Why Shipping Stocks Are Up This Week
Tuesday trading finished strong across the industrials sector, with many companies posting triple-digit basis-points gains, leading index advances of 0.52% for the Dow Jones Industrial Average and 0.31% for the S&P 500. Shipping and transportation companies led Tuesday's charge, showing investor confidence in the growth of international trade. This comes as a German court confirms that it will issue an important ruling on the future of the euro on Wednesday, rather than delaying the decision. Markets appear content that the court will rule favorably to help shore up the stability of the euro and bolster international trade.
Dry-bulk carrier DryShips (NAS: DRYS) was the sector's biggest winner, up nearly 6%. Although DryShips is dependent for revenue on its majority ownership of offshore oil driller Ocean Rig UDW (NAS: ORIG) , that company posted only a 0.42% gain, indicating that it was DryShips' ocean transportation business that investors found attractive today. Despite Tuesday's gain, which pushed DryShips above 25% for the year, the company still isn't highly valued: It currently sells for about a third of its book value and only 2.5 times cash flow.
Other dry-bulk shippers also posted strong gains, with Paragon Shipping (NYS: PRGN) up 5.38%, Eagle Bulk Shipping (NAS: EGLE) up 4.35%, and Navios Maritime (NYS: NM) up 3.18%. All three companies are highly geared to the international commodity trade, which in turn is very sensitive to the economic environment in Europe, particularly regarding the transport of building materials like iron ore for steel and cement. Europe is also particularly dependent on coal for energy, another mainstay of dry-bulk carriers. A more stable Europe should consume more of all these staples.
Investors seem to be anticipating that Wednesday's preliminary ruling from the German Federal Constitutional Court will help to bring about a more financially sound Europe and euro area. The court announced Tuesday that this ruling will be issued Wednesday morning, calming concerns that the date would be put off and market uncertainty would be prolonged.
The court is ruling on whether German participation in the European Stability Mechanism -- a massive bailout fund meant to support troubled economies, reduce the risk of default, and keep borrowing costs low -- is a violation of the German Constitution. Germany, the largest and richest European economy, would need to contribute to the ESM for it to have any chance of being viable. Germany's parliament has approved the country's involvement in the ESM, but the pending court challenge has prevented implementation. If the Constitutional Court issues a favorable ruling Wednesday, the ESM could begin to deploy its $640 million in resources as soon as October, bringing the prospect of a resolution to the euro crisis into sight.
Though no suggestion was offered as to how the court might rule, independent analysts expect that the court will support Germany's participation in the ESM, and the market certainly seems to agree. The court could, however, impose certain conditions that would hamper the ability of the ESM to act independently or decisively, such as requiring parliamentary approval for major aid programs to troubled governments. Too many political strings attached in Wednesday's decision could harm any company levered to the European economy.
Political factors can make or spoil an investment, and just as investors need to watch how European governments handle their current crisis, the American presidential election will have a dramatic effect on international trade and manufacturing. The Motley Fool has identified unique ways to profit from the 2012 election regardless of the winner. To prepare your portfolio for either political scenario, read our free report, "These Stocks Could Skyrocket After the 2012 Presidential Election." It's available for a limited time, so download your copy today.
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