The Piratery Picture

by Johnny Debacle

This will sink your portfolioIn January 2006, we put out a research piece titled Update: Short Indian Ocean Piratery. In our recommendation, we said as follows:

Increased pillaging of dhows is a classic indicator that the local pirate market off the Somalian coast is over-saturated. We recommend a Short position on those markets as they are likely to experience an increase in pirate captures and a decrease in local booty margins. This would be a great time to jump into Latin American Pirate Bonds which are currently yielding a juicy and robust 29%.

With news that an Indian Ocean piratery firm was taken into receivership by the US Government and summarily unwound (75% of their workforce was executed, literally), we wanted to reiterate our short recommendation for Indian Ocean Piratery. Even when supplemented with RPGs and AK-47s, cutlasses and skiffs are no defense against a sniper on a navy destroyer. Competition in the region is only increasing, putting ever increasing pressure on margins, while empirically captures continue to rise. If you invest in that this piratery markets, especially directly, you risk having your portfolio get slaughtered.

In August 2006, we came out with a research report that indicated that signs pointed to the fact that the market had reached the point of Peak Piratery. At that time, we rated the entire industry “do not buy”.

More and more it looks like now might be a time to start dipping your portfolio into piratic pillaging. We think the spotlight being put on the Indian Ocean area will present an opportunity in other geographies, including the Caribbean and the Latin American regions (collectively known as the “Golden Age Markets”), as well as for diversified operators like Piratery Corp Inc. The northwesterly headwinds that the industry has been under pressure since mid-2008 have been abating, and we expect that pillaging operations will move closer to 2004 levels of efficiency. The global wench fleet’s useful life has declined and that segment will still be soft in the short term, but as the pillaging operations begin cashflowing again, piratery firms will be able to pour capex into those fleets and revitalize them, pushing that segment back to historical wenching volumes.

Recommendation: Long direct and indirect investments in non-Indian ocean piratery; shares of Piratery Corp Inc and casks of rum look especially attractive. Short Indian Ocean piratery.

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