Global Market Comments
October 12, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BACK TO THE NIFTY FIFTY),
(CAT), (JPM), (BAC), (NSC), (UNP), (V),
(MA), (FDX), (UPS), (IP), (AAPL), (TSLA)
Global Market Comments
October 12, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BACK TO THE NIFTY FIFTY),
(CAT), (JPM), (BAC), (NSC), (UNP), (V),
(MA), (FDX), (UPS), (IP), (AAPL), (TSLA)
My daughter needed a desk so she could go to high school from her bedroom. So, I drove around Northern Nevada to get the perfect piece, visiting Reno, Sparks, Carson City, and Minden. It is one of the most conservative parts of the country, probably 90% republican.
What I saw was amazing.
There were Biden/Harris signs everywhere. Yes, there will still some Trump signs, but they were in a definite minority. Four years ago, you only saw Trump signs. The rare Clinton/Kaine sign was full of bullet holes, torn down, or copiously marked with offensive graffiti.
I thought, hmm, there must be a trade here.
We seem to be on the verge of massive changes in the US economy. Get in front of them and you’ll make a fortune. Lag behind, and you’ll be seen driving an Uber cab.
Technology undoubtedly led the decade, bringing in a 30% annual return since 2009. Industrial and other domestic stocks brought in no more than 12%. The “Roaring Twenties” could bring the reverse.
Technology will continue to do OK. Ever falling prices and greater service is a tough business model to beat. But let’s face it, none of these things are cheap. Apple (AAPL) going from a 9X multiple to 45X?
Industrials could be playing a massive catch up game initiating a new supercycle as they did from 2000-2010 when tech lagged in the wake of the Dotcom Bust.
This switch is made easier by the fact that most big industrial companies are now de facto technology ones. They all now use advanced cloud software, sophisticated robots, and state of the art distribution systems. Caterpillar (CAT) even has a 290-ton dump truck that drives itself like a giant Tesla (TSLA)!
Many of these companies I have covered for nearly 50 years, when they last belonged to the Nifty Fifty. So, for me, it’s a matter of dusting off my old research, seeing who is left, and giving them a modern spin. The great thing about these stocks is that many pay decent dividends.
I’ll give you a short list of where to buy the dips.
Banks – JP Morgan (JPM), Bank of America (BAC)
Railroads – Norfolk Southern (NSC), Union Pacific (UNP)
Credit Cards – Visa (V), Master Card (MA)
Couriers – FedEx (FDX), UPS (UPS)
Consumer Discretionary – International Paper (IP)
Hmm, a market where everything goes up. I like it! Dow 120,000 here we come!
Trump ordered all Stimulus Negotiations to cease, and then changed his mind six hours later. Clearly, the president has given up on the election and wants the next administration to inherit a Great Depression. Or is this Covid-19 talking? It’s the perfect scorched earth strategy. Write off another 2 million small businesses. Down ticket republican candidates will be beaten like a red-headed stepchild. Stocks plunged 600, with airlines in free fall, then bounced 700.
Jay Powell REALLY wants a stimulus package, claiming the economy desperately needs fiscal help to maintain a recovery or face a prolonged depression. “The risks of overdoing it seem, for now, to be small,” the central bank chief told the National Association for Business Economics. Are his pleas falling on deaf ears in Washington? Trump just gave our Fed governor the middle finger salute.
Share Buybacks vaporized T\this year and will be miniscule next year, with companies whose earnings have been crushed by the pandemic not participating. The ban on bank share buybacks imposed by the Fed continues. This has been the largest portion of net stock buying for the past decade. The good news is that foreign investors stepped in as big buyers in 2020, taking the indexes to new highs.
Apple to announce new 5G iPhone this week. The release came a month late, thanks to the pandemic. Scheduled for October 13, the event is called “High Speed”. Apple’s biggest sales quarter in history has just begun. Buy dips in (AAPL).
The Election is Noise and its best to focus on the bull market that has just begun, says JP Morgan. Record fiscal stimulus and quantitative easing in the face of near-zero interest rates create a perfect storm in favor of equities. The best stock to own going into the October 13 Prime Day?
Weekly Jobless Claims edged down to 840,000, still missing 200,000 from California, due to an upgrading computer system. California stopped reporting data so they can rebuild the antiquated computer system of the Employment Development Department, which has been breaking down due to overwhelming demand. Some 26.5 million workers are now claiming unemployment benefits.
Banks are making record trading profits on the back of the US Treasury market where volume has exploded. Even though there has been little net movement in prices in six months, the two-way bets have been enormous. It helps to have a massive home refi boom, incredible QE, and a government that is printing new debt like there’s no tomorrow.
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.
My Global Trading Dispatch maintained a new all-time high last week by staying 100% in cash. I was just as grateful for having no positions on the up 600-point days as I was on the down 600-point days. Safe to say that I will be an increasingly more aggressive buyer on ever smaller dips.
That keeps our 2020 year-to-date performance at a blistering +35.46%, versus a gain of 0.5% for the Dow Average. That takes my eleven-year average annualized performance back to +36.14%. My 11-year total return stood at new all-time high of +391.37%. My trailing one-year return dropped to +44.26%.
The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 210,000, which you can find here.
On Monday, October 12 at 8:30 AM EST, the government is closed for Columbus Day so there will be no data releases, even though the stock market is open.
On Tuesday, October 13 at 9:00 AM EST, the US Inflation Rate for September is out.
On Wednesday, October 14, at 8:30 AM EST, The Producer Price Index for September is released. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, October 15 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get the Empire State Manufacturing Index.
On Friday, October 16, at 8:30 AM EST, US Retail Sales are printed. At 2:00 PM we learn the Baker-Hughes Rig Count.
As for me, I eventually found the perfect desk on Craigslist Reno. It was from the 1930s and had once occupied the office of the Metropolitan Life Insurance Company of New York, complete with two inkwells.
The company logo was prominently displayed in its wrought iron legs. When the Metropolitan modernized its offices in the 1950s, it sold off its furniture, which has been in circulation in the antique market ever since.
I told the seller, who had just moved from the east coast, of my amazing connection with the company. My Uncle Ed spent three years on a Navy destroyer in the Pacific during WWII. Enlistees in the 1940s were required to take out life insurance policies before they went off to war.
When Ed passed away a few years ago, I went through his papers and what did I find but a life policy from the Metropolitan Life Insurance Company for $1,000.
Ever the history buff, I called the company to find out if the policy was worth anything 70 years later. It turned out to have a cash value of $100,000, which they paid out immediately. I divided the money among my mom’s 20 grandchildren to pay for their college educations. Several now have PhDs. Got to love that compounding of interest.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
December 16, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOOD NEWS IS OUT)
(FXI), (AAPL), (FXB), (VIX), (USO), (BABA), (NSC), (MSFT), (GOOGL)
After a China trade deal, UK election and a NAFTA 2.0 are announced, what is left to drive the stock market?
That is a very good question and explains why the Dow Average was up only a microscopic 3.33 points on Friday. It had spent much of the day down.
It’s not a pretty picture.
Not only is the market running out of drivers, the economic data is still decelerating, with the GDP running a 1.5% rate, inflation rising, and corporate earnings growth at zero, with earnings multiples at 17-year high.
A Wiley Coyote moment comes to mind.
And while we are finishing a great 27% year (56% for the Mad Hedge Fund Trader), we are in effect getting three years of performance packed into one. Not only did we pull forward a good chunk of 2020’s performance, we borrowed heavily from 2018 as well, coming in at such a low start as we did.
Thus 2019 might well get bookended by an 8% gain in 2018 and another 8% year in 2020, with dividends. Blame it all on the massive liquidity burst we got from the Fed that started last December and continues unabated.
Stocks have been floated by a tidal wave of new money creation worldwide. Globally, new money creation is running at a $1 trillion a month rate and much of that is ending up in the US stock market, especially in technology shares.
The rush was enough to drive Apple (AAPL) to a new all-time high at $275, pushing its market capitalization up to a staggering $1.2 trillion. It could surpass Saudi ARAMCO’s $2 trillion valuation in a year or two.
Steve Jobs’ creation now accounts for a mind-blowing 6% of the S&P 500 and 4% of total US stock market capitalization. It’s the best argument I’ve ever heard for becoming a hippy and dropping out of college after one quarter.
Which leads us to paint a picture for the 2020 stock market. Even the most optimistic outlook for next year, that of Ed Yardeni, is calling for only a 10% gain. Many prognostications are calling for negative numbers next year.
You might be better off parking your money in a 2% CD and taking a cruise around the world. I’ve done that before, and it works fantastically well.
You’re only going to have one shot at making money in 2020. Wait for a 10%-20% nosedive to go long. My guess is that happens when it becomes clear that the Democrats are dominating in the polls (Joe Biden is currently 14 points ahead in swing state Pennsylvania). No matter who wins, less borrowing, less spending, and higher taxes will prevail.
Then stocks will rally 10% AFTER the election because the uncertainty is gone. That will get you a 20%-30% profit in 2020, but only of you are a trader and follow the Mad Hedge Fund Trader. After basking in their own brilliance in 2019, 2020 might be a year when indexers wish they never heard of the term.
In the end, corporate earnings growth always wins, especially in tech, which is still growing at 20% a year. Remember, my 2030 forecast for the Dow Average is 125,000.
China (FXI) won big in mini trade deal. We rolled back a tariff increase that was never going to happen and the Chinese buy $50 billion worth of soybeans they were going to buy anyway, except at half the price that prevailed two years ago. All of it will come out of stockpiles built up during the trade war. Only the ag sector is affected, which is 2% of the US economy. The ag markets aren’t buying it. If this were a real trade deal, stocks would be up 1,000 points, not 89.
Conservatives won big in UK election. The British pound (FXB) is up 2% and stocks are soaring. A hard Brexit is coming, so look for Scotland to secede and Northern Ireland to join the Republic. The UK will be gone as we know it. Britain’s standard of living will plummet. Great Britain will no longer be great, and the Russians financed the whole thing.
Volatility crashed, as complacency rules supreme. Don’t buy (VIX) until we see the $11 handle again.
Chinese copper purchases hit a 13-month high, up 12.1% in November, to 483,000 metric tonnes. It explains the 78% move up in Freeport McMoRan (FCX) since October, the world’s largest producer. Obviously, someone believes a trade deal is coming. My long LEAP players love it.
US Consumer inflation expectations rebounded, up 0.1% to 2.5%, accounting to the New York Fed. That’s crawling up from a five-year low, a slightly positive economic note.
Saudi ARAMCO went public, with a 10% pop in the shares on the first two days, providing a $24 billion fund raise. This is one of the top three largest IPOs in history after Alibaba (BABA) and Softbank. It values the company at $1.88 trillion. Oil (USO) is down a dollar on the news, no longer needing artificial support to get the deal done. This could be one of the seminal shorts of our generation.
NAFTA 2.0 was signed, removing a potential negative from the market. It is 90% of the original NAFTA, not the “greatest trade deal in history” as claimed. Buy the main North/South railroad, Norfolk Southern (NSC) on the news.
Weekly Jobless Claims soared to a two-year high, by 49,000 to 252,000. Are stores laying people off from Christmas early this year, or did they never hire in the first place because the retail businesses are gone? Peak jobs are in. US job growth is now far slower than in the Obama era, as is GDP growth.
Most US companies will have fewer staff in 2020, except Mad Hedge Fund Trader. More automation and algos mean fewer humans. Only a capital spending freeze caused by the trade war kept a low of low-skilled people in their jobs.
This was a week for the Mad Hedge Trader Alert Service to catapult to new all-time highs.
My long positions have shrunk to my core (MSFT) and (GOOGL), which expire with the coming December 20 option expiration.
My Global Trading Dispatch performance ballooned to +356.00% for the past ten years, a new all-time high. My 2019 year-to-date catapulted back up to +55.86%. December stands at an outstanding +4.85% profit. My ten-year average annualized profit rebounded to +35.59%.
The coming week will be a noneventful one on the data front, with some housing data and the Q3 GDP on the menu. Anyway, everyone else will be out Christmas shopping or attending parties.
On Monday, December 16 at 9:30 AM, New York Empire State Manufacturing Index for December is out.
On Tuesday, December 17 at 9:30 AM, Housing Starts for November are released.
On Wednesday, December 18 at 11:30 AM, US EIA Crude Stocks for the previous week are announced.
On Thursday, December 19 at 8:00 AM Existing Home Sales are published. At 8:30 AM, we get Weekly Jobless Claims.
On Friday, December 20 at 9:30 AM, the final read on US Q3 GDP is printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, after blowing out 1,200 Christmas trees, the Boy Scouts will be taking down the tree lot for the year. And who do they turn to when it comes to wielding a chain saw or sledge hammer?
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Want to know the best way to play the coming recovery in oil, commodities, precious metals, and emerging markets?
Buy the railroads. At least if you are early, you still have a functioning, cash flow positive business, unlike the rest of the above.
Since they peaked in early 2015, railroad stocks have been beaten like the proverbial red-headed stepchild, trading with the collapse in oil and coal tick for tick. Lead stock Union Pacific (UNP) has seen its share price crater by 36% since then before recently recovering half of that.
What follows a global synchronized slowdown, led by China and emerging markets? A global synchronized recovery, led by China and emerging markets.
I love railroads because they used to belch smoke and steam and have these incredibly loud, romantic, wailing whistles.
In fact, my first career goal in life (when I was 5) was to become a train engineer. By the time I was old enough to know better, American railroads almost no longer existed.
It turns out that the railroads today are a great proxy for the health of the entire global economy. They are, in effect, our canary in the coalmine.
If oil prices stay low enough for long enough, it will boost demand for everything else that Union Pacific ships, including houses, furniture, cars, and every other sweet spot for their franchise.
Union Pacific (UNP), in effect, has a great internal hedge for its many businesses. When one product line weakens, another strengthens. This has been going on since the 19th century.
The industry is carefully watching the construction of a second Panama Canal across Nicaragua (click here for ?Who the Grand Nicaragua Canal Has Worried?).
If completed by its Chinese promoters within the next decade, it could bring an incremental shift of traffic from the US West Coast to the Gulf Ports.
Even this is a mixed bag, as this will move some business away from strike-plagued ports that are currently causing so much trouble.
When I rode Amtrak?s California Zephyr from Chicago to San Francisco in 2014, I passed countless trains heading west hauling hoppers full of coal for shipment to China.
Last year? I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.
Take a look at the charts below, and you will see that the shares of virtually the entire railroad industry are breaking out to the upside.
In two short years, the big railroads have completely changed their spots, magically morphing from fading coal plays to emerging oil ones.
You?ve heard of ?fast fashion?? This is ?fast railroading?.
Today the big business is coming from the fracking boom, shipping oil from North Dakota?s Bakken field to destinations south. In fact, the first trainload of Texas tea arrived here in the San Francisco Bay area only a couple of years ago, displacing crude that formerly came from Alaska.
There are a wealth of interesting companies in the railroad sector now. You could almost pick any one.
These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), Kansas City Southern (KSU) and Canadian Pacific (CP).
Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service.
A friend of mine, taking a passenger train from New Mexico to Los Angeles, found his car abandoned on a siding for 24 hours where he froze and starved until he was discovered.
New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy.
The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government-owned Amtrak passenger service was created out of the ashes.
I know all of this because my late uncle was the treasurer of Penn Central.
Fast forward nearly half a century, and what you find is not your father?s railroad.
While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and lines were reorganized and consolidated.
The government provided a major assist with sweeping deregulation. It became tremendously concentrated, with just four companies dominating the country, down from hundreds a century ago, giving you a great oligopoly play.
The quality of management improved dramatically.
Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from West Coast Ports.
A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.
All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment.
The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.
Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa.
Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double stacked sea containers.
Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic.
Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.
I have some firsthand knowledge of this expansion. Every October 1st, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in.
There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.
During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad.
I can guide my guests through that tunnel today with flashlights because Union Pacific (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.
While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing and another energy renaissance) and Canada (natural resources) promise to boost rail traffic with the US.
The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, providing all great cargo for railroads.
And who knew?
Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four time
s more energy efficient than competing trucks.
In fact, many companies are now looking to railroads to reduce their overall carbon footprint. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad six years ago has probably doubled in value since then.
You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities.
My past letters have chronicled adventures riding the Orient Express from London to Venice and Amtrak from New York to San Francisco.
I even once considered buying my own steam railroad, the fabled ?Skunk? train in Mendocino, California, until I figured out it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.
It gets worse.
Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.
The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition, and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.
When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, click here and hit the ?PLAY? arrow in the lower left hand corner.
Please excuse the shaky picture. I shot this with one hand, while using my other hand to keep my over- excited kids from running onto the tracks to touch the laboring beast.
Railroads all look like ripe, ?buy on dips? low-hanging fruit to me.
No, not really.
I was fascinated by the recent comments made by Union Pacific (UNP) CEO, Jack Koraleski, about the current robust health of his company.
Fourth quarter profits rocketed by an amazing 22% and those stellar numbers look set to continue.
I love railroads, not because they used to belch smoke and steam and have these incredibly loud, romantic, wailing whistles. In fact, my first career goal in life (when I was 5) was to become a train engineer.
It turns out that the railroads are also a great proxy for the health of the entire US economy. They are, in effect, our canary in the coalmine.
Jack sees moderate economic growth in the US continuing. Demand for the heavy products the company shifts is booming. Construction products like stone, gravel, cement and lumber, are up 10%.
The dramatic plunge in oil prices brings positives and negatives. The boom in oil shipments from North Dakota has been a windfall for the railroads that may now ebb.
But if prices stay low enough for long enough, it will boost demand for everything else that the Union Pacific ships, including houses, furniture, cars and every other sweet spot for their franchise. (UNP), in effect, has a great internal hedge for its many businesses. When one product line weakens, another strengthens. This has been going on forever.
The company is watching carefully the construction of a second Panama Canal across Nicaragua (the subject of a future article, when I get some time).
If completed by its Chinese promoters within the next decade, it could bring a tiny incremental shift of traffic from the US west coast to the Gulf ports. Even this is a mixed bag, as this will move some business away from strike plagued ports that are currently causing so much trouble.
When I rode Amtrak?s California Zephyr service from Chicago to San Francisco last year, I passed countless trains heading west, hauling hoppers full of coal for shipment to China.
This year I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here?. It turns out I was right.
Take a look at the charts below, and you will see that the shares of virtually the entire railroad industry are breaking out to the upside.
In two short years, the big railroads have completely changed their spots, magically morphing from coal plays to natural gas ones. You?ve heard of ?fast fashion?? This is ?fast railroading?.
Today the big business is coming from the fracking boom, shipping oil from North Dakota?s Bakken field to destinations south. In fact, the first trainload of Texas tea arrived here in the San Francisco Bay area only a year ago, displacing crude that formerly came from Alaska.
Look at the share prices of the major listed railroads, and it is clear they have been chugging right along to produce one of the best performances of 2013. These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), and Canadian Pacific (CP). In the meantime, competing coal shares, like Arch Coal (ACI) have been one of the worst performing this year.
Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service.
A friend of mine taking a passenger train from New Mexico to Los Angeles found his car abandoned on a siding for 24 hours, where he froze and starved until discovered.
New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy. The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government owned Amtrak passenger service was created out of the ashes. I know all of this because my late uncle was the treasurer of Penn Central.
Fast forward nearly half a century and what you find is not your father?s railroad. While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and roads were reorganized and consolidated.
The government provided a major assist with a sweeping deregulation. It became tremendously concentrated, with just four roads dominating the country, down from hundreds a century ago, giving you a great oligopoly play. The quality of management improved dramatically.
Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from west coast ports.
A huge trade also developed moving western coal out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.
All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment. The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.
Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa. Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double-stacked sea containers.
Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic. Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.
I have some firsthand knowledge of this expansion. Every October 1, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in.
There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.
During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad. I can guide my guests through that tunnel today with flashlights because (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.
While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing and another energy renaissance) and Canada (natural resources) promise to boost rail traffic with the US.
The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, all great cargo for railroads.
And who knew? Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four times more energy efficient than competing trucks.
In fact, many companies are now looking to railroads to reduce their overall carbon footprints. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad two years ago has probably
doubled in value since then.
You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities. My past letters have chronicled adventures riding the Orient Express from London to Venice, and Amtrak from New York to San Francisco.
I even once considered buying my own steam railroad; the fabled ?Skunk? train in Mendocino, California, until I figured out that it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.
It gets worse. Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.
The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.
When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, please click here and hit the ?PLAY? arrow in the lower left hand corner. Please excuse the shaky picture.
I shot this with one hand, while using my other hand to restrain my over excited kids from running on to the tracks to touch the laboring beast.
When I rode Amtrak?s California Zephyr service from Chicago to San Francisco last year, we passed countless trains heading west hauling hoppers full of coal for shipment to China.
This year I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.
Look at the share prices of the major listed railroads, and it is clear they have been chugging right along to produce one of the best performances of 2013. These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), and Canadian Pacific (CP). In the meantime, coal shares, like Arch Coal (ACI) have been one of the worst performing this year, down 35%.
Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service. A friend of mine taking a passenger train from New Mexico to Los Angeles found his car abandoned on a siding for 24 hours, where he froze and starved until discovered.
New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy. The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government owned Amtrak passenger service was created out of the ashes. I know all of this because my late uncle was the treasurer of Penn Central.
Fast forward nearly half a century, and what you find is not your father?s railroad. While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and roads were reorganized and consolidated.
The government provided a major assist with a sweeping deregulation. It became tremendously concentrated, with just four roads dominating the country, down from hundreds a century ago, giving you a great oligopoly play. The quality of management improved dramatically.
Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from west coast ports. A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.
All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment. The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.
Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa. Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double-stacked sea containers.
Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic. Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.
I have some firsthand knowledge of this expansion. Every October 1, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in. There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.
During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad. I can guide my guests through that tunnel today with flashlights because (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.
While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing) and Canada (natural resources) promise to boost rail traffic with the US.
The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, all great cargo for railroads.
And who knew? Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four times more energy efficient than competing trucks.
In fact, many companies are now looking to railroads to reduce their overall carbon footprints. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad two years ago has probably doubled in value since then.
You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities. My past letters have chronicled adventures riding the Orient Express from London to Venice, and Amtrak from New York to San Francisco. I even once considered buying my own steam railroad; the fabled ?Skunk? train in Mendocino, California, until I figured out that it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.
It gets worse. Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.
The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition, and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.
When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, please click here and hit the ?PLAY? arrow in the lower left hand corner. Please excuse the shaky picture. I shot this with one hand, while using my other hand to restrain my over excited kids from running on to the tracks to touch the laboring beast.
When I rode Amtrak?s California Zephyr service from Chicago to San Francisco last year, I passed countless trains heading west hauling hoppers full of coal for shipment to China. This year I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.
Look at the share prices of the major listed railroads, and it is clear they have been chugging right along to produce one of the best performances of 2013. These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), and Canadian Pacific (CP). In the meantime, coal shares, like Arch Coal (ACI) have been one of the worst performing this year.
Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service. A friend of mine taking a passenger train from New Mexico to Los Angeles found his car abandoned on a siding for 24 hours, where he froze and starved until discovered.
New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy. The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government owned Amtrak passenger service was created out of the ashes. I know all of this because my late uncle was the treasurer of Penn Central.
Fast forward nearly half a century, and what you find is not your father?s railroad. While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and roads were reorganized and consolidated.
The government provided a major assist with a sweeping deregulation. It became tremendously concentrated, with just four roads dominating the country, down from hundreds a century ago, giving you a great oligopoly play. The quality of management improved dramatically.
Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from west coast ports. A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.
All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment. The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.
Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa. Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double-stacked sea containers.
Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic. Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.
I have some firsthand knowledge of this expansion. Every October 1, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in. There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.
During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad. I can guide my guests through that tunnel today with flashlights because (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.
While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing) and Canada (natural resources) promise to boost rail traffic with the US.
The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, all great cargo for railroads.
And who knew? Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four times more energy efficient than competing trucks.
In fact, many companies are now looking to railroads to reduce their overall carbon footprints. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad two years ago has probably doubled in value since then.
You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities. My past letters have chronicled adventures riding the Orient Express from London to Venice, and Amtrak from New York to San Francisco. I even once considered buying my own steam railroad; the fabled ?Skunk? train in Mendocino, California, until I figured out that it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.
It gets worse. Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour. The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition, and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.
When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, please click here and hit the ?PLAY? arrow in the lower left hand corner. Please excuse the shaky picture. I shot this with one hand, while using my other hand to restrain my over excited kids from running on to the tracks to touch the laboring beast.
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