Agora Financial’s Rude Awakening

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Dubai, UAE

· Markets continue their financial scorched earth policy,
· An opportunity literally worth its weight in black gold,
· Differentiating between the leaky boat stocks and the super yachts and more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

Baby, bathwater and, after yesterday’s brutal action, even the bath are on the way out the window. Pretty soon, the whole house will be piled up in the vacant lot next door.

After an encouraging rally into Monday’s close, the Dow finished down “only” 360 points. For investors who had only hours earlier been looking down the barrel of the worst single day selloff in decades, the posted loss must have seemed like a pat on the back, a narrow escape. But hopes of a stealthy getaway were well and truly dashed yesterday as US markets followed Asian and European measures further into the red. The Dow ended the affair off over 5% while the S&P and NASDAQ posted similarly painful digits.

Today, the rest of the world continues it’s financial scorched earth policy with renewed vigor, slashing and burning asset classes across the board. The Japanese were the hardest hit overnight with the Nikkei 225 finishing the session down a whopping 9.4%. China’s Hang Seng dipped over 8% and the Aussie All Ordinary Index fell almost 5%.

Not wanting to be left out, London’s FTSE led a mass market evacuation over in Europe, falling another 4.17% yesterday. That comes in top of Monday’s spectacular 400-point evacuation, the worst single day drop in the market’s history.

The story is the same wherever you look. Depression, recession, and the running of the bears are the order of the day. Still, for many creative thinkers, the environment is one awash with opportunity. Well capitalized, fundamentally sound companies that sell today for a 50% discount to last month’s prices will eventually regain their footing. When all the brush-burning is done and the weeds are incinerated, the grounds will be fertile for these oversold stocks to once again flourish. The trick is, and has always been, to separate the rosebushes from the weeds.

“It’s really quite amazing how quickly some people adapt to changing market environments,” your editor’s father observed yesterday. “Times like this, times of crisis and panic, are what some folks feed off. It depends on your perspective, I guess.”

We were puttering down Deira Creek on an old abra, the traditional wooded boats used for pearl diving that mottle Dubai’s main estuary. As mother and sister discussed their recent jewelry purchases from the Dubai Gold Souk up the front of the boat, father and son pondered the tumultuous economic landscape from the back of the vessel.

“Take these boats for example,” our father continued, pointing from our old rickety abra to the mega-yachts moored at the side of the creek. “Unless you live or work on your yacht, like our friend here, it’s largely a luxury item. When things are booming and everyone thinks he’s getting rich, people tend to load up on items they don’t need. Then, when reality knocks them on the head, they are forced to sell.

“A couple of my mates have taken advantage of this very scenario,” he continued as we chugged along in the wake of passing fishing vessels, “They’ve gotten onto a good thing buying up fancy boats in the Caribbean at fire sale prices. Many rich bankers used to keep them down there for weekend getaways and vacations. Now, as their wealth is evaporating before their eyes, they have to liquidate all their assets, starting with luxury items first.

“These guys – you remember Mobsy and Doggy don’t you? – well, they’ve been flying to the US, buying up these boats, then shipping them back to Australia and flogging them off for a massive profit. Even after paying the exorbitant shipping coasts, often in the vicinity of $80,000 to $100,000, they still finish way in front.

“Now, this opportunity may not last long. Maybe the Aussie market will dry up, or things will turn around for the US. The point is, you’ve got to have your eyes and ears open and be ready to take advantage of opportunities when everyone else is complaining about how bleak things look.”

The questions for us, as contrarian investors, remain the same – When does a selloff become a buying opportunity. How can we differentiate between the leaky boat stocks and the discounted super yachts? In the column below, Byron King investigates an opportunity on the high seas that is literally worth its weight in black gold. Details below…

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Sailing to Safety
By Byron King

The price of oil goes up. The price of oil goes down. On July 11, 2008, oil sold for a record $146 per barrel. Just over two months later, on Sept. 15, oil plunged through the $100 mark for the first time since last February and was changing hands at $95 per barrel. That drop in price reflects a change of $51 – or 35% – in just 66 days.

Can you invest for the long haul in a climate like this? It would help to find something that doesn’t swing wildly in just a couple of months. In the world of oil, there’s at least one thing that doesn’t change. That is, much of the world’s oil moves by tanker ship.

In fact about 62% of the world’s oil – over 2 billion barrels per year – is transported via tanker ships. As the accompanying map shows, the tanker routes of the world are pretty much where you would expect. Most of the exported oil moves out of the Middle East and West Africa toward North America, Europe and Asia. The rest of the world’s oil moves by pipeline, mostly through Eurasia and Russia.

Here’s the general process. Large tankers load up with crude oil. Then the ships sail across the sea to their destinations. They discharge the cargo. The tankers take on ballast and begin the voyage back to pick up another load. This is the life of a tanker ship.

Let’s go into a bit more detail. The cost to hire a tanker is called the charter rate. This rate varies according to the size and the characteristic of each tanker and the general availability of ships. That is, in a tight market, shipowners can command higher charter rates.

There are about 4,000 tankers available for hire in the international market. Of course, there are many different sizes and types of tankers. Panamax vessels are suited for transiting through the relatively narrow locks of the Panama Canal. Suezmax tankers are optimized to transit the Suez Canal.

Still other tankers – large vessels called “very large crude carriers” (VLCCs) – are more suitable for long hauls over open water. VLCCs are used mainly to ship oil from the Middle East in large volumes, more than 2 million barrels per vessel.

This description barely scratches the surface. But you can see that the tanker industry is complex. Yet as long as people continue to use oil – a safe bet – there will be some consistency to the tanker business. Load. Sail. Unload. Turn around. Sail back. Do it again.

Are there any risks involved in investing in the tanker business? Sure.

Remember the Exxon Valdez in 1989? Exxon’s big ship hit a rock south of Valdez, Alaska, and spilled 11 million gallons of oil. What a mess, right? Exxon was litigating the punitive damages in the U.S. Supreme Court as recently as this past spring, 19 years after the fact.

Of course, tanker owners are required to carry substantial levels of insurance coverage. Then again, the cleanup costs for a major spill could break anyone’s bank. Looking back at the Valdez oil spill, it was entirely an issue of human factors. The ship driver put the vessel in the wrong place. And a well-managed company can do a lot of things to screen out the human factor. Like not hiring alcoholic tanker captains.

Another large risk to the tanker business is a sustained decline in global oil consumption and transport. After all, oil powers the business model of the tanker industry. What does that mean in a world that (despite the daily fluctuations in oil prices) lives with the growing evidence of the Peak Oil thesis? Could we see a sustained decline in oil transport by tanker?

Over the long term – the next decade or so – the volumes of oil moving in international commerce will surely decline. Eventually, depletion will win out. There will just plain be fewer volumes of oil for sale and available for movement. Those cargoes of oil that do move across oceans may well have armed naval guards for protection because of the value of the oil onboard.

And in the short-to-medium term, as well, we might be seeing something like the beginnings of a global slowdown in oil consumption. There is an economic rebalancing going on in North America. Drivers are burning less gasoline. Energy usage even in Asia is measurably decelerating, though by no means declining.

At the same time, due to the banking meltdown and tight credit situation worldwide, it is now much more difficult and expensive than before for shipping companies to finance existing vessels or new construction. So the result is a looming capacity shortage for tankers.

Tanker demand is outstripping supply. This is driving shipping costs higher. Shipping capacity and freight prices are likely to remain at current levels until it becomes easier to obtain credit for buying new ships.

When all else fails, there are always certain old customs and traditions of the sea. In a recent edition of TankerWorld, one article described how some VLCC tanker owners have recently simply kept their vessels idle to put a squeeze on tonnage availability. A Singapore-based ship broker described how a major player in the shipping world has several of his supertankers “idling and ‘gone fishing’ off the West African coast.”

This sort of thing – holding ships off the market – is a common occurrence when rates are too low for comfort. So some owners – especially the bigger players – will sacrifice days of charter and just park their tankers out at sea, so as to cut supply.

In other words, there is a game of cat and mouse going on. A chartering agent holds the advantage of having a list of cargoes for loading. But the shipowner’s advantage is their list of available vessels. Owners are famously secretive about this, and it is often difficult to get an accurate list of all the available vessels at any one time.

So let’s look ahead. Almost two-thirds of the oil that moves in world commerce travels by tanker. It’s a good bet that a lot of oil will still move in the coming years. There is a relatively tight market for charters, with numerous economic reasons why we should not expect to see a capacity glut in the coming years.

[Joel's Note: For all these reasons and more, well-managed tanker businesses look on pretty solid footing for the foreseeable future. In this month’s issue of Outstanding Investments, Byron reveals the name of one strategically positioned company which not only runs a tight ship as far as its finances go (couldn’t resist) but also, as Byron puts it, pays “one heck of a dividend.” You can grab the current issue right here.

For a bit of background, Byron’s investment strategy over at Outstanding Investments focuses on what we might term the “nuts and bolts” of the world economy. Instead of fancy, pie-in-the-sky financial instruments and ultra-risky paper assets, Byron’s portfolio is divided up into sections including Oil & Gas, Power, Alternative Technology, Precious Metals and Infrastructure & Logistics. In other words, it’s the kind of stuff that underpins life on Main Street, not Wall Street.

Although many of the stocks Byron has stashed in his portfolio are up 100, 200 and even 300%, others have been thrown out with the bathwater in recent weeks as Mr. Market continues its largely indiscriminate liquidation. Trawling through Byron’s portfolio of “stuff” stocks, as we did as this issue was going to print, reveals some real bargains.

Right now you can check out Byron’s portfolio and grab a free precious metals report. For more info, click here

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[Rude Endnote: When your editor first started with Agora Financial, there was a bet going around the office on whether gold would hit $1,000 before oil reached $100. Now, the bet by the water coolers across America is on the Dow, and it’s on the way down, not up.

Some say a turnaround is imminent. “Any day now,” they say, “Just a little longer.”
Others think we’ll dip below 8,000 before it’s all over and done with and others, less optimistic, are preparing for much worse.

If you would like to chance a guess, write to us below and tell us why you think the market is about to turn around or fall through the floor.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com