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Today, we take a look at the Dry Bulk Shipping industry through the lens of the Sentiment Cycle.

Human emotions are a big part of the investment process. To succeed in the long run, we have to become Zen Masters in the financial media circus. The dry bulk shipping industry presents us with a number of textbook examples that correspond to distinct phases of the Sentiment Cycle.

The two phases we’ll focus on is Enthusiasm and Disbelief:

Enthusiasm
Once it is widely accepted that economic and corporate fundamentals are supporting higher prices, a bell goes off. The bull survived The Big Dip. Those who had previously been afraid now have plenty of reasons –- and proof -– that it is safe to go back into the market and buy again.

At this point, we detect a subtle change in psychology, a shift from the fear of loss to the fear of missing out, and the appetite for risk becomes evident. Investors buy on faith, bolstered by analyst and media reports projecting the trend to continue. As price rises to new highs, they all scream, “It’s a breakout!” They are supremely confident that the best is yet to come.

In October 2007, stories by the financial media regarding Dry Bulk Shipping were overwhelming bullish. Let’s check the headlines:

• Cramer’s ‘Mad Money’ Recap: Bulk Up on Dry Bulk Shippers
  Nobody talks about dry bulk shipping stocks because they’re boring. “I can’t throw pies or wear funny clothes when I talk about dry bulk shipping,” Cramer said. The money to be made on these stocks, however, is very exciting; they provide “huge and reliable dividends,” he said. Dry bulk shipping stocks have risen enormously since July, when Cramer recommended them. “This industry is one of the great bull markets in the world right now,” he said. Even though investing in these stocks is “not sexy,” sometimes you have to go for the easy money, and that’s what dry bulk shippers offer.
• Jefferies ups targets on bulk carriers
  Oct 16 (Reuters) -Jefferies & Co raised the price targets on several shipping companies, saying the outlook for the dry bulk shipping market remains attractive as significant quantities of new iron ore production capacity come on-line over the next 12 months.
• Bear upgrades U.S. ocean shipping sector
  Oct 10 (Reuters) -Bear Stearns upgraded the U.S. ocean shipping sector to “market weight” from “market underweight,” saying it was positive on dry bulk fundamentals over the next 6 to 18 months.”
• DryShips Shipping Global Profits
  Oct 1 (Minyaville.com) “DRYS is up over 400% since starting the year trading around $18.00. After a move of that magnitude it would be logical to think that things at DRYS are a tad rich on a valuation basis. But upon further review, valuations aren’t all that frothy.”
• Smiling Dry-Bulk Shippers See The Boom Times Lasting For Years- Investors Business Daily, September 28, 2007

Disbelief
The market fails to go higher, and indeed many of the early leaders have broken down under the 50-day moving average, giving technicians the Subtle Warning. This marks the beginning of the ‘something is not right’ gut feeling, but in the absence of bad news, investors hold on to hope. Not only are they heavily invested in the market, they are psychologically invested in being right and they ignore anything that does not go with their worldview. Indeed, they even wonder aloud why their beloved stocks cannot go up amidst good news, higher earnings guidance and analyst upgrades.

Almost all of the high fliers in the Dry Bulk Shipping industry have pulled back from their highs. Investors are looking around for hopeful articles. The “handholding” phase has begun. A excellent example is the industry review piece from Barron’s that also focused on specific companies. They worked the analysts and company executives for quotes and even did a video interview with Bear Stearns shipping analyst Scott Burk:

• Dry-Bulk Shippers Are on Sail
  DRY-BULK-SHIPPING STOCKS HIT SOME ROUGH seas late last year, but barring a U.S. recession and global slowdown, they should be in for smoother sailing in 2008. While companies across the sector are poised to benefit, two standouts are Diana Shipping and Genco Shipping & Trading. Both shippers will acquire new vessels and will have the opportunity to lock in higher contract rates this year. That would provide the company and investors with reduced earnings uncertainty despite an iffy economic outlook. After roughly tripling from their lows in early 2007 to their peaks at the end of October, Diana and Genco..”
• Video Interview- Scott Burk Bear Stearns shipping analyst

Let’s take a closer look at some of the biggest companies in the industry by market cap and liquidity. The price bars are colored according to the status of our relative momentum indicator. Red = underperform. Yellow = neutral. Green = outperform. The red and green dots are the InVivo.Stops. The charts are marked 1 = Enthusiasm Phase and 2 = Possible Disbelief Phase.

DryShips Inc. (NASDAQ:DRYS)

Diana Shipping Inc. (NYSE:DSX)

Genco Shipping & Trading Limited (NYSE:GNK)

Quintana Maritime Limited (NASDAQ:QMAR)

Eagle Bulk Shipping Inc. (NASDAQ:EGLE)

Excel Maritime Carriers Ltd (NYSE:EXM)

Paragon Shipping Inc. (NASDAQ:PRGN)

OceanFreight Inc. (NASDAQ:OCNF)

In conclusion, even though the “why” for the price drops cannot be found in the fundamentals and the outlook, investors should not ignore price breaks as these may be Subtle or Overt Warnings that the sentiment cycle has entered the Disbelief phase.

As some extra food for thought on why investors should always do their homework, we found an interesting article written on February 28, 2005 on Dryships Inc. (Nasdaq:DRYS) by Katherine Welling: “The Golden Fleece?” (PDF). The article begins with a quote:

“It was surreal,” a source told Welling in relation to DryShips’ IPO. “When someone asked why he was doing the deal, here-now, [Economou] actually said, basically, ‘Because Americans are the dumbest investors around, and there’s lots of liquidity in this market.’”

Thanks to Stephen Ellis who wrote DryShips: An Investing Shipwreck and pointed to the above article.

To put thing in perspective, let’s look at a weekly chart of DRYS. The Welling article was written right around the IPO yet as Mullainathan & Thaler said, “It may often pay smart money to follow ‘dumb money’ rather than to lean against it.”

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