This could be the market’s most hated sector…
It’s the most obvious piece of investment advice you can get.
Buy low, sell high.
Although, colleague Phil Anderson and his team say that’s baloney. They say you should buy high, and sell higher.
It’s a controversial idea. But it’s hard to argue with the concept. Of course, Cycles, Trends & Forecasts know all about this theory.
If you don’t get the research from the Cycles, Trends & Forecasts team, go here to find out more about it now.
But, as for your editor, we’re an old dog. And you know what they say about old dogs (no, it’s nothing to do with weak bladders). I’m talking about the fact that it’s hard to teach us old dogs new tricks.
So we like the old way of investing…especially the contrarian way. One such idea involves analysing an index that’s down 95% since its 2008 peak.
And here’s a hint. It has nothing to do with gold, or investing in mining stocks. This idea is much more speculative. More in a moment. First…
Over the weekend, the Dow Jones Industrial Average fell 57.94 points, or 0.33%.
The S&P 500 index fell 6.77 points, or 0.33%.
In Europe, the Euro Stoxx 50 index added 29.87 points, or 1.06%. Meanwhile, the FTSE 100 closed up by 1.19%, and Germany’s DAX index finished 0.85% higher.
In Asian markets, Japan’s Nikkei 225 index is trading 344.1 points higher, or 2.21%. China’s CSI 300 index is down 0.32%.
In Australia, the S&P/ASX 200 index is up 56.64 points, or 1.1%.
On the commodities markets, West Texas Intermediate crude oil is trading for US$48.43 per barrel. Brent crude is US$49.52 per barrel.
Gold is US$1,285 per ounce, and silver is US$17.34 per ounce.
The Aussie dollar is worth 74.39 US cents.
Contrarians should love this sector
The resources boom resulted in riches for many.
Stocks like BHP Billiton Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO] soared by many hundreds of percent leading to the 2007 and 2008 peak.
Fortescue Metals Group Ltd [ASX:FMG] did even better. From 2004, to the peak in 2008, its stock gained a whopping 21,457%.
That would have turned a $1,000 investment into $215,570.
There’s a lot you could buy with a return like that.
(Incidentally, that’s the kind of return we’re looking for with our limited-by-numbers premium trading service, Microcap Trader. Details on a special Microcap Trader event are available here.)
But as well as those stocks did during the bull market, they’ve taken a terrible beating during the bear market.
However, as poorly as they’ve performed, arguably, another industry has performed worse…or at the very least, just as bad.
I’m talking about the shipping industry.
The shipping industry came to mind today as we read this story from the Wall Street Journal:
‘The giant Panama Canal expansion opens June 26 amid much fanfare and one of the worst shipping industry slumps ever. While it won’t do anything to help the dire state of the industry near-term, the changes are critical to Western trade in the long run.
‘The canal, which handles about a third of Asia-to-Americas trade, had no choice but to expand. As the industry copes with its downturn, major shipping companies are pooling their resources and using fewer but much bigger ships — ones that are too large to fit through the pre-expansion Panama Canal.
‘The nine-year, $5.4 billion expansion more than doubles the canal’s cargo capacity. A third lane has been added to the canal that accommodates ships large enough to carry up to 14,000 containers, compared with around 5,000 currently. This alleviates a cargo bottleneck caused by the smaller ships that was due to get worse over time.’
The key element in that report is the time it has taken to complete the expansion — nine years. That puts the start date somewhere back in 2007.
Check out the chart below. It’s of the Baltic Dry Index, a key indicator of shipping rates for ‘dry’ goods:
Click to enlarge
You can see the index peaked in 2007, before slumping, taking out the previous high, and then collapsing.
Today, the Baltic Dry Index is down 95% from the 2008 peak.
As with the Australian milk industry’s travails, it’s a perfect example of what happens during a bull (make that a ‘bubble’ market).
Companies invest, usually in infrastructure and capital goods, in the expectation that the boom times will last forever.
In the mid to late 2000s, there was a huge demand for cargo ships. The Chinese economy was churning out goods left, right, and centre…all to meet the credit-fuelled demand from Western consumers.
But then…things changed. You know what happens when a bull market (and bubble) ends. That’s right, you get a corresponding slump.
That’s why the Wall Street Journal goes on to report:
‘Expansion was a must if the Panama Canal was to continue to play its key role in global trade. In the shipping industry, supply exceeds demand by about 30% and freight rates barely cover fuel costs. In the move to bigger and more efficient ships, many of the smaller ships that were tailor-made for the Panama Canal are expected to soon become obsolete.’
No wonder the Baltic Dry Index is down 95% since 2008, if shipping supply exceeds demand by 30%.
It’s therefore no surprise that a key exchange traded fund (ETF), which tracks the performance of shipping stocks, is down 62% since it peaked in 2010 (the same year of its inception):
Click to enlarge
To our mind, as a contrarian investor, this is exactly the type of investment opportunity we love. The charts tell you that investors hate the shipping sector.
And quite frankly, investors are right to think that way.
But that’s also a great opportunity to look for bargains. Now, that doesn’t mean we’re at the bottom of the market.
Experience tells us that an awful looking market and sector can always get even more awful. But if you can buy a good stock while it’s cheap, and you can hang in for the long term, it’s possible to make multi-digit percentage gains.
Take a look at two charts. The first is a five year chart of Teekay Corporation [NYSE:TK], a US oil shipping company (note, oil shipping isn’t reflected in the Baltic Dry Index):
Click to enlarge
The stock is down 89.6% since late 2014. That’s in line with the slump in the crude oil price. And looking at the trend, it doesn’t look as though things are about to get any better.
But now look at this chart. It shows the yield on Teekay Corp bonds, which mature in 2020:
Click to enlarge
The bond yield surged to return over 25% earlier this year. Today, the yield is around 13%.
If you listen to stock investors, they’ll tell you things are getting worse. If you listen to bond investors, they appear to see a silver lining.
Sure, it’s true that both can be right. Bond investors could still be somewhat bullish, as they could see the opportunity to make a profit in the event the company goes into bankruptcy protection, and is broken up.
In that scenario, bond holders could make a profit, while stock investors would likely get nothing.
It all depends on the company’s ability to secure financing and rollover existing debt.
Make no mistake; the shipping industry is high risk. All the charts show you that. But as we say, that’s just the type of opportunity contrarian investors should look to try and exploit.
Keep your eye on shipping. We will. This could be the next big trade of the decade.