Thursday, January 24, 2008

Dry Bulk Shipping Stocks: An experiment in self-clustering technology

Dry Bulk shipping companies are those that carry raw materials such as coal, iron ore, grain, fertilisers and chemicals in their specialized ships. The demand for dry bulk shipping is a good leading indicator of the health of the world economy. The Baltic Dry Index is an index of freight rates for dry bulk shipping as compiled by the Baltic Exchange in London. Since October, the BDI has gone down by 40 %, and with it the share price of the dry bulk shippers.
In this experiment, using the Self-Organising Maps [SOM] in software. [for more on Self-Organizing Maps see ] we took the data for 156 stocks from the Transportation Sector. The data included the output of ValuEngine's quantitative models and covered variables such as Valuation, EPS growth, 1 year-forecast retrun %, 1-month forecast return%, P/E ratio, Sharpe Ratio, 1 yr return %, 5 -yr return % etc. There were more than 30 variables. For more on ValuEngine, see
Each stock was given a letter of the alphabet based on the transportation industry it was in viz: A=Airline, R=Railroad, T=Trucking, S=Shipping, M=MultiIndustry transportation. The dry bulk shippers thus belong to the shipping industry. The SOM was constructed and allowed to learn the characteristics of each stock, and the inter-relationships between each of the 30 variables of each stock, with every other stock. In terms of a matrix, this would be equivalent to calculating the mathematical distance for each cell with every other cell, in a 156 row x 30 column matrix. And distilling the essence of these inter-relationships to present it on a two-dimensional SOM.
The top image is a map showing 6 clusters [6 colors]. Although there is some semblance of clustering, such as that many stocks from R and T being in the Purple cluster in the North-East corner, in general, A, S, T, R and M can be found in any of the 6 clusters. What this means is that for stock picking, it matters less which industry the stock is in, and more on the qualities of each company.
However, one group of stocks forms a very distinctive cluster by itself. The Dry Bulk Shippers in Green cluster in the South West corner of the map. The SOM was not informed beforehand that these were the dry bulk shippers. The SOM placed them in a separate cluster based on their distinctive characteristics. There are no other Dry Bulk Shippers elsewhere on the map. We identified and re-labeled the dry bulk shippers with their ticker symbols instead of the former 'S' with which they were labeled when constructing the SOM. * in fact when we looked up the business descriptions of all the stocks in the dry bulk cluster, we found two other dry bulk shippers. We did not know about these companies, but the SOM correctly identified and placed them in the same cluster as the other dry bulk shippers.
In the bottom image, all the transport stocks are placed on a SOM that shows Composite Rank, in terms of Valuation and Momentum. The higher the score the more intense the color towards red. See scale at bottom of map. It is interesting that the dry bulk shippers have the highest score.
The dry bulk shippers are:
DRYS: Dryships Inc
EXM: Excel Maritime
EGLE: Eagle Bulk Shipping
DSX: Diana Shipping Co.
QMAR: Quintana Maritime
GNK: Genko Shipping
ESEA: Euroseas :Ltd
TBSI: TBS International
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