URSABLOG: The Bear Trap

A fur trapper is walking through the forest with his gun, checking whether his traps have caught any animals. Something on the ground catches his eye: it’s a gold coin. He picks it up and puts it in his pocket. He looks up again and sees another one a little further ahead. He walks toward it and picks it up. He sees another one in the same direction a little further away, and strides quickly and takes it, then sees another one, and so on until he is running very fast in one direction scooping up coins as he goes, until suddenly CRASH! The world collapses under him and he finds himself in a deep hole he cannot get out of. After he gets his breath back, he feels a pair of eyes looking down at him. It is a huge bear.

“Help me out!” says the man, for it is that kind of story where animals can talk.

“Why?” says the bear. “You come into the forest trapping us animals to kill us for our skin for the vanity of other human beings, and to enrich yourself”.

“Come on, help me”, pleads the man. “I have all this gold!”

“I have no need for gold” says the bear. “There is one thing you can give me however, and then I will help you out”.

“What?” says the trapper. “Anything I have I will give you to get me out of here”.

“Your gun” says the bear. Now the trapper understands that this is no ordinary talking bear, but an intelligent one. But he figures that if he gives the gun he can go and buy another one, a better one, more than one in fact, with all the money he has picked up. So he agrees and hands the gun up. The bear sends down a rope. The man clambers up into the daylight and sees the bear sitting down next to a pile of gold. This is not just an intelligent talking bear, but a rich one. The bear says to him:

“I’ll let you have your gun back as long as you promise to give me back that gold and never come back into the forest again”. The man figures that as this bear is a liar too, and actually does love gold after all, he should get his gun back as soon as possible, kill the bear, get the skin, and get all the gold as well. So he agrees, and takes his gun. But just as he is taking aim at the bear he feels a big paw rest on his shoulder. He turns around and faces the biggest bear he has ever seen in his life. The bear slowly takes the gun out of his hands and says:

“The trouble with you humans is that you always think that there is only one big, bad bear in the forest, never thinking that a bigger, badder bear could follow.” And he points the gun at the man and shoots him.

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I have been thinking about bear traps for the last couple of weeks, as values for bulk carriers have fallen from their recent highs. For those unfamiliar with the concept, it is when a rising market stalls, and people think the overall trend has reversed and sell too soon, only for the market to rise again soon after and carry on doing what it was doing before. In ship sale and purchase, this means owners selling as they see the market dip. If it is prolonged, more and more owners follow suit and soon there are more sellers than buyers, and the prices fall further, and desperate owners take the best on offer, at less than they were originally considering. But after a while the underlying fundamentals kick in, the market starts rising again, and they have found that they have sold too soon, and are left without a ship to trade in better market conditions.

The rather morbid fable above illustrates another kind of bear trap, and potentially more fatal: a bear market arrives, and investors assume that once it is over the only way is up. In the immediate aftermath of the financial crisis of 2008 there were many fire sales, but within a year the market was taking off again, and many regretted selling too soon. Not only did they regret it, they went into the market again, buying and ordering more ships to make up for their mistake, because after all these ships were much cheaper than they were before the crisis broke. Then the market fell from 2012 into 2013, and when many called the market’s bottom, even more ships were bought and ordered until the market started drifting into the deep trough of 2015-2016. Ironically enough those that bought and ordered in 2011-2012, and then again in 2013-2014 suffered as much as those who invested during the crazy times of 2007-2008, not only by having expensive ships in a poor market, but by making the overall market worse by significantly increasing supply.

Dry bulk carriers are seeing a drop in values at the moment and capes have seen the biggest reset. The 2006 built Cape Frontier was sold a couple of weeks ago at US$ 17.2 mill, at least 20% below what she could have got in April, were she marketed then. NSS Endeavour, a 2002 Mitsui built cape, is reported sold now at around US$ 13.5 mill, more or less in line with this. Both these ships are Japanese controlled, and maybe the owners fear that the unexpected rise of values in the early part of this year will be mirrored by an unexpectedly weak second half.

Let’s put things in a wider context than capes. I’m currently in the process of updating my monthly benchmark values, and can see that 10 year old supramax prices have come off 10% from the recent peak. Even so they are double the value, more or less, of what they were at the bottom of the market in March 2016. That said they are still 50% lower than they were at the beginning of 2014.

So what to do? Speaking to friends in the market, their views are diverse. Some expect the market to recover after the summer. Some think we are done for the year, and 2018 will be a better bet. But one of the problems we human beings have is that, try as we might, we cannot see into the future. So we rely on market information and persuasion, look at what others are doing, trusting our own reasoning or gut instinct however distorted it gets. After all if someone else is out there buying ships, they must know something we don’t, so we should get on with it before they run out or become too expensive. Therefore, from time to time we get things wrong.

So buy, sell, or do nothing? Buy to take advantage of historically low values, or sell to lock in todays’ prices? No wonder many owners are saying the three words that strike dread into every sale and purchase broker’s heart: “Wait and See”.

For myself, I believe that fundamentally the market will not fall back to where it was last year but I don’t think it will necessarily boom any time either. I still believe that 2018 will be better than 2017, and there is a strong argument to invest now to take advantage of this. In general that the market appears to agree with this. The froth has come off to top of the market; fundamental demand remains solid (apparently twelve buyers went to inspect NSS Endeavour). Only a collapsing freight market can send values back to 2016 levels. But we need to consider this possibility. There could be another bear out there, and this possibility should guide decision making before we start chasing deals as the freight market improves.

Perhaps the hunter in my little story above would have been better off not running after the gold, but asking himself why there was gold on the forest floor to start off with, and proceed more cautiously. After all if it seems too good to be true it probably is. He could have then got the bears, the gold, and gone home alive. Likewise, cautious investing on a case by case basis, remembering that a strong market does not necessarily always follow a slump will probably produce better results than risking being shot by a big, bad, talking bear. 

Simon Ward

www.ursashipbrokers.com