Cautionary Note as Interest Rates Tumble – Box Ships Heading toward Bankruptcy
By: Tim McPartland,
Interest rates are tumbling hard this morning as global growth (or lack thereof) has become a more serious concern with retail sales in the U.S. falling more than expected in September. Additionally, PPI, has gone negative for the first time in a year. Lastly the Empire State Manufacturing index plunged hard. With all the negative economic stats the 10 year treasury has fallen to the 2.04% area this morning.
A cautionary note is necessary this morning. We have watched and studied the Static Investment Portfolios we have andInvestment Grade Income Issues are outperforming Junk Grade Issues. This is the opposite of what we have experienced in the past and is a warning that buying Junk now is not a good strategy (although if net asset value is of no concern to you maybe it doesn’t matter). The income from the Junk remains much higher than investment grade, but with the reward comes the risk. These model portfolios are available in the menu above under ‘Portfolios’.
Relating to the above we noted a huge drop in Box Ship (containerships) preferred yesterday. We have studied the situation and now believe Box Ships will be bankrupt in a year. New day rates on their ships are in the $9,000/day area coming off of contracts that were at the $24,000/day area. Additionally we reviewed Costamare and Seaspan financials and found they are likely to head south in the months and years ahead as high priced contracts expire. It would take a miracle in the global economy for these companies to hold the line on day rates–they will go south over time. We are selling the preferred shares of Costamare and Seaspan. Make no mistake that these 2 companies are many times larger than Box Ships and they will not head south immediately, but over time (a year) they will have big time issues.
Added 10:10 am
For those wanting to dig further on Box Ships you can read their 6-K from 9/2/2014 which outlines the rapidly falling revenue items.