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Commodities Cracking?
Old 09-11-2006, 02:31 PM   #1
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Commodities Cracking?

I'm just back from an overseas vacation and I find oil down below $65 and gold back under $600. A short-term correction or a longer-term rout? Smells more like classic demand destruction to me . . . the economy is cooling, the fast money is looking for greener pastures . . . look out below!
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Re: Commodities Cracking?
Old 09-11-2006, 02:35 PM   #2
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Re: Commodities Cracking?

Eh, the speculative hot money is running, but I fail to see any slackening in demand for commodities. Lots of other indicators suggest that this is the reversal of some speculative inflows. For example, check out the trend in the cost to ship bulk cargo: straight up. That doesn't tell me that commodities will be fallling through the floor.
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Re: Commodities Cracking?
Old 09-11-2006, 03:01 PM   #3
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Re: Commodities Cracking?

Quote:
Originally Posted by brewer12345
For example, check out the trend in the cost to ship bulk cargo: straight up.*
Brewer, where can this be monitored?

Ha
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Re: Commodities Cracking?
Old 09-11-2006, 03:17 PM   #4
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Re: Commodities Cracking?

Oil (light sweet crude) is still over $70/bbl for many futures contracts. NYMEX reports May 2007 - April 2009 contracts settling at slightly over $70/bbl while the longer dated contracts slowly decrease in price ($64 for the Dec 2012 contract). What does this mean? It'll take a few years for the current new projects to yield oil which will increase the supply and reduce the price? The war in Iraq will substantially end within 2-3 years? Who knows.

I guess I'm an oil bear, but I find it hard to believe that we will keep seeing oil so expensive (and so much higher than the cost of production). That profit motive is going to drive new exploration and production (organic or new).

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Re: Commodities Cracking?
Old 09-11-2006, 03:20 PM   #5
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Re: Commodities Cracking?

Quote:
Originally Posted by HaHa
Brewer, where can this be monitored?

Ha
Here is a nice summary: http://www.dryships.com/index.cfm?get=report

What you want to look at is the "Spot 4 TCE" by class of ship. *This is a market measure of what it costs to charter a ship for a day on a short term basis, with the charterer paying for fuel and port charges and the the ship owner paying for th crew and the maintenance. *On a modern ship, crew and maintenance cost about $5k per day. *The indexes are broken up by class of ship. *Capesizes are 175k deadweight tons (dwt; carrying capacity measure), and cannot go through the Suez or Panama Canals. Panamaxes are 75k dwt and are the largest ships that cango through the Panama Canal. *Supramaxes are 52k dwt and can go just about anywhere, including underdeveloped ports (they have their own loading cranes on board). *Rates for all of them have been on a wild tear in the last 6 months with no sign of the rise abating.
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Re: Commodities Cracking?
Old 09-11-2006, 04:26 PM   #6
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Re: Commodities Cracking?

Quote:
Originally Posted by brewer12345
Here is a nice summary: http://www.dryships.com/index.cfm?get=report

What you want to look at is the "Spot 4 TCE" by class of ship. This is a market measure of what it costs to charter a ship for a day on a short term basis, with the charterer paying for fuel and port charges and the the ship owner paying for th crew and the maintenance. On a modern ship, crew and maintenance cost about $5k per day. The indexes are broken up by class of ship. Capesizes are 175k deadweight tons (dwt; carrying capacity measure), and cannot go through the Suez or Panama Canals. Panamaxes are 75k dwt and are the largest ships that cango through the Panama Canal. Supramaxes are 52k dwt and can go just about anywhere, including underdeveloped ports (they have their own loading cranes on board). Rates for all of them have been on a wild tear in the last 6 months with no sign of the rise abating.
Thanks Brewer. When /if you have the time, could you give a short discourse on the different ways that these companies can earn revenues? I read the recent Offering Prospectus for Navios, but I still feel kind of in the dark about the drivers of revenue in this business.

Ha
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Re: Commodities Cracking?
Old 09-11-2006, 04:39 PM   #7
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Re: Commodities Cracking?

Quote:
Originally Posted by HaHa
Thanks Brewer. When /if you have the time, could you give a short discourse on the different ways that these companies can earn revenues? I read the recent Offering Prospectus for Navios, but I still feel kind of in the dark about the drivers of revenue in this business.

Ha
Its really simple: they own the ships and rent them out.

Dry bulkers are about the simplest animals out there. They own the ships, usually financed with a mix of debt & equity. They rent the ships out to charterers. Charterers can rent the ships one of three ways:

1) Spot - charterer hires the ship for an agreed on daily rate, the boat owner pays for everything (fuel, port charges, etc.)
2) Time charter - charterer hires the ship for a daily rate for a period of time (days to years) and pays for fuel and port charges, the ship owner pays for maintenance and the crew
3) Bareboat - Charterer pays for everything (rare)

The cost strcture for the ship owner is basically:

- daily vessel expense (crew, spares, lubricants, filters, etc.)
- chartering commissions (typically 5% of revenue)
- corporate overhead
- interest expense (if any)
- depreciation
- drydocking (every 5 years the ships have to be pulled out of the water, inspected, and repaired as necessary)

Most of these companies are based in offshore locations and do not pay income taxes.

The only thing that is a variable cost in all of this is the commission expense. So for every extra dollar of chartering revenue you get for a boat, about 95 cents drops to the bottom line. Combine this with significant financial leverage (as in the case of DRYS) and things can get really exciting. Some ship owners choose to trade away some upside for less volatility by locking their ships in on time charters (moths to years at a time) so they know what future revenue will be.

Charter rates have been zooming up and there appears to be a shortage of ships. The shipyards are turning ships out, but they get quickly absorbed. Lots of buyers are looking for ships on the secondhand market, so prices have been jumping. Lately, charterers have been agggressively trying to lock ships in for 1+ years at a time, which suggests that they are worried they won't be able to get ships in the future very easily.

But, rates can and do go down from time to time. Operating and financial leverage cut both ways. Having said that, I think this sector is one of the cheapest in the market right now. I think it is a matter of time before the market notices, or these things start getting bought out at a premium.
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Re: Commodities Cracking?
Old 09-11-2006, 05:07 PM   #8
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Re: Commodities Cracking?

Brewer.....I always find your posts/replies very informative. It seems I learn something new with every contribution you make to this forum.
Do you mind me asking how you came about this wealth of knowledge? Your education?......what degree? Which college/university? What is your current line of work?
If any or all of these questions are personal or you prefer not to answer.......I completely understand. I'm just always interested in knowing how people like yourself reach this level.
Thank you
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Re: Commodities Cracking?
Old 09-11-2006, 06:15 PM   #9
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Re: Commodities Cracking?

Thanks Brewer. Very clear explanation of something that I had not been able to sort out.

Ha
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Re: Commodities Cracking?
Old 09-11-2006, 07:47 PM   #10
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Re: Commodities Cracking?

Brewer, thanks as well. Great info.

How do you feel USD value will affect the situation? Seems hard to find anyone optimistic about the USD's trend in the near term.
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Re: Commodities Cracking?
Old 09-12-2006, 07:22 AM   #11
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Re: Commodities Cracking?

Quote:
Originally Posted by Charles
Brewer, thanks as well.* Great info.

How do you feel USD value will affect the situation?* Seems hard to find anyone optimistic about the USD's trend in the near term.
Well, as in the oil market, everything in bulk shipping is USD denominated If the USD drops vs. other currencies, charterers and would-be ship buyers can afford to pay more, cheaper dollars to get their hands on the same ship. As such, shipping tends to do well in USD terms when the dollar plummets.
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Re: Commodities Cracking?
Old 09-12-2006, 07:26 AM   #12
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Re: Commodities Cracking?

Quote:
Originally Posted by Poundkey
Brewer.....I always find your posts/replies very informative. It seems I learn something new with every contribution you make to this forum.
Do you mind me asking how you came about this wealth of knowledge? Your education?......what degree? Which college/university? What is your current line of work?
If any or all of these questions are personal or you prefer not to answer.......I completely understand. I'm just always interested in knowing how people like yourself reach this level.
Thank you
Heh, you are more than welcome to the fruit of my research on this industry. I cannot seem to interest my employer in the idea, so someone besides me should benefit from dozens of hours of research. I got a clue on dry bulk shipping by doing a lot of reading (prospectuses, 10Qs, 10Ks, stuff put out by shiprokers, etc.) and by building a series of excel models to get a better understanding of the economics of these companies.

About me: I have a BA in economics and Merkin history, and MBA in finance and accounting, and I am a CFA charter holder. I work as an analyst at a small hedge fund, which doesn't seem to be interested in the bulkers so I can talk about it here.
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Re: Commodities Cracking?
Old 09-12-2006, 09:13 AM   #13
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Re: Commodities Cracking?

Quote:
Originally Posted by brewer12345
Heh, you are more than welcome to the fruit of my research on this industry.* I cannot seem to interest my employer in the idea, so someone besides me should benefit from dozens of hours of research.* I got a* clue on dry bulk shipping by doing a lot of reading (prospectuses, 10Qs, 10Ks, stuff put out by shiprokers, etc.) and by building a series of excel models to get a better understanding of the economics of these companies.

About me: I have a BA in economics and Merkin history, and MBA in finance and accounting, and I am a CFA charter holder.* I work as an analyst at a small hedge fund, which doesn't seem to be interested in the bulkers so I can talk about it here.
Thank you Brewer.......very interesting. I was not as fortunate to get a high level of education. Most of what I've learned has come by way of mentors and a library card. I did decide (early on) to give both my children an education from a major University. They have both done very well and I guess you could say this is the proudest achievment of my life.
I thank you again for sharing your thoughts with this group and look forward you future contributions.
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Re: Commodities Cracking?
Old 09-12-2006, 09:27 AM   #14
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Re: Commodities Cracking?

Quote:
Originally Posted by Poundkey
I was not as fortunate to get a high level of education. Most of what I've learned has come by way of mentors and a library card.
The most valuable things I have learned were from other people in the field, not what learned at school. What you get when you get the degrees is stuff t put on your resume (important, often the price of entry) and, if you were paying attention and not partying too much, you get a leg up on the basic tools you need to figure things out. But it is no substitute for real world experience.
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Re: Commodities Cracking?
Old 09-12-2006, 09:29 AM   #15
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Re: Commodities Cracking?

I think we had a review of "merkin" history around here a while back. It had more to do with crotch lice than with American history, didn't it?
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Re: Commodities Cracking?
Old 09-12-2006, 09:43 AM   #16
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Re: Commodities Cracking?

Quote:
Originally Posted by LOL!
I think we had a review of "merkin" history around here a while back.* It had more to do with crotch lice than with American history, didn't it?
I recently read an interesting book that said one reason for merkin demand was so ladies and gentlemen could better disguise open syphilitic sores that sometimes would develop in their pubic areas.

I guess the modern ethic of fessing up to your STDs had not caught on.

Ha
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Re: Commodities Cracking?
Old 09-12-2006, 09:50 AM   #17
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Re: Commodities Cracking?

Ha:

Thanks for sharing that with us !
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Re: Commodities Cracking?
Old 09-12-2006, 09:56 AM   #18
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Re: Commodities Cracking?

Quote:
Originally Posted by brewer12345
The most valuable things I have learned were from other people in the field, not what* learned at school.* What you get when you get the degrees is stuff t put on your resume (important, often the price of entry) and, if you were paying attention and not partying too much, you get a leg up on the basic tools you need to figure things out.* But it is no substitute for real world experience.
Well said.....and I agree... reading books is a great source, but my mentors cultivated my mind on a wide variety of subjects. It was almost like recieving lessons on all aspects of life......for free. As an afterthought......mentors are not people one searches out.....they just "happen". I had two...... and shall forever be in their debt.
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Re: Commodities Cracking?
Old 09-12-2006, 11:57 AM   #19
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Re: Commodities Cracking?

Quote:
Originally Posted by brewer12345
About me: I have a BA in economics and Merkin history, and MBA in finance and accounting, and I am a CFA charter holder.* I work as an analyst at a small hedge fund, which doesn't seem to be interested in the bulkers so I can talk about it here.
How did you like the CFA coursework? I have a couple associates working on it, and it seems to be a real pain in the butt.

I have a pretty dumb question...........you are obviously a big fan of low-cost investing, yet work for a hedge fund, which typically keep 20% of the yearly gains..........how does that work??
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Re: Commodities Cracking?
Old 09-12-2006, 12:11 PM   #20
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Re: Commodities Cracking?

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How did you like the CFA coursework?* I have a couple associates working on it, and it seems to be a real pain in the butt.

I have a pretty dumb question...........you are obviously a big fan of low-cost investing, yet work for a hedge fund, which typically keep 20% of the yearly gains..........how does that work??* *
CFA: A lot of the coursework was redundant after all the finance and accounting courses for the MBA. Even so, it was a LOT of work. And the tests were gruelling even though I am a lot better at taking tests than actually being able to do the stuff I am tested on.

High vs. low cost instruments: I think that if you can really identify superior managers, it is possible to make money in actively managed vehicles. Most superior managers don't work for mutual funds because they can make orders of magnitude more money elsewhere. I would also say that just because HNW individuals, family offices and institutions have a lot of money doesn't mean that they are smart with it.
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