Repeal the Jones Act!
Beneath the Stock Market Surface
Where the Upside Potential Dwarfs the Downside Potential
Over the past few years, the press in this country have spilled tons of ink and devoted thousands of hours of airtime to the financial troubles of Greece and Italy (among others).
But few have noticed that much closer to home, Puerto Rico is now bankrupt. Its $72 billion debt is higher than that of any U.S. state government except California and New York!
Puerto Rico was invaded by the U.S. in 1898 during the Spanish-American War, and we’ve kept it since, first as a colony and now as a territory.
That’s like kidnapping a child, and then making him live in the shed out back.
Puerto Rico has the potential to be a U.S. state, but is not sure that it wants to. Residents are divided between those who would welcome statehood and those who’d prefer independence.
At the same time, there’s no great appetite in the rest of the U.S. to welcome what would be the 51st state; 50 is a nice round number. Plus, with a GDP of $26,509 per capita, Puerto Rico would be the poorest state of all—a fact that should at least inspire Mississippians to get behind the idea.
As to the reasons behind Puerto Rico’s bankruptcy, there are many, including poor management, lack of autonomy and bloated government. Fixing those is not simple.
But the one contributing factor that would be simple to fix, at least from my point of view, is the Merchant Marine Act of 1920, commonly known as the Jones Act for its sponsor, Senator Wesley Jones.
Jones, by the way, was a Republican senator from Washington from 1909 to 1932, when he failed to win re-election.
The Jones Act, which became a law immediately after World War I, governs cabotage, which is the transport of goods or passengers between two points in the same country. Originally pertaining to sailing vessels, the word cabotage is derived from the French caboter, meaning to sail along a coast, which is close to the Spanish cabo (think Mexican beaches) and stems from the Latin caput, for head.
Anyway, the point of cabotage regulations is to achieve control of a country’s internal shipping so that foreign powers are excluded. The benefits include national security (the main goal of the U.S. in 1920), industry and job security, and public safety.
Nowadays, cabotage applies to transport accomplished via any mode, including rail and air. Cabotage regulations, for example, are the reason that foreign airlines can’t sell Americans tickets to fly between two American cities, despite the fact that they fly there. In many cases, the practice of code sharing gets around this restriction.
But back on the high seas, the Jones Act still exerts enormous power. It restricts the carriage of goods or passengers between U.S. ports to U.S. built and flagged vessels. This applies to barge operators on the inland waterways, freighters on the Great Lakes, and deep-sea ocean carriers serving Hawaii, Alaska, Puerto Rico and Guam.
It stipulates that at least 75% of the crewmembers of these ships be U.S. citizens. And it mandates that foreign repair work of these ships’ hull and superstructure be limited to 10% foreign steel by weight … which effectively prevents them from being refurbished at overseas shipyards. The Jones Act also guarantees rights to seamen, ensuring, among other things, that seamen injured during a voyage are fully compensated.
Now any student of free markets will recognize that those restrictions raise costs, reduce competition and, in the long run, reduce customer satisfaction.
And in recent decades, many politicians, too, have come to the conclusion that the Jones Act should be repealed.
In 2003, Representative Ed Case (D-Hawaii), attempted to repeal the Act, arguing that it increased the cost of living in the islands and claiming that savings of 40% would be gained in some sectors by repeal.
Most recently, early in 2015, Senator John McCain (R-Arizona) proposed an amendment to the Keystone XL pipeline legislation that would repeal the Act, with the goal of making U.S. industry more competitive and saving consumers money.
"It costs $6 per barrel to move crude from the Gulf Coast to the Northeast United States on a Jones Act tanker, while a foreign-flag tanker can take that same crude to a refinery in Canada for $2 per barrel—taking money directly out of the pockets of American consumers," he said.
But every effort to repeal the Jones Act has failed, and what’s interesting about this is that in this increasingly polarized political climate, the lines that separate the critics and defenders of the Jones Act cross through both political parties!
There are Republicans and Democrats who want it repealed to lower barriers to trade and thus costs for their constituents. But there are Democrats who defend it for the job protections it provides to seamen and shipbuilders, and there are Republicans who defend it for its contribution to national security.
But then there’s the El Faro.
The El Faro was a 735-foot United-States-flagged cargo ship, built in 1975 in Chester, Pennsylvania, and until recently spending her golden years (rusty years, some might say), shuttling between Jacksonville, Florida and Puerto Rico.
On October 1, the ship lost power in Hurricane Joaquin and sank, taking with her the lives of 28 American seamen and five Poles—along with 391 shipping containers and 294 trailers and cars.
Without the Jones Act, the El Faro wouldn’t have existed.
If we can repeal the Jones Act, we can not only avoid a repeat of the El Faro sinking, we can also remove one of the impediments to Puerto Rico’s economic health, and—most important of all—end the protectionism that’s distorted the free markets of shipping in this country for so long.
But political forces become entrenched. Our representatives in Washington act first to protect their own jobs, second to serve their own constituents and third to serve their country.
And so the Jones Act lives on.
The Stock Market Today
The market finished with a bang at the end of last week, spurred by excellent earnings news from technology leaders Alphabet (GOOGL), Amazon (AMZN) and Microsoft (MSFT).
If you own the leaders, this is a rewarding market.
But beneath the surface, all is not well.
In fact, over the past five trading days, we’ve seen the number of stocks hitting new lows on the NYSE exceed 40 every single day, which is not a healthy pattern.
In short, while the generals are leading the way, the troops are increasingly less willing to follow. This is classic late-stage bull market action—and it can last quite a while—but it usually ends badly.
So, if you enjoy investing in leaders, by all means enjoy the party—but have an escape route handy when the party ends.
Alternatively, you could consider investing in stocks that are already down, stocks where the upside potential dwarfs the downside potential—which gets us back to the shipping business.
Seaspan, with headquarters in Hong Kong and Canada, is the largest independent charter owner and manager of containerships in the world.
The company has 96 vessels in operation, and another 22 to be delivered by 2017.
Cash flows at Seaspan are extremely predictable, given that the company’s vessels are chartered for years at a time. The company has $4.6 billion in contracted revenues, and the average remaining charter length is roughly five years.
Revenues were $717 million in 2014, while earnings per share were $0.90. For 2015, analysts are looking for earnings of $1.06 (up 18%) and for 2016, $1.42 (up 34%).
Yet the stock doesn’t reflect it.
SSW (the stock) has suffered this year, dragged down by the selling of most stocks related to commodities. But the fact is, the company’s business is relatively immune to commodity prices.
On a fundamental basis, the stock is relatively cheap here, selling at 18 times earnings.
Plus, there’s a big fat dividend, currently yielding 9.05%.
I think it’s a low-risk, high-potential stock right here, suitable for patient investors looking for income.
So, you could just step up to plate here and take your chances. Buy a few shares of SSW and put it away.
But if you really want to do it right, you should get the latest (and continuing) advice from Paul Goodwin, Cabot’s expert emerging markets analyst. Paul’s had his readers in Seaspan for a long time, and would love to have you join them.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory