Buy Pac Basin and CSET vs. Sell Cosco Shipping and K-Line.    The trends for bulk and container continued to diverge heading into 4Q. Dry bulkrates, driven by strong commodities imports into China, have resumed an uptrendafter the holidays in China, while VLCC rates have largely tripled in the past onemonth to US$30k/day. On the other hand, container rates have kept on falling asthe post-holiday demand recovery appears to be weaker/slower than expected,while new mega vessels continue to hit the water. Top picks: Buy Pac Basin vs.    Sell Cosco Shipping; also Buy CSET and MOL and Sell K-Line.    Container - a perfect storm.    Weakening demand has now fully encountered rising supply. 4Q is a traditionallyslow season for container demand, but the seasonal weakness this year is likelyto be even more acute than in previous years due to recent gov't environmentalinspections. Our checks with industry participants also revealed that the demandrecovery after the holidays was slower than the market expected, especially forAsia-Europe routes. On the supply side, another 62k of mega vessels (>15k TEU)hit the water in September, a record high with the exception of May-June 2015(c.74k per month). Another 145k and 568k of mega vessels are scheduled to arrivein 4Q and 2018. Historically, after heavy deliveries of new mega vessels, ratesfor long-haul routes have consistently retreated. Asia to Europe and Med ratesdropped another 3.9% and 5.8% last week and they have fallen 32% and 31%since 3Q. Transpacific rates have also been on a downtrend since August anddropped 3.3/9.5% in the last week for Asia to US west coast/east coast. Lineshave totally given up on mid-Oct rate hikes for Asia to US routes and we are notoptimistic on Asia-Europe rate hikes on Nov 1.    Bulk - party gets started.    Following the holidays, dry bulk rates have resumed their robust uptrend (BDIYat 1,485 lately, +15% vs. early Oct). As 4Q is the strongest season for dry bulk,the demand strength along with falling new supply (nominal newbuild deliveriesof 8.7m dwt in 4Q17 with about 40% slippage ratio, so actual deliveries of about5-6m dwt, vs.18m/9.8m/7m in 1/2/3Q17) should drive BDIY higher in the comingmonths. Similarly, tanker rates have moved up on a strong winter season. VLCCrates have largely tripled in the past one month to US$30k/day, at which mostindustry players should be able to break even. Looking at the 2018-20 period, we see an upcycle for both dry bulk and tanker, on falling newbuild supply and risingscrapping due to upcoming regulations (i.e. ballast water and low-sulfur oil).

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