Why do they do it? This refrain has cropped up in broker reports for a century. When the market is on its knees, owners start ordering like there’s no tomorrow. And in a de-pressing number of cases they are right – thanks to the orders there is no tomorrow. But that’s shipping and as the contracts stack up, analysts start wondering what investors have spotted that they’ve missed.

Bulkers Bumpy Ride

So let’s take a look at what investors know that analysts don’t and where better to start than the bulkcarrier market. Over the last 18 years bulker contracting could hardly have been more volatile – not exactly “planned investment”. Between start 1996 and end 2013 average ordering has been 3.8m dwt/month, but the area on the graph which plots the three month moving average of actual bulkcarrier orders over the 18 years shows a high of 17.5m dwt in December 2007 and a low of 0.4m dwt in October 1998.

It’s Your Money, Mr Mate

How could anyone predict that? Well, try the A, B, C, D, E model. A is for angst, the worry that by delaying you miss early berths or cheap prices. B is for the bargain price, which clinches the deal; C is for cash, if you’ve got it, or credit if you haven’t. D is for depreciation, since ships are wasting assets which must be replaced some time. But the big one is E for earnings which drive cash and emotion. No wonder analysts struggle with this complex mix!

ABC in Practice

In this alphabetical approach to ship investment, earnings are the most important, and a statistical model based on earnings explains about 60% of the volatility in contracting. But there is often a big divergence between the orders suggested by the earnings model and actual orders – in 1999, 2004, 2010 and 2013. With the exception of 1999, prior to 2004 actual contracting (the area) lagged way behind the model estimate (the line). For example in 2003 and 2004 when the earnings model suggested a big increase in orders, actual orders were sluggish. Then in 2006-07 everything changed and actual orders ran ahead of the model estimate. Much the same happened, but on an even bigger scale, in 2010, and again in 2013 when actual orders were way ahead of the model estimate.

This analysis suggests that in 2006 there was a “seismic shift” of market sentiment. In the decade 1996 to 2005 investment had lagged, helping prepare the bulker market for the 2007-08 mega-boom. But as it took hold, it generated a significant upward shift in investor sentiment, which has proved recession-proof.

Learning to Read the Rest

So there you have it. The ABCD rule is your guide to “over-ordering”. Depreciation (buy an eco-ship that makes the old fleet obsolete); Cash (spend it before the bankers get it); grab a Bargain (prices are almost half what they were 6 years ago); and Angst (don’t miss the bottom of the market). Surely that’s enough to put canny investors on a plane to South Korea or China. Have a nice day.