Castalia Group

Clearly since the financial crisis of 2008 the U.S. Government, the Federal Reserve, social activists and pundits have been preoccupied with the idea of “Too Big to Fail”. The U.S. government enacted the Dodd–Frank Wall Street Reform and Consumer Protection Act on July 10, 2010. As described by President Obama, this Act to change the U.S. financial regulatory system (and impact the global financial system) would be a “sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression”.

The greatest impact of Dodd-Frank on the marketplace has been the destruction/elimination of entrepreneurial. Instead of controlling those financial entities that are “too big to fail”, Dodd-Frank has enhanced their size, power and market competitiveness as compared to smaller entities. The regulatory framework which Dodd-Frank has put in place has all but limited entrepreneurial development of financial institutions, such as start up hedge funds or new start-up banking/financial institutions, The Dodd-Frank Act has not only increased the likelihood that a large entity will need to be protected from failing, but also that its failure will have a significant and systemic impact as these entities have become even more pervasive throughout American society and the economy.

Rumors of Chinese Dried Distiller Grain (“DDG”) shipment cancellations…There is talk China canceled two bulk vessels of U.S. DDGs. It is also being rumored that China could cancel as many as six more cargoes pushed DDG prices lower last week. Another source cited by Reuters said, China was simply rolling deliveries of DDGs over until October 2015 or later. Feed demand in China is sliding and cheaper soymeal prices are thought to be slowing demand for DDGs.

In any event, while this is not a good sign for dry bulk shipping, the commodity market that will determine whether there is some life in the dry bulk market is coal. Even with increases in iron ore cargoes from Australia, from a shipping demand perspective, it will be the coal market that will be the determiner of a recovery in dry bulk. The coal market is a problem and it is providing real pressure on the dry bulk market. The jury is out……

When one says “Clear Sailing”, many forget the existence of “Grey Swans” and even “Black Swans”. Yes, “Swans” of all types, “White”, “Grey” and “Black” (and maybe some of colors). Currently, the tanker market is sailing well. Shipowners that experienced serious financial difficulties years ago are now enjoying “good times”. During these difficult years, some hunkered down, other shipowners benefited from acquiring secondhand tonnage/yard resales at attractive prices and others restructured their assets and liabilities or built their organizations with the support of private equity firms. The real key to this recovery was that shipowners had no choice to act responsibly and they controlled their ordering of newbuildings. The dearth of newbuilding orders was in no small part due a spectacular collapse in rates, which had followed an exceptional tanker market from 2002 to the end of 2008.

The current tanker market is benefiting from Middle East OPEC producers and a rationalized fleet structure. While fleet supply is important, the impact of the Saudi Arabia and Middle East producers can not be understated. In particular, Saudi Arabia’s focus to capture and control market share has changed the fortunes of the tanker market. By Saudi Arabia maintaining its crude production levels and the emergence of Middle East refining capacity, it is causing cost floors to come under scrutiny and budgets curtailed in other parts of the world. Saudi Arabia and Middle East producers are attempting to impact the momentum and the production in the Americas. With Middle East onshore crude production in the range of $20 to $40 per bbl. and American output being in the range of $60 to $100 per bbl., Middle East producers are attempting to control the market expansion of American output, In so doing, the actions of Middle East producers are permitting the tanker market to benefit. And while trade patterns are continuing to be influenced by policy and geopolitical turmoil in 2015, we are seeing increased crude and products seaborne trade.

The tanker market is primed for a period of reasonable growth and financial stability. At this point, shipowner management decisions are becoming even more crucial, And while, shipowners need be mindful of a “Grey Swan” or even a “Black Swan”, hopefully, at the very least, shipowners can manage their natural urge to order newbuildings. We may thus be able to see an extended period of growth for the tanker market.

Equity Market Performance

The first quarter of 2014 produced positive equity market returns. For the first quarter ending March 31, 2014, the Standard & Poor’s 500 Index (“S&P 500”) produced a total return [including dividends] of 1.8%. The Dow Jones Industrial Index (“Dow”) and the Nasdaq Composite Index (“Nasdaq”) produced total returns of (0.2)% and 0.8%, respectively. Measuring only capital appreciation, the S&P 500 produced a return of 1.3%, while the Dow and the Nasdaq produced returns of (0.7)% and 0.5%, respectively.

The second quarter of 2014 produced positive equity market returns. For the second quarter ending June 30, 2014, the S&P 500 produced a total return [including dividends] of 5.2%. The Dow and the Nasdaq produced total returns of 2.8% and 5.3%, respectively. Measuring only capital appreciation, the S&P 500 produced a return of 4.7%; while the Dow and the Nasdaq produced returns of 2.2% and 5.0%, respectively.

Through the first half of 2014 the equity market produced positive returns. For the first half of 2014, the S&P 500 produced a total return [including dividends] of 7.1%. The Dow and the Nasdaq produced total returns of 2.7% and 6.2%, respectively. Measuring only capital appreciation, the S&P 500 produced a return of 6.1%; while the Dow and the Nasdaq produced returns of 1.5% and 5.5%, respectively.

Posting Also Available at: www.jcgoodgal.com/investment

Jay Charles Goodgal, Comment:

Portfolio Allocation
An improving U.S. current account position is having a significant impact on the attractiveness of U.S. equity and fixed income markets. The improving U.S. current account balance is increasing liquidity in the U.S. which is making its way into the equity and fixed income markets. Given the uncertainty of China and Japan to continue to finance U.S. government deficits, the improvement in the U.S. current account balance may enhance, if not offset, investment in U.S. assets by foreign investors.