J Mintzmyer On Red Sea Disruptions And 2 Key Shipping Segments

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J Mintzmyer explains the ins and outs of the shipping sector (3:00). Why the Suez Canal and Red Sea matter so much to the industry (5:50). Investment opportunities in tankers and containerships (14:20). Why ZIM is such a volatile stock (24:55) and why J doesn’t love the shipping ETF BOAT (26:15). This is an abridged conversation from Seeking Alpha’s recent video webinar.

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Transcript

Daniel Snyder: Welcome, everyone. Daniel Snyder from Seeking Alpha here. Thank you again for taking the time to show up and hanging out with us today.

I’m so thankful that we could get J Mintzmyer to join us today. He is the founder of Value Investor’s Edge. Dr. J Mintzmyer in the building. Welcome, J. How are you?

J Mintzmyer: Hey, thank you very much, Daniel. That was a very gracious, very generous introduction.

We’re going to talk about how to profit from Red Sea disruptions. That might sound like a little bit of a callous headline. So it’s more so informative about what’s going on in the Red Sea, as well as some shipping segments that are definitely impacted, and some interesting points to follow.

I’m the Founder and President of Value Investor’s Edge. You can follow me on X, it used to be called Twitter, @Mintzmyer. Follow me there for free. If you’re interested later on in our exclusive research and model portfolios, you can go to vieresearch.com. Of course that’s a Seeking Alpha product. And then we have an entry-level newsletter, little bit more retail-oriented, smaller price point, that’s vie-lite.com.

I have about 15 years, a little bit over 15 years of experience in the shipping sector. Started covering that in 2007/2008. Lots of experience with booms and busts and all sorts of things going on, mergers and acquisitions, fleet acquisitions, divestitures, spin-offs, take privates, bankruptcies, all sorts of things. I have seen it all in the shipping sector. And as part of being involved for so long in the sector, I have key relationships with almost all the management teams, all the institutional analysts who might be involved, as well as many of the institutional investors.

Educational background for those who are interested. I have a Bachelors in Economics from the U.S. Air Force Academy, a Masters in Public Policy from the University of Maryland. I also worked as a Research Intern in the White House Council of Economic Advisers. And I just finished, as Daniel mentioned, I just finished a PhD from Harvard focused on International Relations, specifically Sanctions & Trade Flows. I defended that last November. Just uploaded it a few weeks ago. So hopefully, that’ll be published soon for anyone who wants to read that dissertation.

And then on the business side, I launched Value Investor’s Edge in the middle of 2015. It was just me at that point. But we’ve been now going out this for eight and a half years, or eight year total IRR from our tracked trades initially and our model portfolios is 43.4%. That’s 17x in over eight years, actually, it’s a little bit closer to 18x. And then our model portfolios which we launched in 2019. We’ve been doing those for just over five years now. Those have an IRR of 53.9%, which is nearly 9x in five years.

And our team has grown a lot. We now have a team of 10. Very proud of what our team has been able to do.

So we’re going to talk about our research background and our approach at Value Investor’s Edge. We’re going to talk about the high level impact of the Red Sea disruptions, why it’s important, why it matters, what exactly is going on. And we’ll talk about two key sectors that are poised to benefit — they’re already benefiting actually, those are the tanker sector and the container ship sector.

So our lane at Value Investor’s Edge, exclusively maritime shipping and energy. It’s a niche sector. There’s not a lot of publicly available research, and it’s very cyclical, and traditionally was also heavily leveraged. That’s not quite as true today. In fact, the balance sheets right now are the best they’ve ever been in 15 years.

But it’s still a cyclical industry. So you have your booms and bust. And you have a lot of opportunities to get in, analyze the cycle, be ahead of the curve. And then you get towards the top and as close as you can be, and then it’s time to look to a different segment.

The really cool thing about shipping is, it’s not one big monolith. There’s actually like seven or eight different sub segments that each have their own supply and demand. So at any given time, on Value Investor’s Edge, there’s two or three segments that are very interesting, very attractive for investment, there’s two or three or four segments that are not very interesting.

We want to avoid those or stay away from them or bide our time. And maybe there’s a couple that are in transition. So it’s not just one big cyclical industry, it’s like six or seven cycles going across the graph at once. So there’s always something to do, there’s always some sort of opportunity in the market.

Now the best part about shipping is that mainstream news reports and the broad markets often get things wrong. A lot of times, a knee jerk reaction is backwards. You think back to the supply chain crisis in 2020/2021. At first, a lot of folks thought that would be negative for shipping companies, right, all the congestion off the ports, the lack of dock workers, the lack of warehouse space, people initially thought that would be bad for shipping.

Obviously, that wasn’t the case. Rates went up over 10x. And it was one of the biggest cycles we’ve ever seen. But there’s a lot of backwards, things like that. When Russia invaded Ukraine, we saw a similar reaction. Tanker stocks went down because everyone was worried about the Russian oil leaving the market. Whereas that wasn’t actually the case. And so we see a lot of these opportunities that we can take advantage of because oftentimes the broad market is either wrong or they’re really, really slow to sort of the meat and potatoes of these trades.

So with that, let’s talk about the impacts from Red Sea, what you’re all here for. So first of all, before we get started, just a credibility point. I want to highlight James Catlin’s excellent macro work on our platform. You can see, December 4, 2023, this is just kind of the headline. But he talks about turmoil in key shipping choke points. He talks about the Suez Canal, the Panama Canal, he talks about the recent attacks on vessels. He was talking about this way before anybody. CNN, Bloomberg, BBC, nobody was talking about this too much. And James was already ahead of things.

Then the end of December, so about a month ago now, James was talking about tankers. How the tanker market would benefit. He talked about the ton miles, the tight markets, and how it’s now really time to start leading into some other tanker trades. And then most recently, about a week ago, I sat down with the team from Bridgewater, hopefully, most of you all are familiar with them. And we talked about the Houthi attacks and the economic implications, both for shipping and also for the market. So hopefully, that just shows a little bit quick snapshot of that credibility piece of being ahead of the curve.

So now, high level, Suez Canal, Red Sea, why does it matter? So the Mediterranean Sea in Europe, links to the Suez Canal, which goes to the Red Sea into what’s called the Bab al-Mandab Strait. That is the key trade link between Asia and Europe. Now this Bab al-Mandab Strait is only a mile and a half wide. So not very big, but as big across as some average lakes that you’re probably familiar with. It’s between Yemen, Djibouti and Somalia. So Yemen and Somalia, very unstable. 15% of all global trade goes through that choke point, and 30%, almost one-third of containerized trade.

So think of any, like 20 foot, 40 foot box, things that you’d see on a rail car or truck, stuff you buy from Amazon (AMZN), Target (TGT), Walmart (WMT), Costco (COST), that’s the sort of stuff that goes through there. Here’s a little map to help you out a little bit.

So you’re probably familiar with, four, five, six years ago, there was a lot of headlines about Somali pirates. That was in the Gulf of Aden and around the Bab al-Mandab. You can understand why they were able to do that sort of stuff, because it’s such a choke point. This choke point is even smaller yet.

So why did this start? Well, it all kind of goes back to those terror attacks that came from Gaza into Israel. Israel, of course, responded, they invaded Gaza. And we had a lot of uproar and unrest in the Middle East. The Houthis, not necessarily, traditionally a terrorist group. It’s not like Al Qaeda or ISIS. They were — it’s more of a civil war, it’s more of a separatist movement. But now in response to the Gaza conflict, they started indiscriminately attacking maritime vessels. So now they’ve moved from like civil war participant, a military group, into outright maritime terrorism.

So the U.S. responded after a few weeks, what was called Operation Prosperity Guardian. It was put together with several coalition partners, several naval assets would go and escort commercial ships through the lane. And that seemed to work for like a day or two. But then the attacks continued. So then in early January, the U.S. bombed several Houthi targets. It was more of a warning shot. They didn’t kill too many people. They didn’t blow up a lot of the infrastructure, a lot of targets. It was kind of a warning, right? The U.S. has taken this seriously.

But the Houthis didn’t get the message. The attacks continued. In fact, some of the attacks escalated. The Houthis even attacked some U.S. naval assets directly. And so now we’re in this sort of instability, tit-for-tat, you’ll turn on the news one day, and then the Houthis have attacked a ship. The next day the U.S. will bomb something, the Houthis will attack someone else. It seems like the more the U.S. attacks them, the more emboldened they get, it’s kind of having the inverse effect, it’s not stabilizing the region whatsoever. And so that’s the current situation.

Now the Houthis, they’re doing a little bit of the whole like speedboat, hijacking stuff. But primarily, they’re using one way suicide drones to attack ships, they’re also using more advanced surface-to-sea missiles, which they seem to be getting from Iran. So it’s a much more complex attack on maritime shipping. It’s anywhere from, I would say 10x to 20x more impactful than anything the Somalian pirates ever did.

So its order of magnitude more impactful. And again, those attacks are ongoing, even with U.S. Naval escorts, even with naval U.S. strikes. If anything, they’re getting more and more emboldened to keep going through with these strikes.

And so we kind of covered what is the Red Sea, the Suez Canal, why is it important, the background of the Houthis and why they’re able to carry on these strikes. But what does this mean for shipping?

Well, if you’re not going to go through the Red Sea, you’re not going to go through that choke point, you have to go around South Africa, it’s called the Cape of Good Hope. And this adds 40% to that key Asia to Europe route, it adds 60% to 70% to Asia-Mediterranean trades.

A map we borrowed from Reuters here, no need to reinvent the wheel. It uses Singapore as sort of a proxy for Asian trade. That’s kind of a transloading hub. And Rotterdam, which is in Northern Europe, that’s the biggest containerized port in Europe. Through this, Singapore to Rotterdam is about a 26 day trip. Now, if you instead reroute around the Cape of Good Hope, you go from 26 days to 36 days. And that’s exactly where that 40% number comes from.

The 60% to 70% impact is for oil, right, that’s going from the Arabian Gulf into Mediterranean. So think Italy, Greece, Turkey, all those southern — South of France, all those southern ports 60% to 70% impact, because instead of just going through here, you have to go all the way around Africa, through the Strait of Gibraltar and in sort of the backdoor route here. So significant impact to those Asia-Mediterranean trades.

I want to key in on three key segments. So the first one is containers. And those are those retail goods we talked about. That’s the green numbers here, you see normally about 110, 120, 125 vessels per week would go through that choke point. Now we’re down to about 33, 34 over the last couple of weeks. So it’s more than two-thirds, but a 70% reduction. And all those container ships are going around the Cape of Good Hope adding 40% to 50% like we talked about.

The product tanker trade, which is more recent, normally, you would see anywhere from about 45, we have 55, here we got 69 ships go through on a weekly basis. Now we’re starting to drop. We dropped down to the 40s. In the last week, we were at 29. So more and more product tankers are starting to divert as a reaction to these attacks.

Now, thankfully, no ships have sunk yet. No crew members have been killed yet. And I hope that that remains the case. I hope more and more shipping companies are taking this seriously, diverting appropriately, doing the right cautionary measures.

There was a really rough attack on a tanker vessel last Friday. They were able to evacuate all 15 crew members. I hope they can get the oil and the products off there. So they don’t have an environmental catastrophe. But it looks like that ship is going to be a total loss. I don’t know if it’s actually going to sink or they’re just going to have to demolish it. But it looks like one ship at least has been destroyed now. And lots of ships have been damaged, which means they’re out of service, they got to go get repaired. So there’s a significant impact, and it’s ongoing.

The third segment here, we’re not necessarily going to cover the stocks today, because it’s a niche sector, is car carriers. That’s a pretty big Asia to Europe trade. Normally we see 25 to 30, here is 33 car carriers going through. Now we’re down to 10. We’re in single digits, eight and seven, I believe. So car carriers are also really impacted. Those are the three big segments here.

So let’s zoom out a little bit. We’ve talked about the Red Sea, we talked about the Suez Canal, we’ve talked about the rerouting that’s clearly happening. Why does this matter? Well, shipping is a supply and demand driven commodity market, like anything else. Demand is measured in tons x miles. So we’ve seen those miles go way up. So just quick math here, you know, 30% containerized trade, two-thirds of it is getting rerouted x a 50% increase, I did all the math for you, for myself too, do public math here. But that’s a 10% increase to demand for global containers. That’s global demand. 10%. Not just one route, that’s the entire world.

For tanker trade, we got about 20% of that, half of it’s getting rerouted, 60% increase, maybe 70% or 80%, honestly, because this is cross Med trade. So big reroutings. That’s about 6%. So 10% and 6% might not sound like a lot, but when you have an already tight market, and it’s what we, in economics, we’d call inelastic market. That means that the rates can go up 5x, 6x, 7x, 8x.

And it’s not going to like break the market. Right? It’s not going to be destroying demand. Because even if you have tanker rates go up 2 or 3x, you’re talking about maybe $0.30, $0.40 a gallon to gas. That’s not good, right, for consumers. But that’s not going to break the market. People are still going to pay $0.30 or $0.40 more for gas, even if the tanker rates double, triple, quadruple.

Now, on the supply side, you have ships x speed. So normally when the rates would go up, you would expect the ships to speed up, right. But that can’t happen. And here’s a few reasons why. First of all, there’s a lot of logistical challenges going around the Cape of Good Hope, the logistics repair depots, the bunker fuel ports, all this stuff are being overwhelmed, because the ship traffic is surging beyond anything they expected. So there’s shortages there.

Secondly, the speeds are hampered by all these new environmental regulations. There’s a lot of new stuff that came into play in 2023. And there’s a five year rolling implementation, 2023 to 2027. If you think about a car driving down the road, say you’re going 60 miles an hour, you’re going to get pretty good gas mileage, right? Maybe you’re getting like 35, 40 miles a gallon. If you speed up from 60 to 80, right, you’re only speeding up a little bit, 20 miles per hour, your gas economy plummets, right.

So ships have a similar concept, although water friction, and resistance is an order of magnitude higher on that curve than air resistance for like a vehicle on the road. So ships simply cannot speed up very much without drastically exponentially boosting their emissions. With these new environmental regulations, taxation, restrictions, they’re unable to do so. They can’t really speed up hardly at all.

Finally, the tanker order book, right. The new tonnage that’s coming online to replenish the supply is at all-time record lows, the fleet is the oldest in modern history. So it’s just a really, really tight market. So little impacts on demand can make a huge difference in rates.

So with that, we’ve kind of covered the big picture. Now I’m going to dive down and talk about the sectors and some of the investment and trading opportunities.

So with tankers, we have these tight markets and the potential for what I would call supercycle rates. A little bit of a background here in history, the crude tanker rates and product tanker rates were decimated after COVID. You had demand fall off the cliff because of all the lock downs and shut down in industrial activity. At the same time, you had OPEC+ trying to control the price of oil by cutting exports. So you have lot less exports, a lot less demand, the shipping rates plummeted.

Well, because the market was so bad for so many years, there was no orders, nobody was going to buy new ships because the market was terrible. So suddenly, we had the oldest fleet balance in modern history. And now with the focus on greenhouse gases and climate change, you have the most significant regulations the industry has ever seen.

What happens now? Well, even though rates are rising, we have extremely few tanker deliveries from 2023 to 2025. That’s because it takes three to four years to build some of these tankers. So that gives us the potential that I’d say is a multi-year supercycle potential through 2026.

So for tanker picks, for stocks we cover, Scorpio Tankers (STNG) is one of the key beneficiaries of the surging rates. And a trade idea — this one’s a little more volatile, I like Nordic American Tankers (NAT). I personally have a position in that one, just for disclosure, and in some other tanker firms to consider. Those are the tankers that are very impacted by this current trade.

So where are the tankers at right now? What’s getting rerouted? It’s all that new impact. So you have this whiplash of sanctions, or seeing all this new trade, and then all of a sudden all the new trade can’t go there, so all these orange lines are going to have to start going around Africa. So a significant impact to tankers.

I talked about how old the fleet is. This is the VLCC fleet that’s on the water going all the way back to 2005, up two new builds to 2027. The order book is 2.5%, which is one of the lowest numbers. I’ve never seen a number this low. Well, last year it was even lower, it was like 1.8%. But this is the lowest number I’ve seen in my career, it’s phenomenal. A normal number would be like 10% to 15%.

These are Suezmaxes. Their order book is at 10%. That is very low as well, I said 10% to 15% is a normal number, maybe 20% in a strong market. And so it’s at the lower end of that spectrum. You have a little bit more deliveries coming online in 2024 and 2025. But it’s very similar to what we saw these last few years 2014, 2015, 2016. And let me tell you 2016, 2017, very strong for tanker markets. So it’s a very promising setup on that side of the equation.

The global fleet, we have one-third of the entire fleet is more than 15 years old. If you’re more than 15 years old, you do not qualify for prime trades. So you can’t work with Exxon (XOM), Chevron (CVX), Shell (SHEL), Trafigura, Vitol. They won’t accept your ships, it’s too risky.

Suezmax, it’s not quite as extreme. We got about 16% that are 20-years or older. Suezmaxes can go a little bit longer. So instead of 15, we usually focus on 20. But the same thing, here’s the dark fleet, the old nasty ships, the red ones, that can’t really compete anymore. And then these are sort of the at risk, by like 2027 these ships are always going to be at risk.

The order book is a little bit larger, it’s about 10%. But it’s 10% versus we got 16% here, that’s totally outdated. We have about a third — almost half of the global fleet that’s going to be hamstrung by those new environmental regulations. So even in that case, the order book is only half or maybe a third as large as it probably should be.

Just kind of a wrap up of tankers, the tight markets. I like Scorpio Tankers. They have a lot of those LR2s that are surging in rates. And then I like Nordic American Tankers, this is a trade idea. They have exclusively Suezmax tankers, which are very much benefiting from those re-routings.

So for containerships, we’re looking at kind of two stages. One is cashflow harvesting, the last supercycle and the second is, how to benefit from these surging rates. Containerships kind of have the opposite impact of tankers. When the tankers were struggling during COVID, the containerships were doing extremely well. Remember how I said shipping is like seven or eight segments, and all the segments are doing different things at different times. This is proof of that. Right? The containerships were crushing it the last couple of years when the tankers were doing very poorly.

Last year that was the opposite. Tankers were doing pretty well. Containerships were fading. They’re falling out of favor. We had a lot of newbuilds that came online during COVID because the liners realized I don’t have enough ships, I need to order new ships. There’s a lot of new environmental regulations. I need to order new engines, new retrofits, but a lot of the current newbuilds are a poor fit for the Suez Canal trades and these reroutings.

A lot more reliance on smaller and midsized vessels that can go to different ports, that can handle the tighter logistics situation. And that order book is a lot smaller. It’s still larger than I’d like to see. But it’s about 10%, 15% as opposed to 30% to 40%. We’ve talked ad nauseam about the environmental regulations, but again there’s a ton of them and they’re all 2023 to 2027. And that impacts containerships more than any other sector, the reason why is containerships traditionally go faster than any other type of ship.

And that’s because it’s retail goods, just in time inventory, high value cargoes, a lot of these ships carry $1 billion to $2 billion worth of cargo. So they’re going to be a little bit more speedy on the ocean versus a ship that just carries coal or iron or crude oil. You can long lead, you can plan ahead for things like a cargo full of iron. But when you have a cargo full of holiday goods that need to hit the store shelves, or to get there in front of Black Friday, you got to move fast.

And so again, we talked about it. The faster the ship is more inefficient. So these environmental regulations alone, in five years we think they’re going to hit supply by about 20%. And that’s because ships x speed. So speed comes down by 20%, your overall global supply comes down by 20%.

Selective firms, the ones we like, we have contract rolls that not only benefited from the last part of the supercycle. That’s why we say harvesting. We’re harvesting that cashflow. They’re also benefiting from the recent disruptions because the ships that are coming open are getting recharted at these spiking rates. Freight contracts. This is freight.

So think Zim (ZIM), Maersk (OTCPK:AMKBY), CMA CGM, those freight contracts are typically one year long, and they normally negotiated between January and April. So those negotiations are happening as we speak.

So our container pick, my favorite one is Danaos Corp (DAC), you may have heard me talk about it before. That’s a more steady Eddie long term contracts. They have stuff all the way out to 2028. So they’re not like a huge, they’re not going to go up 3x or something from this, but they’re going to benefit because not only are the current contracts more stable, they’re able to roll some of their new openings on new contracts. One of our hot trades, it’s been super dynamic, for us very volatile, I’m long on Danaos Corp by the way.

Zim, I don’t currently have a position, but I’ve been trading in and out over the last few months. It’s been extremely lucrative. Zim Integrated Shipping, it’s just very volatile, it’s little more risky. But it’s definitely the key trading name to look at. And there’s a handful of other picks, Costamare (CMRE), Euroseas (ESEA) and Global Ship Lease (GSL) that are involved in this segment.

So again, a quick review, just so you didn’t forget. Tankers, we have that tight market, right, and the rates are ripping higher. Scorpio Tankers is a key play in that segment. We get Nordic American Tankers, is a trade idea. And then for containerships, I like that harvesting. I like that long term dynamics, very steady, very safe. I like Danaos Corp.

And then call it the high octane trade, if you really want to see something that’s going to move up and down and get a lot of trading volatility on both sides, we got Zim Integrated Shipping. I mean, feel free to open up a browser right now, type in Zim, look at like a six month chart. And you can see exactly what I mean when I say high octane.

DS: I think I want to jump in. Insurance. I know some people have been reading about how these containerships and these tankers, they need insurance policies on the vessels as they’re traveling, yet we didn’t really dive into that. Is that a growing concern about expenses for these companies that are operating these vessels?

JM: Yes, it’s absolutely an impact. And the way insurance works is, it’s based on your planned voyage routing. So where are you going? It’s not just like a blanket. You can’t just get insurance and then drive your ship anywhere you want in the world. It’s based on where your voyage is going. Starting location, ending location, planned route of travel. And there’s a thing called war risk insurance. And that is total catastrophe, right, hit by a missile, the ship sinks, that insurance is going to cover the total value of your cargo.

So these container ships, as I mentioned, can carry $1 billion, $2 billion, $3 billion of cargo. So even if you think, war risk premium normally is a fraction of a percent, you’re paying a few thousand dollars, maybe $10,000, $20,000 for a voyage, which is just, I mean, it’s like a rounding error, right? It’s something you never really think about. It’s war risk, right? That doesn’t happen.

But now with the surge in the Houthi attacks, the war risk premium has went up orders of magnitude 50x, 100x. Now, we’re still at a point where the war risk premium is maybe like 1% or less of a voyage. But if you talk about 1% of $2 billion, right, now, we’re talking serious money. I think that’s public math. But I think that’s $20 million on a single voyage.

And so there’s a huge economic pressure to divert these vessels and move them around. So you like to think it’s the goodness of the management teams hearts. It’s like they’re looking out for the crew members and they’re just being really safe, and they’re doing the right thing. But there’s some really clear economic incentives to why these crew members or why these shipping companies would divert around.

Not only that, not only the war risk, but you also have crew members that are either refusing, or saying, we will not take our ship. The captain says, I’m not going to take my people through these choke points, too dangerous. Or they say, well, we’ll do it. But we want double, triple, quadruple hazard pay to go through. So you have two different economic incentives that are happening, that it’s not just risk aversion, there’s actual economic incentives here.

DS: I’m glad you clarified that. Because the way it was put to me once was, a company sailing a ship without an insurance policy, I mean, if that ship goes down, the company goes bankrupt.

JM: Yeah. Absolutely. I mean, you’re talking about a $1 billion, $2 billion in cargo. The biggest companies, I mean, like the Maersk, they control like 20%, 25% of the global trade. They could probably take a ship or two down. But I mean, yeah, most companies will be bankrupt almost overnight from that.

DS: Thanks for answering that. And then let’s go into some of these names. So of course, I think there’s some people here that have been following you for quite some time, because I keep seeing all these stock names that are popping up that I know that we’ve talked about before. So let’s go with this one. Any thoughts on (SBLK), Star Bulk.

JM: Yes, Star Bulk is a dry bulk company. So they do the iron ore and the coal and things like that. The dry bulk market is very interesting right now. But as far as the Red Sea disruption, specifically, it’s not really a huge impact. In fact, the Panama Canal drought situation has been a far bigger impact to dry bulk markets. Also, China’s sort of reopening, stimulus, sort of reactionary measures have had a bigger impact to the dry bulk market.

Red Sea, it could maybe at the fringe do a little thing, but not really – it’s not really a big impact. So I don’t — for this webinar specifically, obviously on Value Investor’s Edge we cover 50 firms and we get into the nitty gritty of each one of these segments and the firms that we like, but for the purposes of this webinar, dry bulk is not a huge impact here.

DS: Zim Integrated Shipping. Why is it so volatile as you were talking about?

JM: Yes. So, Zim is super volatile. First of all, because it’s heavily shorted. It’s one of the highest shorted stocks on the stock market. The free float — it depends on how you define the free float, but it’s anywhere from like 20% to 30% of the float is shorted. It was very retail popular name a couple of years ago, because it was IPO-ed at $15. It started trading. It dropped. Initially it was trading from $11. It went from $11 to $80. So it’s like an 8x. It had these huge dividends.

I mean, the entire IPO was at $15. And after a year and a half it paid off like $30 in dividends. I mean what company in the world has ever done that? They IPO at $15, they pay-off $30 in dividends a year and a half. So this is a very like — there’s a lot of eyeballs on this name. There’s a lot of heavily invested shorts in this name. And so it just moves on any sort of news, on any sort of headlines.

And secondly, Zim has a very interesting cost structure. They lease in almost all of their ships. So one term I’ve heard is, they’re like the WeWork (OTC:WEWKQ) of shipping. I don’t know if that’s exactly accurate. I think WeWork was a lot more shabby and shammy. Zim is actually a legitimate, it’s a really good company, but they are heavily levered. So if the rates go up 2x, Zim’s profits can move 5x. So this is a very, very levered firm, and so the stock is going to correspond.

DS: What do you think of the ETF (BOAT)?

JM: I never want to — I know some of the folks behind that. They’re good people, I don’t want to say anything negative about it. But I like the idea of a shipping ETF, because I can compare our performance to it, we’ll put it that way.

Look, it’s just a really small ETF. There’s not a lot of market capitalization behind it. And a lot of these ETFs, unfortunately they can’t equal weight their picks. First of all, they don’t even have picks, because it’s just passive. They just buy whatever’s on the market. But they can’t equal weight, they have to put a lot of their money into the biggest market cap names. And a lot of times the biggest market cap names are the worst valued, right? They’re overvalued. They’re overhyped. There’s not a lot of potential.

Again, it’s nothing wrong with the BOAT folks. I’m not — I don’t want to say anything negative against them. But I mean, I showed you and I’ll show it again, I mean, I think, if I can find the chart quickly. I mean, if you buy an ETF in shipping, you’re going to get, I can’t tell you what you’re going to get in the future. But if you bought ETF in shipping, this on the right, is what you would have gotten the past. You would have gotten 129% in eight years.

If you were looking at the VIE models, you would have got 18x in eight years. I can’t promise that’s going to be that way in the future. But a lot of folks say, oh, I just want to buy the shipping industry. I mean, maybe but historically that has not went well for folks.

DS: Can also say that you’re giving up 69 basis points for the expense ratio there, of course, assets under management about…

JM: I mean, look, people do a job managing portfolio, they have to make their management fees. But yeah, that’s a drag for sure.

DS: Yeah. All right. So this is a great question, I actually kind of have a little bit of a follow up on it. Because you were talking about the new ships that are being built, people are going for the larger ships to hold more, maybe it’s the way the business is going. And I kind of picture it as an idea of I was going to compare it to the airline industry, it’d be, let’s make bigger airplanes, right. And we know what’s going on there and see more problems and things like that.

So we have a question here that says, what will Egypt do to reestablish the Suez Canal shipping with Egypt suffering from low revenues currently? With everything that’s going on as well, it’s definitely not helping them out, since they get a lot of revenue from that shipping lane. Wanted to know your thoughts on that? Are these big ships that you said can’t go through the Suez? Is that going to cause issues for that area even more? Are they going to just plan to go around Africa? Do you have any thoughts there?

JM: Yeah, no, no, no, it’s a great question. Egypt unquestionably is suffering economically from this. In fact, it’s ironic because the Houthi stated goal was to attack Israeli linked trades, Israeli –this was sort of a protest movement. Initially, again, it’s kind of a contentious topic of whether or not they’re terrorists. Traditionally, it was more of a civil war, it was more of a militant group. The initial action was meant to be a military action against Israeli — they basically declared war on Israel. And they said, we’re going to attack Israeli flagged ships or ships that are facilitating Israeli trade. It’s like a declaration of war, right?

Well, the Houthis don’t have access to the world’s greatest shipping intelligence. And so they were just indiscriminately hitting ships. So it was quickly like, by day one or day two, it morphed into outright terrorism, right?And so ironically, the Houthis are trying to, like hurt Israel, but they’re really just hurting Egypt and some of the other players in this region. They’re not really hurting Israel all that much.

And so yeah, definitely Egypt is suffering loss of economic revenue from this. I can imagine that they’re probably behind the scenes saying, hi, let’s calm this thing down. Let’s try to mediate something. There was a news report that was sort of leaked over the past weekend that there’s four Arab nations, I think it was Saudi Arabia. I’m not sure if Egypt was on the list, but it was like four major players that are trying to mediate and trying to bring something together.

But the problem here is that the Houthis are backed almost primarily by Iran. And Iran and Saudi Arabia are big time enemies. Right. And so not only that, Saudi Arabia is backing the other side of the civil war against the Houthis. And so you have all these cross cutting dynamics, right. You have like sort of the anti-Israeli movements in the Middle East, you have the Sunni versus the Shia, you have Iran versus Saudi Arabia, which is linked to the religious conflicts.

You have Egypt, which is kind of teetering. Sometimes they’re Islamist, sometimes they’re secular. And so you have all these different forces going on. So it’s not all that simple. It’s just like, hey, let’s get everyone around the table. I mean, these are folks that really, really, truly deeply have cultural hatred toward each other.

DS: So here’s a question for you. In regards to the rates changing for these markets, the tankers, containerships, specifically maybe containerships, there was a lot of questions about how does that trickle down into share price as well as the goods on the market? Is there a delay in timing that that usually happens or is it pretty instantaneously?

JM: Yeah. No, that’s a great question. And it came up recently in our chat with Bridgewater because they’re big time, the world’s biggest hedge fund, or U.S. biggest hedge fund, right? And so they’re very focused on the global macro impacts. This is definitely a pressure on global inflation, but it’s a small pressure.

I mean, I would say maybe 0.1%, 0.2% to overall inflation. So it’s not going to move the needle. It’s not going to be enough to make the Fed change their interest rate policy, anything like that. It’s more of a, just a little bit of a pressure.

Are we going to see prices rise in storefronts? I think in the United States, you could see, I’d say 0.1% overall, maybe there are certain goods that might go up a couple percent. You could see gasoline prices. I think you could see gasoline prices rise $0.20, $0.30, $0.40 a gallon. And that’s meaningful, right? That hurt. That hits your pocketbook, right? But even then at $0.40, we’re talking 10%, 15% increase.

So it’s nothing that I expect that’s going to be totally crazy. I don’t think it’s going to be anything that breaks the market. There are some shortages going on. Tesla (TSLA) had a headline a while back that they couldn’t get enough of their automaker chips. They had a shortage in automaker chips for years. And then everything kind of finally got ironed out. And now you have this going on.

So there’s like these niche markets that are getting impacted. They’re having to shift to air freight in different sorts of locations like that. So, I’m not saying nothing’s going to get impacted, nothing’s going to break. But as far as like the average consumer, I don’t think it’s going to have a huge, huge impact.

However, the shipping rates, they’re already up 3x in container freight, they’re already almost double in product tanker rates. And so for these shipping companies’ perspectives, their profits are going up massively.

DS: So with the reduction in the number of ships, already no longer going through the Suez Canal, going through the Red Sea with what is left, if they were all to just say, we’re all going to go around the Cape of Good Hope, are we looking at another three multiple, like, is there enough or six multiple? Have you thought about that calculation of where prices could go from here if they have to fully shut down that canal?

JM: Yeah, fully shut down is a pretty extreme move. I don’t think that’s ever really been our base case. I think our base case has been diversions, probably 50%. In fact, our base case has already been exceeded by what’s happened in the last few weeks.

If that did happen, yeah, I mean, you would see, I believe we haven’t seen that yet Daniel. And this is more of a hypothetical. But if you saw the Suez Canal trade shut down entirely, then yeah, I think container rates could probably go up another 2x, or 3x, 4x and I think tanker rates could probably double again from here.

Again, we’re at six figure, $100,000 per day or higher for LR2, when you look at the triangulated rates. A normal rate for an LR2 right now is like $20,000 a day, $25,000. So those rates were already strong, even before the Red Sea stuff. It was already a very tight market. And so now, you’re seeing rates that are 4x or 5x historical average. And I say they’ve only doubled. Well, they doubled from 50, which was already very strong. Right? So it’s all in context.

Yeah, the rates could certainly move higher. But I don’t think that’s really required to make these stocks attractive. I think if the rates just hovered around at these levels, a lot of these stocks still have significant upside. I think the broad market has written this off as like, oh, it’s only going to last two weeks or four weeks or six weeks. It’s just like this flash in the pan.

When the U.S. did the airstrikes against the Houthis. You saw a lot of the shipping stocks fall like the next day. And because folks are, ‘oh it’s over.’ I saw one person on Twitter, he says, like Donkey Kong versus Yoshi, or Toad. It’s like, maybe not the best analogy, right? Because these are very determined militant folks who are not discouraged. In fact, they are ignited. They are impassioned when these airstrikes happen. So they want to seek revenge.

So if anything, it’s emboldened the Houthis to get even more and more crazy. They are attacking U.S. ships directly. They attacked this tanker, as I mentioned last Friday, it looks like it’s going to sink. Now I hope there’s not an environmental catastrophe there. Thankfully, all 15 crew members got evacuated. But these tensions are increasing, not decreasing.

DS: What exactly is your relationship with Bridgewater?

JM: Bridgewater folks are good people. We’ve had, the macro team has been following our research now for over five years. The recent thing I showed was just a podcast. I did a podcast for them. I wasn’t compensated for that. I’m not collecting any fees from Bridgewater. That was just them inviting me on to do a public podcast.

But I’m proud of that. It’s a great hedge fund, the U.S. biggest hedge fund. I think one of the world’s largest hedge funds. So anytime I get to sit down with that group of folks and work with them, it’s something I’m very proud of. But no I’m not collecting commissions for Bridgewater, anything like that. But they have been subscribers to our research now for over five years.

DS: Definitely notable, thank you for clarifying. Maersk was, I think I said that right, announced that they were going to stop sending their ships through the Suez Canal and the Red Sea and instead go around the Cape of Good Hope. What are the expectations for the upcoming March annual dividend distribution? Are you expecting these companies that are having to reroute and seeing expenses to go higher? Are the dividends going to get hit?

JM: So the expenses that go higher come from rerouting, right, but when your expenses go higher by 20%, 25%, but your rates have tripled, the net profit free cash flow impact is massively positive. So I think that was a reaction to the market initially. They said, oh these shipping companies are rerouting, you know, like, oh they’re going to be hurt by higher expenses. Well, no, because the revenues have tripled.

So yeah, the expenses went up a little bit. But it’s a similar kind of thing that happened during the supply chain crisis, that you had all that congestion off LA, you had the warehouses that were jammed shut, the expenses doubled. It was oh, no, the expenses doubled. Yeah, but revenues went up 10 times. So the net impact is pretty huge.

As far as dividends, just to get it out of the way for Zim. Zim is going to report their Q4 2023 results here in about a month. Those results, Q4, was before almost all this Red Sea stuff. So those Q4 results are not going to be very strong. So, I hope folks aren’t thinking like Q4 no, no, the good results’ gonna be Q1. So if you look at Q1 results for Zim, that’s going to be in like May. So these results are going to trickle through in the future.

We haven’t seen any companies report the gangbusters profits they’re making. We’re not going to see those reports until the end of April, May, middle of May. And that’s when those gangbuster reports are going to come out and people are going to see how much money these companies are really making.

DS: I’ve heard a lot of shippers converting to LNG for fuel. Do you have any thoughts on the conversion of ships now using liquid natural gas for fuel?

JM: Yeah, I mean, in principle, when you’re facing all these environmental regulations starting in 2023 going through 2027, I don’t think that’s going to be the end of this. I think we’re going to get to 2027 and the IMO, the UN agency is gong to say, hey, we need to do even more to combat climate change.

So when you’re facing those sorts of regulations, it definitely makes sense to choose a fuel that has less emissions. Now LNG still has CO2, right? So it’s not a perfect fit. But as far as the contaminants, significantly less. The total CO2 is less than other conventional sources. There’s no sulfur. There’s none of those issues.

So the LNG retrofits definitely make sense. However, you have to have the logistics in place not only to pay for the retrofit, which can be up to $10 million, $15 million per vessel, right, you’re swapping out the entire engine. The entire basis, you have to add LNG storage tanks on the deck. You have to have qualified crew members that know how to handle this kind of stuff.

Not only that, but you also have to have the ships, the bunkering vessels that will refuel and resupply and repair these vessels if anything breaks. And that’s why I’m mentioning going around the Cape of Good Hope is an issue right now. Because the raw number of ships going around there is a lot higher than historical baseline. So there’s issues and nothing’s broken yet. It’s just sort of like concerns.

But there’s issues that there’s not enough fuel down there. There’s not enough logistics. There’s not enough bunkering vessels. There’s not enough repair facilities for – sometimes you’re moving your ship along and a propeller breaks or something, you have to replace it. And so there’s a lot of concerns about the infrastructure. And when you’re using a more esoteric fuel, more modern fuel like LNG bunkering, you have to have even more of a supply chain. And that supply chain in that region is not prevalent.

Now if you’re in Houston, right, or if you’re in Singapore, there’s a lot of that stuff available or near Rotterdam. But when you’re down in South Africa, Cape of Good Hope there’s not that kind of stuff available. So yeah, it’s just one more wrinkle in the chain here.

DS: Now, I think I’ve saved the most important question for last, because I’ve seen it come up time and time again. I was wondering it as well. And it’s probably the hardest hitting question that you might have to answer here today is, say this entire event driven saga that is going on, finds its resolution. And we talked about the containership stocks.

And we talked about the tanker stocks but people want to know, J, what will happen to these stocks? Or how should they position who’s going to be the losers? Who’s going to be the winners on the other side?

JM: Yeah, no, you absolutely have to be asking that question. In fact, I was hoping that question come up sooner. But I’m glad you hit it. So it depends on how things were going beforehand. If you’re in the tanker sector, that market was very strong before the Red Sea. And all the prospects going forward, were very strong without the Red Sea.

So you’re in the tanker market. I’m not too worried about that. I’m not too focused on what will happen. Rates might come down a little bit in the short-term, but I think a long-term investment thesis is totally intact.

Now, if you’re doing that high octane trade I mentioned. If you’re in Zim, Zim stock is probably not going to do well if everything’s resolved. If everything is resolved, you probably are going to see a pretty big drop.

Now how big a drop depends, right? Right now the stock is like $13, $14 in that region. You might see it fall to $10 or $9. So pretty big drop, but not devastating. But if Zim catches fire, right, if these attacks keep going, if the trade keeps ripping, and you see Zim at $25 or $30, and the shorts get squeezed and the thing goes ballistic, then you can see a pretty big gyration in the stock price.

So Zim is like your high octane trade. That’s maybe not suitable for our year-long models if someone asked how long those changed. Zim is something you got to watch that thing every week, every day maybe.

Some of the stocks I mentioned, Scorpio. I mentioned Nordic American Tankers. I mentioned Danaos Corp, DAC, I am long that name as well. That’s a longer term play, where it’s not so much heavily dependent on the Suez Canal disruption.

DS: Well, Dr. J Mintzmyer, I can’t thank you enough for your time today. Anything you want to say to everybody before we jump off here?

JM: Thank you so much everybody. I hope this was very helpful. And thank you finally to Daniel for moderating this whole thing.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.