Earnings Reports May Rock Shipping Stocks

The Baltic Exchange's Baltic Dry Index (BDI) fell by 4.1% this morning, after suffering a 4.1% loss on Friday while U.S. markets were closed in observance of the Fourth of July holiday. On a weekly and monthly basis, the BDI is now down by 9.6% and 7.4%, respectively.

Futures trading on Friday finished the day very weak with a decline in third-quarter BDI contracts to 2620 from 3000 a day prior, on the back of disappointing employment data from the U.S. Losses diminished further out on the curve, with contracts for next year falling to 1955 from 2030. This morning's decline in spot rates, coupled with Friday's Forward Freight Agreement trading, could place some downward pressure on the sector today, without a positive catalyst.

Baltic Dry Index FFI Curve Source: Imarex

This week's U.S. economic calendar, unlike last week's, is relatively light and should only have a modest impact on the sector, barring a few potentially significant releases, starting with today's non-manufacturing ISM, followed by same-store sales and jobless claim on Thursday, and consumer sentiment on Friday. For a closer look at this week's economic releases please see my week-ahead calendar published yesterday.

The big drivers over the next several week are likely to stem from the start of the second-quarter earning's season -- Alcoa (AA - commentary - Trade Now) kicks things off on Wednesday -- along with any dry-bulk sector or company-specific headlines.

Baltic Exchange Indices Index 1D% 1W% 1M% 1Y% Avg. $/day BDI -4.1% -9.6% -7.4% -62.3% BCI -5.2% -15.4% -6.4% -52.4% $66,441 BPI -1.9% 4.7% -1.9% -67.0% $23,783 BSI -0.1% 0.1% -4.9% -69.3% $17,942 BHI 0.1% -0.9% -14.0% -71.5% $10,796 Dry Bulk Shipping Index 1D% 1W% 1M% 1Y% Weighting DBSI -3.7% -5.6% -24.6% -63.6% DSX -3.6% -6.9% -23.2% -52.3% 21% DRYS -4.0% -6.2% -24.3% -92.3% 31% EGLE -3.3% -9.1% -32.7% -83.0% 4% EXM -3.5% -1.5% -37.4% -80.7% 6% GNK -5.2% -4.5% -19.0% -64.8% 14% NM -2.2% -5.0% -19.6% -52.9% 9% PRGN -0.8% -5.5% -33.8% -75.7% 2% SB -0.8% -0.8% -10.0% -63.6% 8% SBLK -4.3% -3.8% -27.2% -63.1% 5% Mining Index 1D% 1W% 1M% 1Y% Last Price BHP -4.2% -4.8% -6.8% -31.2% $53.17 RTP -3.0% -4.1% -12.9% -63.3% $159.07 VALE -2.8% -3.8% -10.2% -45.8% $17.40 Source: Bloomberg; Capital Link; McDonough calculations (equity data as of 6/30 close)

The Baltic Capesize Index (BCI) lost 5.2% this morning after losing 6.0% on Friday and 3.8% on Thursday. The average daily cost for a capesize vessel has fallen to US$66,441, compared with June's high of US$93,197. Capesize forward contracts experience sharp depreciation, especially on the short end of the curve, with the market continuing to price in a sharp decline in shipping rates over the coming months. Third-quarter capesize contracts closed the day between US$46,000 and US$47,000, dropping US$2,750 from the previous day.

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At the time of publication, McDonough had no positions in stocks mentioned.

Michael McDonough is an independent research consultant in North America and Asia. Over the past two years, he has advised hedge funds, central banks, broker-dealers and corporations on a range of economic and financial issues. He is also the creator of Fiat Economics, a global financial/economics blog. McDonough has worked on Wall Street as an economist, specializing in the U.S. and Latin America.