The headlines may be grim, but there are a lot of reasons to be excited about the year ahead. My personal goal is to make 2009 my best trading year ever... and to share as many insights with you as I can along the way.

To that end, I’m really excited to have my old friend Zach Scheidt suited up for Taipan. Now that Zach has retired from the grueling grind of the hedge fund world, he has more time to write about his top trading and investing ideas... and he and I have more time to brainstorm.

So, as a new regular feature of Taipan Daily, Zach and I are going to start homing in on various sectors and industries each week. (We might not do it every single week, but we’ll do our best to be consistent.)

In line with our natural strengths, I’ll take more of the “top down” angle, then turn to Zach for the rich detail work that comes with his “bottom up” view.

This week we’ll take a closer look at the shippers. And if you have a question for Zach or me – or a specific industry or area of the market you’d like us to tackle – let us know: justice@taipandaily.com.

Media Plumbs the Depths

In the early stages of a downturn, the mainstream media tends to be too upbeat. In the later stages, they tend to be way too depressed. If you remember your Winnie the Pooh, you could say the media bounds in like Tigger and slumps out like Eeyore.

Right about now they’re laying on the gloom with a trowel.

Investors, too, are acting like neurotic groundhogs afraid of their own shadows. How else to explain U.S. Treasury yields going negative this week – a phenomenon in which ninny asset managers actually chose to pay the U.S. government for the privilege of handing over their cash.

The World Bank also did their part with a just-released report titled “Commodities at the Crossroads.” In this remarkably bleak (and remarkably thick) report, the World Bank offers a decidedly deflationary perspective on things, with the World Bank’s chief economist speaking grimly of “the worst recession since the Great Depression.”

And yet, buried on Page 40 of this 196-page tome, a bit of sunshine stands out.

How about that... for all their talk of an awful year ahead, the World Bank forecasts a V-shaped recovery for GDP growth in 2009. By the looks of the forecast, they put the timing of that recovery about mid-year. (Why did the media miss this in their dreary summations? Perhaps because they’re so depressed...)

Remember, too, that the market looks forward, not backward – and that the historical tendency is for stocks to turn higher in advance of the economic turn.

Deep media pessimism is the stuff that bottoms are made of... by some measures stocks are the cheapest they’ve been since 1974... and a GDP recovery in mid-2009 would put the timing of an equity rally somewhere around now. Draw your own conclusions.

And with those conclusions in mind, let’s turn to a key barometer of the shipping industry – the Baltic Dry Index ($BDI).

Why Ask Why (Try Baltic Dry)

Daniel Gross of Slate serves up a great description of the BDI. I can’t top it, so I’ll just quote him:

One might say, in other words, that the Baltic Dry Index is the ocean-going equivalent of the “canary in the coal mine” for global trade... and in the summer of 2008, the canary dropped stone dead.

From its high of 11,600 in the spring of ‘08, the $BDI fell more than 94% to current levels. Now that’s a decline.

Yields Through The Roof

And not to anyone’s surprise, the epic decline in oceanbound trade absolutely crushed the shipping industry.

As credit lines evaporated and global trade dried up, the shippers saw their income plummet. Stock prices fell through the floor – and dividend yields shot through the roof as a result. (When the price of a stock falls, the value of a constant dividend yield goes up in percentage terms.)

To see how crazy things have gotten, check out some of these eye-popping yields.

So is it time to load the boat with shipping stocks and grab those 28% (yowza!) average yields with both hands?

After all, the Maritime Shippers Index ($SHI) looks to have made a higher low to kick off the month of December, and after the sheer depths we’ve seen it’s easy to think the worst has passed...

Not All Ships Are Created Equal

The thing is, not all shipping stocks are created equal. The fat yields in the list we just highlighted may look enticing... but you need to know what you’re buying.

Look at like this: Some ships are well maintained and seaworthy, right? Others are rust-bottomed barnacle farms ready for the scrap heap. The same goes for the shipping companies – and it’s not always easy to tell at first glance.

That’s why Zach has a specific process he goes through for sorting the winners from the losers – the shippers that are likely to continue advancing and paying out fat yields, versus the ones that are floundering and headed for the rocks.

In describing his process for analyzing shippers, Zach told me he asks questions in four key areas. Here’s the gist:

• Capital Funding. Does the shipper use debt, equity or internal cash to bankroll its growth?
• Customer Contracts. What types of long-term or short-term agreements are in place for each ship owned?
• Dividends. What are the quarterly payments? Is this a fixed dividend or does it fluctuate from quarter to quarter?
• Vessel Type. What’s the mix? Does the company own mega-freighters, nimble smaller ships, or an in-between type assortment?

The first two areas dominate. On the subject of capital funding: “I could bore you to tears with a discussion of debt ratios and funding strategies,” Zach says, “but a key thing you really need to know is how do they pay for their ships?”

In other words, there are various strategies these companies use to keep the fleet strong (which requires spending money). Some rely heavily on equity (issuing more shares to raise capital)... some rely more on debt (leveraging up the balance sheet)... and some use a mix of both.

There are pros and cons to any mix, and the winning debt / equity mix can shift depending on the market cycle.

“In this particular environment, a conservative approach (low amounts of debt) has served certain shippers well,” Zach says. “But if and when we make the turn and shipping rates rebound, then the more leveraged players will turn out to be the big winners again.”

Customer contracts are also very important.

“Shippers must decide whether to lock in long-term rates,” Zach notes, “or take the going rate on a day-to-day basis. This is sort of like choosing a variable rate savings account versus a fixed CD. If rates shoot up higher, then you make more money with a variable rate. But when rates drop, as they did so sharply with the dry bulk day rates, then it looks much smarter to be holding a fixed rate contract.”

Do Your Homework

There are a more details, obviously – those are just a few key elements. That’s why Zach urged caution when I told him I was blown away by the big yields in shippers now.

“Before you go buying a bunch of these names, let me tell you there is a REASON that these stocks are so low. There is fear that some of these shippers could either cut their dividends or go out of business altogether! So homework is definitely a must... you want to stay away from the rustbuckets and the duds... but I can tell you there are some very strong bargains out there now.”

I can tell you, too, that Zach and I added a mutually agreed-upon shipper to our IPO Confidential roster this week. I can’t disclose which one – that wouldn’t be fair to IPO readers – but I can say Zach and I both think the higher quality shipping names are worth a hard look here.

I hope you enjoyed this industry snapshot. And once again, if you have any specific industries, sectors or red hot names you’re dying for us to cover with an eye for investing or trading guidance – from either the long or short side – let me know: justice@taipandaily.com.

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Other Related Topics: Industry Analysis , Justice Litle , Stocks , Trading Industry , Zach Scheidt