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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  1. Pleb
    April 16th, 2009 | 1:34 pm

    I have questions about three smaller piracy offerings. First, I’m told that the Pittsburgh Pirates like to go long, but there’s no evidence they are capable of doing that, post Bonds/van Slyke. Similarly, we have been told that Butt Pirates like it long, but I have no first hand knowledge of market conditions there and suspect you may have an informational advantage in that market, or at least have “a good friend” who does. Finally, the Seton Hall Pirates are located in Jersey, so do you think that a position in the related markets of hair products and imitation gold chain would be a safer position? Help me, Johnny Debacle. You’re our only hope!

  2. April 16th, 2009 | 10:54 pm

    @ Pleb, re:

    1. Pittsburgh (Pirates, or otherwise): Short anywhere “yins” is acceptable substitute for “ya’ll.”

    2. Agree with your assessment.

    3. They’re gold-plated chains, not “imitation gold,” but they’ve largely faded out with meatheads’ hairlines and IROC-Z’s sightings. If you’re around, I’ll gladly take you on a tour of the “related markets” of which you speak (Belmar, Manasquan, etc), which are RIPE with booty during the Summer months.

  3. Straight Cash Homie
    April 17th, 2009 | 9:56 am

    Belmar…. From my own personal experience trading in the Belmar market I would classify it as an emerging market with no meaningful correlation to any other market. This applies even to other regional markets even in NJ so if anyone reading this has significant long term assets in say Glen Ridge, Morristown, or Brielle you DON’T have to worry about correlation with your existing portfolio. To state the obvious investments currently held in NYC are even less correlated to Belmar.

    The Belmar market is also rightly characterized as having very attractive investment opportunities. Many if not most of these commodity centric firms house very desirable physical assets and due to their cheapness (in real and nominal terms) contributing to very low P/E ratios potential returns are extremely attractive. Many of these investing opportunities present themselves in the highly developed otc options market that despite being very regional has huge volume, transparent pricing, and low transaction costs.

    However, investing in Belmar is not without risks. You are exposed to special systemic risks: possible beating from juiced up meathead covered in orange fake tan pretending to be part of the Gotti entourage and the fat tail risk associated with this type of market.

    The most profitable trades in the Belmar market are short term in nature and are highly exploitable so you will need to move quickly to establish your position, lest another trader goes long in the desired asset before you. Also, stick to the options market you DO NOT want to be stuck in a long term equity or debt position as both have very high barriers to exit. To hedge away most of the risks associated with this market its imperative you go long in two other commodities: rubbers & a pay as you go phone. The rubbers significantly reduce finding yourself in a long term equity and debt position.
    By only using a pay as you go phone with your “weekend name” on the voicemail you can hedge away many of these risks. Statistically it has been shown that Sharpe Belmar + Condoms + pay as you go phone is significantly higher due to the same returns with far lower risks.

  4. April 17th, 2009 | 4:29 pm

    @ Straight Cash Homie

    Agreed with your thesis, however we must learn to crawl before learning to walk (I’m told); The first and most important step is gathering “assets” to deploy. I’ve found success with both the more “flashy” marketing strategy (difficult in such a crowded space, literally and metaphorically), and also a more low-key, targeted approach.