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|From Wall Street to the wild seas|
|Friday, 08 May 2009 15:04|
Voluminous commentaries have been written about the financial markets meltdown and the global economic slowdown and their impact on the shipping industry. The verdict is clear: the devastating combination of credit crunch, rock bottom consumer confidence, and sharp decline in industrial productions and business activities have hit the shipping sector very hard, and will continue to drag down the sector for some time to come. At the rate the global economy is contracting, things look set to get worse for this sector that facilitates much of international trade before they can get better.
It is interesting to draw comparisons between the mechanics of the financial markets and the shipping markets, which are essentially driven by the immutable laws of demand and supply. Although different in nature, the two markets are characterised by some common denominators that drive their movements and influence the behaviors and mentality of the players involved. Both the financial and shipping markets display the whole gamut of human emotions that propel prices forward and drag them down, and are influenced by elements of speculation, greed, anxiety, fear, hope, confidence and optimism.
Before joining the exciting world of policy research, I used to trade currencies and equities. This, of course, does not make me a qualified person to seriously comment on the state of the financial markets. But then again few among the so-called experts can claim coming out smelling like roses amid the mess the world is in. Much of the damage in the financial markets was created by the very “experts” who were supposed to know better!
During my time as a money trader and stockbroker, I came across several time-tested (worn out?) phrases often heard while hunkering down in the financial market trenches. It occurred to me that one could draw parallel between these golden rules of investing in the financial markets and negotiating the waves of the shipping industry.
All the same, these two markets are governed by the indomitable law of demand and supply, and is subject to human infallibilities and wisdom, hence making for fascinating comparative – albeit lighthearted – study.
Here is my personal compilation of “The Ten Commandments” of the financial markets with which parallels can be drawn with the shipping market. These are among the commonly used - and sometimes abused – phrases which I often came across during my trading days in the money and stock markets.
Veteran traders in the financial markets are fond to quote these sayings to “educate” the rookies on the tricks of the trade, to impress certain points, to impart certain lessons and to emphasise the indomitable laws of the markets. Judge for yourself if these rules of engagement of the financial markets can be applied to the shipping industry:
10. If the only thing you have is hope, then you are in a bad position
This oft-quoted phrase is a close relative of the saying “if you only have one option, then you have no option”. It is most applicable to traders who wager bets on a position and face the near certain prospect of losing on the bets due to unfavorable market conditions and factors that go against the positions they have taken.
There is an unwritten rule among traders to always have an exit strategy in whatever position they take. To traders, losing control of their own destiny, and to be rescued and “bailed out” of their positions by forces beyond their control or by sheer luck alone, is not a position they want to be in. If they find themselves stuck in a bad position and powerless to change the course of events, and are reduced to hoping that the market turns around in their favor, then they consider their position to be untenable.
This phrase is best exemplified by the dire situation that Nick Leeson of Barings Bank got himself into that resulted in UK’s oldest investment bank collapsing in 1995. While his losses piled up, he had no more tricks left up his sleeve to salvage his position but was only hoping that the markets would rebound so he could win a reprieve from the bets he took. The name Nick Leeson has even become an adjective among traders in the financial markets, as in, “Be careful – don’t be caught in a Nick Leeson position!”
Shipping companies which do not have exit strategies when the markets turn sour and merely hope that the economy, trade and market cycles turn around in their favor are in a position not different to Nick Leeson.
When the global economic slump hit, many shipping companies that did not have diversified strategies and business activities found themselves stuck in a bad position as they could not wriggle out of their one option, one dimension business approach fast enough.
Shipping lines serving particular routes and trades, terminal operators dedicated to serving particular types of cargos and shipyards focusing on building certain types of vessels got hit quicker and harder compared with other players with diversified business.
Merely hoping that things would turn around in their favor à la Nick Leeson when he was stuck with loss-incurring positions is the equivalent to the gambler’s desperate throw of the dice. This is the position many players in the maritime sector are sadly facing now. Stung by their own “Hail Mary” business approach of putting all their eggs in one basket, they are hit badly when the economic crisis hit their business sector. Those who lack a diverse business strategy can do little now but hope that the dark clouds pass as quickly as possible.
9. Buy on rumors, sell on facts
Here is one of the most clichéd of all stock market clichés. Rumors move the market, but facts confirm what have been said through the grapevine. Hence, when a rumor leading to price appreciation starts to make its round, people place a buy order with their brokers in the hope that they will benefit later when the rumors are confirmed true. When the facts come out, which at times may not be as rumored, they tell their brokers to sell as the rumor has come full circle and is considered past its sell-by date. At the core of this cliché is this: rumors, or speculations, do to prices in markets what fuel does to fire.
Although valid to a certain extent, it is not always applicable to all situations. If indeed people bought on rumors and sold on facts all the time, they would not be badly scalded when markets, whether financial or shipping, come crashing down, as they would have acted fast enough to avoid losses when news about the inevitable economic recession started to trickle in. Sure, when the rumour mill churns out material information that can move prices and markets upwards, investors will be quick to call their brokers and place a buy order on the strength of a particular rumour. However, rumours may also point to bad things, in which case the investors should sell on rumors instead.
As the saying goes, market players hate nothing more than uncertainties and ambiguity. Such is the obsession of markets with absolute surety that they are said to have discounted bad news even before they happen.
Markets seemingly have an in-built cleansing mechanism to weed out the grey areas in such a way that any material events, or developments that influence market movements, would have already been factored into the investment decisions of the players.
This is at least the conventional line of thinking, but there is also a lag between the time material information is generated and material developments take place and the time they reach the markets.
This lag accounts for the inefficiency of the market in disseminating information throughout the entire length and breadth of the marketplace that prevents those involved from making informed decisions. This gap is however fast closing in with the advent of telecommunications and the Internet.
Investors, however, are a funny lot. They like to attribute their successful investment decisions on their own abilities and wit to outsmart the market, but they are quick to blame all kinds of external factors when their bets go wrong.
When they follow up on a rumor to its end and make profit for their persistence, they will take credit for having the conviction to follow a good lead. But when they lose out when the facts come out, they will almost always blame everything and everyone but themselves.
We can see some players in shipping blaming their current woes on the banks not lending, shippers not transporting goods, consumers tightening their purses and industries cutting down production. Very few have the fortitude to blame their wanton profligacy of splashing capital beyond their means, going on a spending spree to build excess tonnage and entering into overheating trades in the hope of making a quick buck.
8. Those who can, trade; those who can’t, recommend
This is the financial markets’ version of the saying “Those who can, do; those who can’t, comment” and its many other derivatives. The supersensitive might take offense and see this as a putdown, but it is really nothing more than just a good-natured ribbing that characterises the love-hate but nonetheless mutually dependent relationship between traders and analysts.
There are all kinds of analysis, whether fundamental or technical, in any markets that help investors make informed decisions. Some analysts use extremely complex models and methods that can bedazzle, convince and even confuse the “consumers” of the reports they churn out.
However, analysts’ recommendations are only that: recommendations. They are not legally binding. Investors have the option to accept or reject recommendations. In no way they should be taken as the gospel with which to make major investment decisions. At the end of the day, the decision to buy, sell or hold is exclusively the investors’ to make.
At times, analysts can forecast the outcome of certain trades to a stunning degree of accuracy, but they can also get things horribly wrong. It is therefore not smart for investors to depend on the views of analysts alone in making business and investment decisions.
It would be lame for investors who are wide off the mark with their bets made based on analysts’ recommendations to blame the analysts. Unfortunately, investors tend to practice selective picking of information in making investment decisions. They tend to take recommendations that may justify their decisions and preconceived notions about where the markets are heading more willingly than they take cautions and warnings by analysts.
There are many quality shipping reports churned out by reputable, authoritative research outfits such as Drewry, Clarksons, Lloyds Register-Fairplay, Institute of Shipping Economics and Logistics, Bremen and RS Platou. Their in-depth and often succinct reports do help put things into perspective and are indeed helpful for shipping managers to sieve the wheat from the mountainous information chaff in the shipping industry. However, to solely depend on such reports in making investment and business decisions in the shipping industry is never a prudent approach. Some shipping managers swear by the recommendations of their favorite analysts and tend to go for whatever views they present in making decisions pertaining to their business, without doing their own due diligence.
There have been some spectacularly bad decisions made in the maritime sector over the years, as evidenced by cases of ill-advised, unsynergistic acquisition of companies at excessive prices, ordering of expensive newbuildings at the time of falling freight rates and tonnage overcapacity, and poorly thought out development of new ports – which can partly be blamed on relying too much on overoptimistic recommendations and overambitious forecasts by overenthusiastic analysts and overeager consultants.
7. Don’t fight the trend, it’s your friend
Another version of the adage “the market is like the house dealer: it never loses”.
No investor can beat the markets all the time, even when he or she is in a strong position to take a contrarian view and go against the flow of the market. The market is the sum of many parts which combine to create a momentum and force larger and stronger than any single investor can bear.
As such, it is important to observe the trends in the market in order to do well in it. Market movements may not make sense at times but at any given point in time, there are visible, distinct trends which one can count upon in negotiating its currents. Observing market trends carefully can contribute a long way towards meeting investment objectives, in the same manner road signs help drivers get to their destinations accurately and safely.
Truth be told, there is no real mystic about markets. My mentor during the time I was trading currency at Citibank in Kuala Lumpur once said: “Markets are like people. They are not that difficult to figure out as they generally behave in the manner they appear.” Market trends – historical, current and future - reveal a wealth of information and hints about their past behaviors, present dynamics and the direction they are heading. Current market prices reflect the demand and supply situation of particular assets and commodities traded in certain markets; the state of the companies involved; the sentiment of the investors; and the health of the economy, among a whole lot of other information. As such, market performance at any given point in time contains pretty much all there is to know about the direction they are heading.
Applying this logic to the shipping markets, there are visible trends that investors and industry players should heed in making investment and business decisions. Amid the current global economic malaise, low trade volumes, declining consumer confidence and tightening credit squeeze, demand for shipping services is slumping.
On top of this, there is the spectre of huge new capacity coming into the markets. Some shipping trades such as dry bulk and container are worse hit than others, while demand for shipping services to support the offshore oil and gas sector and for fuel-efficient ships is strong. These unmistakable trends should be closely tracked by players in the sector in deciding their business strategies, investment decisions, resource planning and capacity development, in the same manner that the players in financial markets rely on market trends to help them maneuver their way.
6. These are only my opinions; if you don’t like them, I have others.
This is a personal favorite quote of mine and I suspect among many other traders in the market. The crux of the application of this high-handed saying, often credited to Groucho Marx, to the financial markets is this: one must have full conviction about one’s decisions. Sometimes, investors stubbornly cling on to convictions that turn out be misguided and erroneous. But such convictions give markets the edge and energy they need. As Peter Lynch, the investment author and fund manager, once said: “In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten”. In other words, nobody will ever get it right all the time, but one should try to get it right most of the time.
To develop what Americans call a good batting average, investors need to be a little bit opinionated and must be prepared to follow through a certain strategy and objective which they have set out for themselves, through thick and thin.
Markets tend to punish those without a clear picture of what they want out of their investments and a definitive game plan on how to attain their objectives. Those who come into the market without any opinions or tactics will tend to get sucked into the herd mentality of following the crowd, and tend to get trampled when there is a market stampede as they lack an exit strategy.
Shipping players cannot afford not to have a strong opinion about the business they are in and a firm stand on the direction of their business. Shipping is a capital-intensive and capital-hungry business which requires a long-term perspective, patient following and strong commitment from its players and investors. It is not a business for the faint-hearted and for those without opinions about where the business is heading.
With such an attitude, seasoned players in shipping have weathered several market downturns and will stand to remain in the business when others succumb to the current freefall in the shipping markets due to a lack of faith in their ability to survive the onslaught and the capacity to stay the course amid the turbulence.
5. Misery likes company; market swings even more soFormer US Federal Reserve Chairman Alan Greenspan
This is at the core of the now legendary phrase “irrational exuberance” coined by former US Federal Reserve Chairman Alan Greenspan. When markets move and swing, they can create a rhythm and momentum that can draw in the crowd, in the manner the hordes of rats are drawn to the Pied Piper of Hamelin’s flute playing. Punters tend to lose all sense of individualism and display all the qualities that characterise the herd mentality, hypnotised in the mass exorcism created by markets in flux. Likewise, the opposite of “irrational exuberance”, call it “nonsensical apprehension” if you will, can also be seen in a bearish market. Once investors are gripped by thoughts of doom and gloom, they chuck aside rational thoughts and ignore all market fundamentals, sending the markets on a hair-raising free-fall.
A market driven by sentiment is like a car driven by a blindfolded driver. It can still move forward or backward but it risks running into things and doing a lot of damage. Despite being full of very intelligent, highly educated and experienced people, the financial markets can display some erratic and bizarre behaviors that defy logic and conventional wisdom. The manner in which rock solid institutions can fall like bowling pins as a result of investment in dodgy asset classes and the stunning fashion in which seasoned fund managers could get conned by the Ponzi scheme conjured by Bernard Madoff stand testimony to the extent with which people can get sucked into and shoved around by market swings.
Drawing a parlance with the situation in shipping industry, it was stunning to see even experienced players and seasoned companies get caught out flat by the global economic crisis as if they were in a daze.
The predicament of the dry bulk trade that has slumped as spectacularly as its climb will stand as a lasting evidence of how the masses can be lulled into complacency by the momentum of the raging markets that leads to dire consequences. The excesses of container operators to go on a spending spree to acquire huge new tonnage even when signs were pointing towards an overheating trade provides testimony to the power of market swings in influencing the behavior of market players, and the weakness of humans in facing the prospect of making huge profits.
4. It’s never a sin to take profit
See Commandment #3.
3.When you have a position, forget your emotion
This commandment and the one before it address two of the same elements: greed. Gordon Gekko proclaimed that: “Greed is good, greed works” in the movie Wall Street, but in the context of investment, greed can also be the downfall of many investors.
Those already in the money on a particular position or trade tend to want to wait further for their investment to gain more returns before unloading their position. Driven by the greed factor, or, as some brokers creatively describe it, the “G spot”, investors tend to cut losses faster than they take profit. This behavior is one of the most common traits of investors who tend to get their emotion to get the better of their judgment and sound decision making.
The psychological makeup and behaviors of players in the financial markets never fail to fascinate market players, market watchers, sociologists and behavorial scientists. One of the most common observations in any markets is that investors on a good run tend to think the rub of the green will continue forever. Take the profit and run is one of the least followed advices among investors.
This trait was there for all to see in the shipping industry when it hit its purple patch. Amid the shipping supercycle, several shipowners tend to get swept away by the euphoria and failed to capitalise on their positions of strength.
Fuelled by the mistaken and dangerous belief that the bull run would go on indefinitely, some shipowners in certain trades continued to place huge orders for new vessels even when newbuilding prices were at stratospheric levels while freight rates were showing sign of softening. Many of these reckless players are now caught in a bad position: they find themselves having to lay up vessels, cut down on unprofitable routes, cancel vessel orders placed at high prices, and even staring at the prospect of going out of business altogether. They are paying a high cost for allowing themselves to become controlled by their emotions instead of mastering them.
2. Organised chaos theory is often disorganised
The financial markets are not cold-blooded monsters and impersonal machines that operate on some mysterious forces and run on autopilot. They are a trading platform made of a collection of people: investors, traders/brokers, underwriters, analysts, fund managers, regulators, market makers, banks, companies, rating agencies, clearing houses and many others.
As such, the markets’ every move is determined by the moods, hopes, aspirations, fears, irrationality, greed, conservatism, confidence and a whole spectrum of other human emotions. Human beings being who they are, they can at times be rational and irrational, careful and careless, meticulous and messy, smart and stupid in their investment decisions. Markets provide the stage for people to act out their range of emotions, which fuels the markets’ movements and directions.
Market watchers, scholars and even psychologists have often attempted to explain the behaviors of market players by assuming that people are generally guided by an indefatigable moral compass that steers them towards rational behaviors most of the time. They contend that in the seemingly chaotic marketplace, there is a certain method in the madness anchored on the premise that market players tend to ‘do the right things and do things right’.
While this assumption may be valid in most cases, every now and then comes a time when the moral compass goes haywire and leads players down the wrong, and at times fatal, path. The recent meltdown in the financial markets is stunning in the extent of its decapitation and in the shocking display of irrational behaviors among the players who seem to embrace the concept of herd mentality to the extreme.
Take the mood in Wall Street just before the crash: despite clear signs of the markets overheating and the raising of red flags everywhere – record breaking indices, unbelievable returns on hedge funds, big bets placed by highly leveraged players, gaping US trade deficit and voracious appetite for highly-susceptible new asset classes like sub-prime mortgages - players continued to buy, buy and buy and push the markets to record highs.Photo: Fletcher 6
The situation in the shipping industry mirrored the disorganised chaos in the financial markets, as evidenced by the building of the bubble in certain trades such as dry bulk and container before crashing spectacularly. In the dry bulk trade, signs of a growing bubble were eminent at the peak of its super bull run, as evidenced by Baltic Dry Index recording historical highs, bulk ports straining to cope with huge demand, newbuilding frenzy and the spectre of entrance of huge new tonnage looming in the near horizon. The gains, trajectory and momentum of the bulk trade were such that they would clearly not be sustainable for long, but players did not hold back and continued the feeding frenzy by ordering more vessels and pushing freight rates skywards.
Somehow, these signs were ignored, or not taken as alarming enough, by bullish players who thought the good times would go on without end. It was a classic case of confidence breeding confidence often seen during bullish periods in any markets. Take the dry bulk trade for example: When the chicken came home to roost and the shipping markets collapsed on the back of the global recession, the organized chaos disintegrated into a disheveled mess. The players were defeated by their greed, irrationality and mistaken belief that their moral compass was pointing to the direction of the righteous path.
1.Thou shall not overkill!
A spoof of the commandment “Thou shall not kill”. Quite simply, the best and the truest of all the market commandments. It advocates market players not to overdo things and to be guided by their hearts and minds, instead of their heads and hunches. The phrase also serves as a reminder for them to instill a sense of self-imposed discipline to cut losses when the markets are retreating and to take profit when markets are advancing, without hesitation or regrets.
Just like the original Ten Commandments that Moses brought down from Mount Sinai, this market commandment should be applicable to all situations (read: all markets, all trades and all industries) at all times. It can act as a useful moral imperative for shipping players to allocate their resources wisely, capitalise on their strengths, borrow wisely, avoid being highly leveraged, and not bite off more than they can chew in their chosen trades and business activities.
Decalogue in the age of decadence
There is also another saying which I have left out from the above list on purpose : There are Ten Commandments on how to maneuver the market – and they are all wrong!
All said, the commandments provide nothing more than a source of amusement and light-hearted relief to market players grappling with the high-octane nature and stress-inducing rollercoaster ups and downs of the markets. But viewed more judiciously, there might be a nugget or two in them that can provide a set of fundamental obligations of morality to guide the behaviors of us mere mortals in negotiating the might of the markets.
In these tense and trying times, we could all use a bit of guidance - jocular in tone or serious-sounding - to steer us through the treacherous waters of the financial markets and shipping sector. Remember, no good times or bad times last forever, so watch the signs and trends in the markets and industry for signals of recovery to be the first to seize the opportunities emerging when confidence picks up and the bulls outrun the bears.
Godspeed and good luck!
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