WEST PALM BEACH, FLORIDA – Tanker stocks are reporting earnings this week.
They are presenting their best quarters ever, and announcing huge dividends. How are their stock prices reacting? More below…
Last Days in West Palm
Greetings from West Palm Beach, where we’ve been sheltering from the virus for the last two months.
We’re staying with Kate’s parents, who took us in, fed us, entertained us, and gave me all the space I needed to write. It’s been great here and we’re very grateful to Kate’s parents for looking after us when we showed up on their doorstep in March.
But now, it’s time for us to move on…
We’ve got a car (a 2016 Nissan Pathfinder) and a tent (a 2007 Colman pop-up camper). In a few days, we’re going to drive to Alaska and sleep in campgrounds along the way.
We’re busy preparing for the trip. Yesterday, I went to the Department of Motor Vehicles to renew my driver’s license, which had expired.
I made an appointment and went to the county office at the appointed time. It was the first day they’d been open in six weeks.
There were dozens of staff and lots of policemen, but very few customers. I expected to have to wait in line for hours, but the whole thing took about 20 minutes.
The Oil Tanker Story in a Nutshell
Back to tankers…
This is the story with oil tankers in a nutshell. The tanker industry is a VERY cyclical industry and oscillates between boom and bust every 10 years or so.
The number of ships plying the ocean is the main driver of the cycle. When there are too many ships, lease rates collapse and the industry goes into a decade-long bust.
When there are too few ships, lease rates soar and everyone makes a fortune for four or five years. But then the industry shoots itself in the foot by ordering too many new ships and the cycle repeats. (The CEOs love shopping for new toys.)
It takes two years and $100 million to build a new large oil tanker. Then that ship has a lifespan of about 20 years.
The last two major bull markets in the oil tanker industry were 1984-1990 and 2003-2008.
It’s a very simple, low-tech, low margin industry and it’s infamous for its terrible corporate governance. In short, this is not a glamorous sector of the market.
There was a huge boom in shipbuilding between 1990 and 2010. But the shipping bubble burst in 2008, and since then there’s been 10 years of very low shipbuilding activity.
As I write, the order book for new ships is the lowest it’s been in decades. Meanwhile, many old ships in the fleet are being retired.
In other words, we’re at – or near – the part of the cycle when there aren’t going to be enough ships. If you’re crazy enough to invest in the shipping industry, this is the time to buy.
This chart shows the number of new ships entering the fleet. It’s measured in gross register tonnage (GRT) – the ships’ total internal volume.
As you can see, new ship construction has plummeted over the last decade, setting the stage for a big increase in the rates oil tankers can make for their services… and therefore, higher prices for oil tanker stocks.
Two Important Developments
Ship construction aside, there have been two important developments to this story in the last year.
The first is IMO 2020. This is new anti-pollution legislation from the International Maritime Organisation that requires ships to curb their sulphur emissions. It went into effect on January 1, 2020.
Ships must now either burn expensive low-sulphur fuel or spend millions of dollars modifying their engines to reduce the sulphur they produce.
This has been a big pain in the neck for the shipping lines, but if you understand how investing works, this is great news for investors in tanker stocks.
Why? It further reduces the number of ships in the fleet.
First, it prevents the shipping companies from ordering new ships because of the uncertainty. Second, it leads to more old ships being retired early, because they don’t comply but also aren’t worth converting.
The second big development is coronavirus, the price war in the oil market, and the glut of oil they caused.
If you understand how investing works, you’ll understand this was also great news for investors in tanker stocks.
Not because oil tanker companies are being paid to store oil (although they are). But because demand for oil storage reduces the number of ships in the fleet available to transport oil.
These two developments have constrained – and will continue to constrain – the number of ships in the fleet. It is setting the scene for a period of at least two years of much higher tanker rates and a bull market in the tanker stocks.
A Tiny, Unloved Industry
There are only a handful of tanker stocks. It’s a tiny industry.
The correct way to value a tanker stock is by NAV, or net asset value. A tanker’s NAV is the market value of its fleet (there’s an active market for second-hand tankers to value ships with) plus its non-fleet assets (its cash in the bank, fuel stores, etc.) minus its debt.
The tanker industry, right now, trades at a deep discount to NAV. (Every company has a different valuation, but in general, most companies trade between 25% to 50% discount to NAV.)
In other words, the stock market doesn’t expect tankers to generate profits. It’s pricing them for what we might call “worst-case scenario.”
To repeat what I said above, if you’re crazy enough to invest in the oil shipping industry, this is the time to buy. But it’s a crazy sector and the stock prices are insanely volatile.
How are they performing this week so far with the blockbuster earnings and huge dividends the tanker companies are announcing?
They’re crashing again. Yesterday, most tanker stocks were down by more than 10%.
– Tom Dyson
P.S. My hope is, instead of using their profits from coronavirus to buy new ships, CEOs use the money to buy back shares at discounts to NAV. This will create tremendous value for shareholders.
In response to the postcard, “I’ll Never Regret This Decision,” one reader reflects…
Reader comment: Your postcard of April 29, 2020 was beautiful. It struck me hard. It made me realize I wasted my children’s time with me. Thank you for writing the column.
While others encourage Tom’s upcoming travels… ask about Japan’s economic state of affairs and U.S. capital… and inquire about investing in other metals…
Reader comment: In response to the nanny-state ninny berating Tom about going to enormously spacious national parks – How many times has that reader been inside a grocery store in the last six weeks?
And anyways, wilting-in-place gets to be debilitating for one’s immune system. I can think of nothing better, in every way, than going out into nature, now. Keep on truckin’, Tommy & Company!
Reader comment: I’m a huge fan and have followed you since the Stansberry days. I agree with your thesis that the government’s only way out of its obligations is to inflate them away. I agree that the Federal Reserve will now do anything it can to accommodate this fraud on the American people. But how do you explain Japan? Japan has been trying to ignite inflation for almost 40 years. (I’m surprised to read that writing is such an effort for you. Your style is so fluid and cogent.)
Tom’s response: Japan is a surplus country and the largest creditor nation on the planet. Japan’s ability to earn dollars through trade overwhelms any concern investors may have about holding the Japanese currency. Normally, it’s deficit countries that fall victim to debasement, hyperinflation, and default. They spend more than they produce and make up the difference by printing money until international creditors lose patience and the currency starts sagging.
It’s interesting you mention Japan. I’ve been reading a book about how Japan was rebuilt by American planners after the war to serve as a sort of vassal state and pillar for post-war American hegemony. I felt this about Japan when we visited last year in early December. It was odd – for example – how much they loved Christmas trees in public places. It felt so American… including all the lights and Christmas music.
Anyway, my point is, is it possible the yen is really just an extension of the dollar?
Reader comment: I enjoy reading your open and sincere commentary in the Postcards and your views on the economy. I am not an economist, so some things are hazy and therefore would appreciate your comments on the points below. My limited knowledge prevents me from seeing inside the economic “crystal ball” no matter how often I rub its surface.
We know that: All major economies in the world are in debt, all are printing excessive amounts of money to make liquidity available in the system, all are keeping their interest rates low as an economic stimulus, all are borrowing or issuing bonds to cover their current and future debts, all are vying to weaken their currency relative to the other in a currency war to increase export and employment, and all this will debase the value of currencies relative to the value of goods and services, and subsequently give rise to inflation, according to the standard economic model
Your articles don’t take into account productivity and efficiency improvements as well as wealth creation by new technologies and systems; disruptions; the relative values in competing economies; and the political economic strategies in the different economies. The world economies have been printing money since the 2008 economic collapse and the money velocity has been decreasing, yet there has been no significant rise in inflation. Why? New technologies, systems, and efficiencies? The world has changed dramatically in the last 20 years. Do we need a new economic model and look at things differently?
Tom’s response: You’ve summarized the situation very succinctly. The answer to all these questions is – I think – in the way the U.S. sucks in the world’s capital. This capital then finances its twin deficits. It’s a very unstable system. And it has unpredictable consequences that appear to be paradoxes… like the constant fall of money velocity. And the strength of the dollar.
But I don’t care which economic model you use. This system isn’t sustainable… mainly because there’s finite capital available to satisfy America’s gargantuan appetite for dollars… and there’s a limit to how big the deficits can grow. Therefore, the Federal Reserve must be lender of last resort. And that’s what we’re seeing. This is why the Fed’s balance sheet will continue to grow by trillions and trillions, especially during recessions. So the question is, when will people lose faith in the dollar’s ability to maintain its purchasing power?
Reader question: Your writing is so easy to understand and I appreciate your valuable information. I have a question today. You wrote an article about hyperinflation at the beginning of April, and more recently about inflation of only 3% to 4% a year for the next 20 years. Which do you think is likely – based on the current Coronavirus collapse and huge money-printing?
Tom’s response: God will make a fool of anyone who thinks they can produce 3% or 4% inflation every year for 20 years. Inflation is a psychological phenomenon. It’s not a dial on a machine that can be carefully adjusted. In my opinion.
Reader comment: I read many emails from other services. But I love your personal stories and your investment advice. For the first time ever, I just recently invested a high percentage of my money into gold/silver. I feel good about it also. Thank you for your help. Please keep writing these Postcards as much as you are able to.
Reader question: What are your thoughts about platinum as a store of value? It seems cheap relative to gold compared to a few years ago. Love the Postcards!
I was a 60+ year old vagabond 2013-18 until I had to move in to take care of my 90+ year old mom. I enjoyed several drives across the U.S., and one summer across Canada from Quebec City to Vancouver. Can’t wait to get back on the road!
Tom’s response: I’ve considered buying platinum too, and it’ll be a better long-term store of value than paper currency. But I won’t buy it because it’ll be harder to sell when the time comes. You want something as close to money as you can get, widely recognized and accepted. The further away you get, the harder you’ll make things for yourself. So I really stick with gold.
Reader comment: When explaining the “lazy dollar,” you said when velocity is “sluggish,” the economy is making each dollar work hard; right after that, you said if velocity is “low,” the economy is not asking each dollar to do many transactions. It would seem that “sluggish” and “low” are the same, but you use them as doing opposite things. And later, you said when the “economy is calling each dollar to work harder,” velocity rises. What do you mean by “sluggish” velocity if sluggish velocity does the same as rising velocity?
Tom’s response: Well spotted. I made a typo in that column. Sorry for the confusion.
And, as always, please keep writing us at [email protected]