Here’s a negative trend we’re going to want to keep a close eye on.  This week’s rail traffic is showing a negative reading again.  Intermodal was down 2.8% while carloads were down 5%.  The 10 week move average remains positive, but dipped to 4.3% from 5.2% last week. The year to date change has now turned negative.  The AAR has more details:

“The Association of American Railroads (AAR) today reported a decline in weekly rail traffic for the week ending February 25, 2012, with U.S. railroads originating 281,644 carloads, down 5 percent compared with the same week last year. Intermodal volume for the week totaled 214,402 trailers and containers, down 2.8 percent compared with the same week last year.

Nine of the 20 carload commodity groups posted increases compared with the same week in 2011, with motor vehicles and equipment, up 30.9 percent; petroleum products, up 25.6 percent, and metals and products, up 19.4 percent. The groups showing a significant decrease in weekly traffic included coal, down 13.1 percent; grain, down 11.9 percent, and nonmetallic minerals, down 10.8 percent.

Weekly carload volume on Eastern railroads was down 8 percent compared with the same week last year. In the West, weekly carload volume was down 2.9 percent compared with the same week in 2011.

For the first eight weeks of 2012, U.S. railroads reported cumulative volume of 2,272,480 carloads, down 0.3 percent from last year, and 1,772,839 trailers and containers, up 1.6 percent from last year.”


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. When you overlay the last few years data what is characterizing the current data is the lack of wild swings. Barring data falling off a cliff, least another month is needed I think.

  2. I agree wildebeest, we have been following this here for quite sometime and we want to see another 2-3 weeks data to confirm a new trend. It is important to note that January port data in L.A. as well as Truck Tonage (albeit off of record levels) showed solid declines as well. These are leading indicators so they take time to filter through to the GDP data and again we need to see the trend continue. If you noticed almost half the GDP number was thanks to inventory rebuilding so some weakness given the sluggish growth makes sense unless sales pick up strongly and clear that inventory. It appears this is starting to hit Durables and the ISM mfg reports as we saw with the latest releases this week.

  3. In an effort to follow and learn, on Feb 8 the rail update discussion had a comment from Cullen :

    “Cullen Roche

    So, the way I trade this thing is as follows. It generates three trades with the goal of not “timing” the market with too much specificity. The trade will generally last 8 weeks with the position building phase in the first 2 weeks or so. I’ve established an initial short position and will wait to see the next two get executed. I will never be short more than 50% of my total portfolio. I treat shorting differently than going long because shorting is generally a losing game. I will actually leverage up slightly when long. Shorting requires a different risk management approach. So, yes, you could say I am in the process of building a short position right now. I am down on it currently, but only marginally.”

    Because the economic data has not been convincing in the positive or the negative but the market has continued to melt upward, would this short position still be added to or due to risk management as mentioned above would such positions now be closed to limit the downside. I am estimating that this trade would be 4-5 weeks in to its 8 week time frame.As was warned, shorting is generally a losing game so any tips on what should be looked at to judge whether things are still looking positive for this or on the other hand indicators to suggest that the move up continues?

  4. When gas prices surge, consumers stop “right now”. It might start slowly, but suddenly accelerates. Then hyper speed. Every extra dollar spent at the pump seeks two dollars savings from other spending. It’s not linear. Hold on!

  5. Personally I can’t help to also notice the action of the transportation sector, read the main railroad stocks… with this latest push higher in the market they simply refused to go along and even went down to sideways… almost like they “know” something and refuse to play along. And I should know since I am stuck in one of those railroad stocks waiting for an exit point :)

  6. The price action you’re seeing in those areas and this data has NOTHING to do with braoder macro-economic weakness and Cullen should make note of this…

    It has EVERYTHING to do with the non-stop decline in Nat Gas prices.

    The biggest component/weighting in rail loads each week is what? Coal. Coal, form a demand standpoint, is coming under increased pressure as Nat Gas is increasingly used as a substitute for Coal.

    So, what happens? Rail stocks get hurt (their biggest revenue source is under pressure) and car loads look bad when in reality this has nothing to do with broader macro weakness…

  7. Gut feeling, the economy has been in recession since September of 2011. The NBER will confirm my gut feeling in June.

  8. Deja vu all over again. Euphoria, then negation and finally desperation. For a real bull market we need a lot of desperation, that will be the time to buy with both hands.

  9. Phenomenal point B Ferro.

    My good friend, a market-neutral energy hedge fund manager, believes US nat gas prices will eventually rise to the world price of $9 per mcf, perhaps by 2014. If so, this means the weakness in the Rails provides a wonderful entry point into an “economically moated” industry with secular growth margin expansion, pricing power, and a free call on additional US economic growth.

    Disclosure: long CSX

  10. That’s interesting…

    Rail and transports have had a phenomenal run on a relative basis vs. the broader market over the past decade – one of the best relative performance areas of any industry actually.

    You think that continues?

    One thing people are missing when they talk about the divergence of transports vs. the broader market here is that post the summer 1998 bottom as the market continued to rally for another 18 months, transports did exactly what they’re doing now – diverged down both on a relative basis vs. the SPX and in the absolute.

    In other words, this isn’t unprecedented.

  11. Alberto we actually saw that desperation back in the September 2011 period.

    In fact, statistically (not my opinion, statistcal, factual data), there was as much desperation in the September/October 2011 period as there was at the low in 62, 74, the 87 crash, the 98 summer low, 02 and lastly March 09.

    The MIN rally the market put in off each of those lows when the same levels of panic/fear existed was 60% and that was off the 98 summer low.

    Moreover, in each of those examples (ex 09) the market NEVER failed to put a new high in vs. an old high. In other words, the market is likely to eclipse the old 1550 highs within the year and could be at 1,800 (+60% off the 1,120 weekly closing low last fall) within a two years.

    If history holds, which is where my betting money would be.

    Point being – desperation was at historically peak/outlier levels last fall.

  12. “Rail and transports have had a phenomenal run on a relative basis vs. the broader market over the past decade – one of the best relative performance areas of any industry actually.

    You think that continues?”

    Looking at it from a trading perspective misses why the Rails in particular have outperformed. The entire industry has gone from an 85% operating ratio a decade ago to about 70% now due to A) market share gain from trucking, B) implementation of fuel surcharges, C) re-pricing of legacy contracts and D) the ability to price freight in excess of rail inflation. So in order to determine how the Rails do going forward, we need to look at each of these factors going forward. A) Market share – growth in intermodal infrastructure and elevated fuel costs will most certainly be tailwinds for the industry for the foreseeable future. B and D are not going anywhere barring legislation severely limiting what Rails can charge. C) Re-pricing – this is the only legitimate knock against the Rails going forward since the majority of existing contracts have been re-priced, but that’s also why they are not projecting 55% operating ratios. As with nearly all secular growth stories, the market thinks the growth is done long before it truly is finished – think Apple, Google, Priceline, and McDonalds. I bought McDonalds in the fall of 2009 at $55 per share when it was trading at 15 times earnings – if the market truly believed MCD’s secular growth via the re-franchising of its restaurant base, then it would have traded at 25 times versus the 15 times I bought it at.

    “One thing people are missing when they talk about the divergence of transports vs. the broader market here is that post the summer 1998 bottom as the market continued to rally for another 18 months, transports did exactly what they’re doing now – diverged down both on a relative basis vs. the SPX and in the absolute.

    In other words, this isn’t unprecedented.”

    Again, this is purely looking at the situation from a “trading” perspective. It’s growing at 6%, pays out 100% of its earnings, and will be a $40 stock in three years. I don’t care how the broad market or the transport sector is trading – that has nothing to do with the fundamental story going on with CSX’s business.

    Obviously you are going to counter from a trader’s perspective – 100% fine, there is more than one way to skin a cat. You can probably trade CSX profitability every month for the next three years – I can’t. So I’m going to sit back and let the company make me money while I do nothing but wait.

  13. I’ve added into it in increments. You are essentially doing a reverse dollar cost avg. Because of this I am only about 1% out of the money right now. But I am at a full position so now we hold on and see if the market turns. I guess we’ll see. Tough market to be short in. That’s for sure….But the lesson is that it’s all about position management. If you think you can pick tops and bottoms to the day then you’re in for some tough times.

  14. As I read around the web, the tone is bullish. I remember something CR said recently that might apply to the risk side of portfolios… the financial media probably shows more exuberance at the buy side of advise, and not so much at delivering the sell side. Selling into a bull market is really hard. Forget about picking the top. Think about “never be afraid to take a profit”.

  15. Russell 2000 has been in retreat since mid February. I trade mostly small caps and by end of Feb I got stopped out of all of my positions after some good runs, especially in Oil and Gas Services. I can’t figure out the big trends in the market. I trade stocks, not the stock market. My stocks stopped rising and started retreating and it is not easy now to find undervalued stocks like it was in Nov/Dec.

  16. Cullen,

    Sorry if you have explained this in the past but why do you place such importance upon rail traffic? It’s clearly a data point you post about quite a lot.


  17. Warren Buffet has said in the past that if he were stuck on an island with only one indicator, it would be rail.

  18. 1550 ? (not to mention 1800 later on). Possible IF:

    – US decouple from EU, China…
    – Real incomes grow after a long decline
    – Real estate not only bottoms but prices begin to raise
    – Huge investments are made in infrastructures
    – China’s hyperbolic growth continue, no real estate bubble, Pettis & Chauvanec are wrong
    – Europe is fixed
    – Oil prices decrease
    – Deficits really don’t matter. Reinhart & Rogoff are wrong.


    – FED starts buying stocks and dollar index craters

    Anyway I’m not shorting a market where crazy people buy Apple at 535$ but I’m not buying it. And with the exception of a few quality stocks, all the other US stocks are over priced.

  19. When the economy is doing well then corporations need transportation to get commodities delivered to one’s factory. And they need transportation to get the finished product to be delivered to the retailers. So, transportation is a measure of how well an economy is doing. It’s a confirmation of economic slow down or recovery. And these numbers can’t be manipulated/manipulated less/””seasonally adjusted”” by US government wonks who need to serve a political agenda. E.g. reassure foreign creditors that an investment in US T-bonds or corporate bonds is a sound idea.

    Remember: the US has a Current Account Deficit and is therefore at the mercy of foreign creditors. 50% of T-bonds are owned by foreigners.

  20. Even the Dow Theory gave a “”non confirmation”” signal recently. I.e. The $INDU continued to rise whereas the $DJUSTS got hit in the last two weeks (use the weekly charts).

  21. The previous rail traffic report was not what the market expected and so the $DJUSTS took a hit.