Strong demand to short shipping as institutional investors shy away

Amid the Global meltdown and continued macro economic uncertainty, the Baltic Dry Index, which measures bulk shipping activity, has hit a three month low. However, according to Wall Street Journal, the decline is not anything as severe as the collapse witnessed post Lehman. We use securities lending flow data to see how both long and short investors have positioned themselves in the major shipping stocks to see if they have been anticipating reduced global growth. Demand to borrow has indeed been strong across many floating freight companies and this shows that some investors were predicting what central bankers are now admitting, that global trade is slow. We will look at: Overseas Shipholding Group Inc. (NYSE:OSG), Knightsbridge Tankers Ltd. (NASDAQ:VLCCF), Pacific Basin (HK:2343), Diana Shipping (NYSE:DSX).

Strong demand to borrow

The WSJ noted that the shipping industry adapted very slowly to the new economic landscape. The global fleet is still largely set up for economic boom and not all ship orders were canceled when things fell apart, which partially explains the three month low in the BDI.

The global Bloomberg Relative Value below shows that average Utilization across the Marine Transportation sector stands at 54%, meaning that over half of the stock that is available to be borrowed is outstanding on loan. This has been the case since we last highlighted the sector at the beginning of June. This is mainly because many of these firms are listed in Asian markets where the supply of shares to borrow is more limited that in the west.
 

The screen shows that shares across the sector have slumped by 17% over the past two weeks, yet average short interest, measured against shares outstanding, is only 2% below that of the main U.S. and European indices. Only a few stocks have high absolute levels of short interest including the following:

Short interest in U.S. listed Overseas Shipholding has built steadily over the past year to a whopping 39% of the total shares being out on loan, giving the company the dubious honor of being the most shorted of the shipping stocks. With almost all the shares that can be borrowed out on loan, it will be hard to short more of this company and there has been little short covering despite the 20% fall in the shares since the end of July. Institutional investors who lend also reduced holdings by almost 30% in late June, but this still stands at an impressive 34%. So there are clearly two schools of thought for this one.
 

Another interesting name, also a U.S. listed company, is Knightsbridge Tankers - the second most shorted stock with 10% of shares outstanding on loan. Shorts have been gently reducing positions since February and it will be interesting to note how they react to the sharp slump in the share price seen since the end of last month.

Small cap Norwegian shipping company Frontline is the third most shorted stock. It has seen substantial short covering since the end of February with short interest having more than halved to just over 8% as the price has continued to drift downwards. We should point out, however that a good proportion of the short selling is in relation to Frontline’s existing convertible bond as opposed to directional. More interestingly, long only investors who lend have also voted with their feet, having almost halved their holdings since February.

Few longs go overweight

Only four stocks in the Bloomberg Relative Value screen below see holdings by institutional investors above 10%. This means that institutional investor appetite for Marine Transportation stocks is well below the average across major indices, which tend to be between 20-25% for mid-cap stocks. It is interesting that Overseas Shipholding (34%) and Knightsbridge Tankers (9%) rank in the top 5 for this group, while also appearing in the above screen for the most shorted stocks. Hong Kong listed, Pacific Basin (HK:2343) ranks second with 23% of its shares held by long only investors who lend after a recent spike up. This is very high for a mid cap in this region since an average of 10% of HK listed large cap firms are typically borrowable. Diana Shipping is also popular amongst the long only funds that have been ignoring recent price weakness to buy increasingly more shares, taking their holdings to just under 19% of the company.