Ton Mile Trader

The NAT/FRO pairs trade took another 3% hit yesterday, which is the unfortunate nature of this beast – especially when FRO is the short leg. George Glass is holding on tight for the time being, though it seems some investors in the sector are unaware of the difference between wet and dry. The following is from thestreet.com, “In the "Mad Mail" viewer feedback segment, Cramer told a viewer that when it comes to dry bulk shippers, he's only trusting Nordic American Tanker and would not consider rival Excel Maritime.” While I am sure Cramer knows the difference between iron ore and crude oil, I am not sure that enough investors do. Sometimes that’s a good thing, as the presence of goats in a market provides for profit opportunities. However, en masse – the goats can cause you a lot of pain when they are running the wrong way – straight into your trade. On any given day – the goats can run you out of town. And on that specific day – they are right and you are wrong...and there is nothing you can about it.

In ratings news...

Starbulk – 1 Buy, 1 Hold

- Omar Nokta maintains a HOLD on SBLK, calling it one of the safer plays in dry bulk, though he mentions concerns on counterparty risk.
- Charles Rupinski maintains a BUY on SBLK ($11), citing their underleveraged position relative to the sector.

Other...

- Justin Yagerman maintains a MARKET PERFORM on TNK, citing attractive dividend yield – though believes their spot exposure and full payout model will provide for noticeable volatility.
- Scott Burk initiates coverage of ESEA with an OUTPERFORM ($6). He cites ample liquidity and minimal risk to bankruptcy or covenant violation, though mentions global recessionary concerns.
- Scott Burk initiates coverage of FREE with a PERFORM, citing solid charter coverage in 2009, though writes that debt covenants could be in jeopardy if asset prices continue to decline.
- Scott Burk initiates coverage of OCNF with a PERFORM, citing long term charter coverage being able to support 2009 forecasted dividend, though writes that debt covenants are at risk if market weakness continues.
- Anders Rosenlund maintains a HOLD on SFL, though he reduces target to $9.50 (from $22).

Thoughts on dry bulk asset valuation from Greg Lewis’s note...”What’s a Lady Worth Anyway?”

Unfortunately, given the current uncertainty in the freight market and the availability of financing from banks the answer is challenging to say the least. In a distressed market where there are more sellers (especially if they are forced sellers) than buyers asset prices can overshoot to the downside. Likewise if the amount of tonnage for sale is scarce (more buyers than sellers) asset prices can overshoot to the upside. While we believe there is long term value that will eventually be unlocked from buying assets at current prices the current lack of financing by banks will most likely keep many potential ship buyers on the sidelines, hence putting further downward pressure on asset prices. We also note in the current environment the acquisition of a ship may result in near term negative cash flows after interest and debt amortization are accounted for.