I Never Promised You a Rose Garden

As we enter the final weeks of Q-1 earning seasons, it is important to differentiate between the underlying fundamentals and the market narrative.  There was a broad, negative shift from early April to May in cyclical stocks, reflecting the likelihood of an economic slowdown/recession in the West and disappointment with China’s slow reopening.  These stories were reflected in the stock performance of dry bulk and tanker equities, with even companies who beat consensus estimates and guided up for Q-2 underperforming or selling off.  As an investor, one’s evaluation of performance must be viewed through the lens of holding periods and style. Since we’re contrarian investors with a six month to two-year time horizon, bad news may be good news and vice-versa.  It all depends on whether we are buying or selling.

We exited our exposure to container shipping last year, given that the orderbook was massive. The container ship news flow has been negative, although some analysts have called the bottom.  We will buy quality container ship lessors when the majority of analysts have given up, and no good news is priced in.  We have been buying dry bulk, because the current equity values price in little good news with stocks at 60% to 80% of NAV, despite a healthy sales and purchase market and decent spot cape rates.  The risk/reward ratio, our key investment metric, is attractive. Tankers present much more of a conundrum.  Stocks are cheap on elevated asset values.  The order book is still low for at least the next two years, and prices for new builds are high, especially for VLCCs.  Trade routes due to sanctions have changed.  Recently, we listened to an interesting podcast from Platts Oil Markets on the shifting landscape for diesel in South America.  Russian distillates are displacing US ones.  It’s a benefit for the Jones Act product fleet and a short-term negative for MRs in the Gulf.  Other trade routes that make little logistical sense are Russian oil to India and the Middle East, and distillates back to Europe and the US East Coast.  These unusual patterns contribute to significant volatility in rates and consequently in guidance.  We continue to maintain exposure to the crude and clean segments as the risk/reward today is better than in April.  We may be on the cusp of super cycles and stock rerating, or at the peak of the market.  The challenge is that we will not know except in retrospect.  No one ever promised that being a contrarian long investor would be a rose garden.