When the Central Bankers started printing money in 2009, I knew they wouldn’t be able to stop before they took things to an unimaginable extreme. When you’re in government and your policy isn’t working, you keep pushing harder—like your career is at stake if you fail. When China embarked on a massive infrastructure binge to re-ignite economic growth in 2008, it was obvious that once started, this would also continue for quite some time. What they’ve learned is that US $1 trillion a year just doesn’t kick-start an economy like it used to. This is why I don’t think Trump’s US $1 trillion infrastructure spending plan will stop at that. What’s $100 billion a year over ten years when the Chinese are doing a trillion a year? It just won’t create the sort of job growth needed.

With Trump at the helm, we can be proud that America is leading the western world in a new trend. You cannot fix an overleveraged economy with artificially low rates—you need spending on infrastructure. Trump realizes that. When America starts spending others will follow—just like they followed us with QE. What happens when everyone starts spending? Well, you’re going to need a lot of stuff and someone has to move that stuff around.

Last week, the Baltic Dry Index (BDI) hit a two year high following one of the worst bear markets in the index’s history. This bear market was caused by a crushing glut of ships that were ordered during the bull market of 2006 to 2012, but delivered en masse from 2010 onwards. The last of this glut should come in online in 2017. After that, there are almost no ships on the order book, meaning almost no more new deliveries until 2020—as it takes about 2 years to build a ship. So, a sector that has seen double digit tonnage growth crushing charter rates will now enter a period of no tonnage growth or even contraction as older boats are scrapped. At the same time, more stuff will suddenly need to be moved around on its way towards becoming infrastructure.

BDIY

Baltic Dry Index is finally showing some life after making a multi-decade low at the start of this year.

 

My favorite company in this sector is Star Bulkers (SBLK: Nasdaq), which owns 68 bulk carriers today. After a two year period of declining asset values, repeated equity raises and forced ship sales, the business has stabilized. The loans have finally been restructured. There won’t be any more forced ship sales. Instead, you have one of the world’s lowest cost operators with a fully financed fleet that will grow to 73 ships by early 2018. Based on current BDI rates, they should be making good cash flow for the first time in two years. I expect charter rates to come off a bit over the winter, as they often do, but even then, SBLK should be roughly cash flow neutral—nothing like the past two years where charter rates didn’t even cover operating costs. Effectively, you have a long-dated call option on demand for bulk shipping recovering at a time when supply should finally cease.

You can buy the shares today for just a bit over $5 while net tangible book per share, should be a little over $7 based on current vessel values. Of course, vessel values are currently highly distressed and should charter rates increase, vessel values should increase dramatically. Additionally, $476 million of equity was raised in the past two years, with roughly two thirds of it put up by management and noted value investment group Oaktree Capital. I like it when the insiders keep buying and at a market cap of $289 million, you can buy the whole company at 60% of the price that they thought was appropriate for their investments in less than the whole company. You’re paying less than the insiders paid, less than the boats are worth and the BDI is going to continue rallying because Trump intends to make infrastructure great again.

Categories: Current Investments
Positions Mentioned: none