Doubled Down on DryShips (DRYS)

We doubled down on DryShips (DRYS) yesterday at $4.08 per share. Previously we purchased DryShips at $19.30 on 10/9/2008. With this purchase, we are almost 20% on margin. The following risk factors contribute to the drop in the share price:

1. The company has around $2.5B in total debt and in the current credit environment that is a bad thing,
2. Concerns about the company breaking loan covenants as there collateral (value of the ships) have come down dramatically. The saving grace is that they have liquidity and cash flow to meet their loan obligations and so it is unlikely that they will be asked to pay it off immediately.
3. The Baltic Dry Index (BDI) index plummeted over 90% in the last year. The charter rates are set based on this index and as such has a direct impact on the company’s business.
4. Concerns about whether the company will have problems collecting payments as the credit crunch has resulted in a liquidity crisis spanning the entire industry.

The reasons below that made us purchase these shares a month ago at almost 5 times the price still holds:

1. As one of the largest dry bulk carriers, DryShips owns a fleet of 54 dry bulk carriers,
2. They also own 6 UDW drilling units through their subsidiary Primelead, which is expected to be spun-off within the next six months,
3. The company took advantage of the spot market as the BDI increased between 2006 and 2008, but shifted to fixed rate contracts as the year progressed. At this point 61% of the vessels have an average remaining term of 5 years. The BDI index has plummeted but the fixed contracts should limit the decrease in cash flow,
4. The Baltic Dry Index (BDI) should settle well above the current value as global trade resumes,
5. DryShips is a proxy for global economic activity.

Below is our updated portfolio:

Stock	Buy Date	Buy Price	Current Price	Current % Of Portfolio	Unrealized % Return	Yield as % of BOY Portfolio Value Plus Deposits
Altria (MO)	Various	16.69	14.45	5.34	(13.40)	0.10
Philip Morris International (PM)	1/4/2005	32.19	36.63	7.71	13.78	0.13
Kraft Foods (KFT)	Various	24.03	28.87	6.12	3.48	0.08
Plum Creek Timber (PCL) – Call Value	5/12/2005	35.5	28.31	10.46	(20.26)	0.16
Pfizer (PFE)	Various	24.37	14.45	8.90	(40.70)	0.22
ICICI Bank (IBN)	5/18/2006 and 08/01/2008	28.30	11.33	6.98	(55.17)	0.03
Taiwan Semi (TSM)	7/27/2006	8.71	5.90	7.27	(32.14)	0.09
Advantage Energy Fund (AAV)	11/2/2006	11.22	4.33	3.47	(61.42)	0.16
SunTech Power (STP)	3/14/2007	36.73	5.39	1.33	(85.32)	None
Central Europe & Russia Fund (CEE)	Various	51.03	13.19	5.68	(66.37)	0.45
Patni Computers (PTI)	8/10/2007	20.85	4.90	3.02	(76.52)	0.01
Itron Inc. (ITRI)	11/07/2007	85.01	34.43	4.24	(59.55)	None
Anthracite (AHR)	11/09/2007	7.97	2.07	2.55	(74.03)	0.15
ClickSoftware (CKSW)	11/09/2007	4.61	2.06	2.54	(55.31)	None
Harvest Energy (HTE)	11/28/2007	21.01	9.00	4.43	(57.17)	0.28
iRobot (IRBT)	12/18/2007	18.65	7.24	3.57	(60.85)	None
MCG Capital (MCGC)	Various	10.86	0.77	0.76	(92.91)	None
LDK Solar (LDK)	01/22/2008	30.49	9.95	3.68	(67.37)	None
Aegon N.V. (AEG)	04/28/2008	15.99	3.51	2.59	(78.04)	0.06
LM Ericsson (ERIC) (AEG)	05/05/2008	11.83	5.64	5.56	(52.31)	0.08
TD Ameritrade (AMTD)	05/21/2008	17.68	9.71	4.78	(45.09)	None
Trina Solar (TSL)	06/06/2008 and 07/31/2008	45.61	5.72	1.76	(86.42)	None
Costco (COST)	08/01/2008	62.28	44.99	5.54	(27.76)	0.02
Frontline Limited (FRO)	10/06/2008	36.95	25.19	4.65	(31.82)	0.54
DryShips Incorporated (DRYS)	10/09/2008	19.30	3.80	2.81	(67.41)	0.05
Companhia Siderurgica Nacional (SID)	10/10/2008	11.47	7.87	2.91	(31.40)	0.05
Cash				(19.94)
Total Portfolio					(58.70)	2.67

• For Altria and Philip Morris International, assumed spin-off ratio of 30.83:69.17. Altria is yet to supply the cost-basis info
• For Plum Creek Timber (PCL), we wrote covered calls for 2008 November 35 on 10/28/2008 at $2.75.
• For Taiwan Semiconductors (TSM), we wrote covered calls for 2008 November 7.5 on 10/31/2008 at $1.0.