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Shippers Kept Afloat by Shorts?


Red sky at night, sailor's delight. Red sky in morning, sailor's warning


This morning The Wall Street Journal reported that short sellers are betting against tanker stocks in an article entitled, "Shorts Expect Tankers To Take On More Water." The paper reports that
tanker rental rates have dropped 42% from a year earlier, according to Swedish ship broker P.F. Bassoe. Shares of tanker stocks have dropped as well causing the short sellers to smell blood in the water. Notable names with above average short interest include Teekay Shipping (TK), Omi Corp (OMM) and General Maritime (GMR).

We note the paper highlighted Frontline (FRO) as a stock with a high short to float basis of 6.9% and therefore a crowded short. We would counter that with a low short ratio of 2.68 and a low short intensity level 23% this is exactly the type of stock to be shorted.

Erlanger Research - FRO-Frontline Ltd ADR

In our analysis, we have found no predictive value in short to float and much greater predictability in a low short intensity, short ratio and technical rank. This makes for the perfect long squeeze.

Since late January, short intensity has risen from 29% to 48%. Indeed, short sellers have increased their bets. The last time short sellers bet against the tankers was November 2002 to July 2003. Their returns were less than stellar as OMM, TK and GMR had strong advances during that period.

Erlanger Research Marine Trans Group

In conclusion, we note one theme that we hear being echoed time and again is that "the shorts will be correct this time" whether it be the tanker stocks or another group. The market rarely lets a short seller be rewarded when the short position of a stock or group is crowded. More often than not, the stock or group only collapses after the shorts have been forced to cover the stock or group. Witness Frontline as potentially a perfect example of the long squeeze.

No positions in stocks mentioned.

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