it, but the final result should still be a little lower. Should be a buy if and when it gets to about $6

Ship versus Rail transport.

Hamilton

Clearly the railway companies have , in the main, enjoyed pretty good times since the second great recession. Shipping companies have not. There are a few obvious reasons that may explain why two different sectors of transportation have such different experiences. One is that railway companies usually own the track, a very costly proposition in terms of investment in land, and an obvious cause of reduced mobility. Railways are to some extent always regional monopolies. Secondly the investment in rolling stock is, relatively small compared to the whole.

Ships operate on the open sees and can change their route mid-stream if they care to do so. Relative to the infrastructure, mostly owned by governments and not the shipping companies themselves , the cost of the “rolling stock”, that is the ships, is enormous. Consequently shipping companies are far more sensitive to prevailing interest rates and the hog cycle. This cycle occurs in most businesses that have alternating over- and underinvestment as the result of too rosy or too gloomy outlooks, more so now with low rates to stoke the fires. Mitsui & Co. is a good example, the largest and from Japan.

mitsui 2012mitsui ship

After a 14 year triangle we get a moon shot followed by a shot in the head. Schumpeter’s creative destruction is at work here. These boats do not come cheap and getting rid of them kills your P&L. And the freight rates, expresses very eloquently by the Baltic Dry Index, which has nothing whatsoever to do with the Baltic.

baltic dry index june 2012

It is now,as expected (see previous blog) at a new low and almost at the lows of late 2008. Frontline FRO and TNP are two other shipping companies. FRO (see prev blog ) is working itself down to equality between  A and C in a large A-B-C correction. It is getting close. TNP, Tsakos Energy Navigation Ltd is one of the bigger operators, Greek as so many are, registered in Bermuda. It seems to need one more leg down but yields 11%.

fro jul 2012tnp jul 2012

The trade to do might well be short the rails and long one of these ships.

GLD, Gold update and K, Kinross

Hamilton

GLD jul 2012

We have seen some very incorrect wave counts that would suggest the GLD is presently in a one year long contracting triangle as opposed to some form of a 1-2,1-2. Assuming, for the sake of argument that this is an acceptable count,  the above labelling would be the most plausible. This would have to be a 4th wave and, given the duration, probable one of high degree. A thrust should follow soon and swiftly take the GLD to just above the old high of 192 or to a new high of 225 or so. An almost immediate return to 150 would follow.

The problem with this count is that it has no counterpart anywhere! Not a single large cap gold miner has a pattern that comes close. Nor does that other precious metal silver which already has retraced 50% from the recent peak. K, Kinross is a good example even if some would cry foul given this stock idiosyncratic problems. Here is the chart;

K jul 2012

No count is ever certain but as more pieces fall in place confidence in the accuracy increases. So this stock drops from $45 to $1 in what has to be a 5-wave move! This is confirmed by the wedge or wedges that are always 5 waves (or Cs). 5-wave moves do not stand alone, there always has to be a second one (as in a flat or zig-zag). In between there is invariable a 3 –wave counter-trend rebound that often retraces 50, 62 or even more % of the preceding drop. There is also a tendency to go to the level of either the 4th wave or the 4th wave of 3. It more or less did all of this! Therefore it is safe to assume that we are in the second 5-wave leg down which should terminate <$1. At about $10 we will get overlap. Should this second 5 wave leg develop as a wedge, that will not matter. In the event that we are actually in a double zig-zag (in blue) overlap at this time would also not matter. Given that this stock is already down some 75% or more, the outlook on GLD shown above is downright impossible, but then impossible things seem to happen more often lately..

UNP, Union Pacific Corporation

Hamilton

unp 2012

This railway goes back 150 years. It was listed as a stock back in 1870. It’s performance beats that of either CNR or CP, at least in terms of stock appreciation. The operation ratio has dropped from about 80 a couple of years go to 70 in the first quarter of this year. Profits were up an impressive 39% y-o-y. Given the stocks tripling since the recent lows we would exit or stand aside. The count may not be perfectly correct but reversion to the mean, or the potential for that to happen, is a good enough reason.