With Warren Buffett’s recent acquisition of BNSF, you could understandably get the impression that all is well in the world of American railroads.  After all, if the Sage of Omaha sees value there, then it must be so.

We’re not necessarily disputing Mr. Buffett’s claims about the long-term attractiveness of rail — after all, he’s the best in the investment business, and the man presumably knows what he is doing — but we do feel it is necessary to point out that most of us do not have time horizons like Mr. Buffett, whose preferred holding period is “forever” in his own words.   But while we are waiting for “forever,” a lot can happen in the meantime.  And right now, we’re getting very mixed signals from the rail sector.

Michael Robertson, one of our HS Dent financial advisors, forwarded us these stats from the December issue of Rail Time Indicators, a publication of the Department of the Association of American Railroads:

U.S. Freight Rail Traffic:

Carloads: In Nov. 2009, ↓ 8.2% from Nov. 2008 and ↓17.4% from Nov. 2007.

Intermodal: In Nov. 2009, ↓ 6.7% from Nov. 2008 and ↓ 14.1% from Nov. 2007.

And if a picture is worth a thousand words, we’ll save a little space with this chart: Read the rest of this entry »

Ford Motor just announced quarterly profits of nearly a billion dollars.  So, that’s it.  The recession must be over.  Time to pop open the champagne bottles.

You no doubt detect more than a hint of sarcasm in my words.  Yes, Ford’s results are good news for the company’s shareholders.  Ford managed to claw some market share away from its domestic rivals — both of whom were distracted by their respective bankruptcies.  Ford also had a better lineup of  fuel-efficient cars, allowing the company to better take advantage of the Cash for Clunkers windfall.

But this is where the celebration stops.  As you can see from the WSJ chart below, even with Cash for Clunkers, car sales are FAR below the levels of the early and mid 2000s.  And now that Cash for Clunkers is finished, sales are beginning to falter again.

The WSJ writes: “Clunker-driven sales peaked in August at a 14.1-million-unit pace, but payback was rough: Sales tumbled in September to a rate of 9.2 million units… Auto makers sold, on average, 17 million cars annually from 1999 to 2007. It might be years, or another credit bubble, before sales get anywhere near such levels.”

The Journal has taken to calling this mild recovery — in which expectations are lowered — the “New Normal.”  This is a term we’ve used quite often of late in recent posts.   And we expect to be using it quite a bit going forward.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Continuing our theme of the “New Normal,” we thought we’d share this tidbit from the Financial Times: “Industrialists fear return to growth is long way ahead.”  Writing for the FT, Richard Milne says,

Some industries may never see demand return to pre-crisis levels as manufacturers learn to live with much lower growth rates in the coming years, according to leading chief executives.

Hans-Paul Bürkner, chief executive of Boston Consulting Group, said companies such as manufacturers of trucks and machines - which have seen revenues plummet 50-70 per cent during the economic crisis - would struggle to return to the levels they achieved at the peak of the boom in 2007.

“Some will never get back to those [levels] because they have lost competitiveness and will be taken over,” Mr Bürkner told the Financial Times in a video interview .

In the New Normal, we start at a lower level and we accept a slower rate of growth.  Expectations have to be moderated.   There are casualties along the way, but the economy  more or less moves sideways with a slight upward bias.

What might some of those casualties be?  Bloomberg reports that GM and Chrysler, even after bankruptcy washed away most of their legacy debts, may still be at risk of ultimate failure.  Who else might join them on the scrap heap of economic history?  Sears and K-Mart, perhaps?  An airline or two?  We shall see.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

I say this mostly in jest, of course.  Though I did start to wonder this weekend when I couldn’t find a parking place at the local outlet mall.  Patrons were parked in the grass, behind the dumpsters, and on the medians — which was odd given that it wasn’t a holiday weekend, the Christmas season is still a few weeks away, and there were no major sales to speak of.

The weak dollar has had its benefits for South Florida.  Though the local economy has been in the tank (one of the worst in the country) the relative weakness of the dollar has encouraged foreign tourists to frequent the area’s many high-end outlet malls.  But this past weekend, it was only the familiar Chicagoland and New Jersey snowbird accents that could be heard.

Even stranger was the fact that this increased mass of people were pursuing a diminished stockpile of goods that are now selling at much less attractive prices.  The phenomenal sales of a year ago are no longer to be found, and neither is the selection.

So…is this is?  Is the recession over? Read the rest of this entry »

We don’t buy into conspiracy theories that the government intentionally distorts economic data as part of some kind of diabolical scheme to fleece the voting public.  These allegations pop up routinely, usually (though not always) in off-beat investment newsletters, and are particularly focused on the reported stats for inflation and unemployment.  (Somehow, using a core inflation gauge that excludes volatile items like food and fuel or using hedonic adjustments to account for technological improvements are forms of government chicanery…)

At any rate, while the numbers may not be lies or intentional distortions, this does not imply that they are complete or that they tell the whole story.  Read the rest of this entry »

We’ve used words like “timid” or “cautious” to describe consumer behavior, but we now rather like the term “gun shy.”  What a great mental image — that of a brash cowboy consumer with a reputation for quick-drawing the credit card at every cash register suddenly losing his swagger.

This is more or less what has happened in the Great Recession.  The Washington Post reports that credit card usage has waned in the past two years, but debit card usage has surged (see “For Gun-Shy Consumers, Debit is Replacing Credit“).  This shows that consumers value the convenience and safety of paying with plastic but have adopted a more responsible way of doing it.  The days of throwing down the credit card with “devil may care” reckless abandon are over.  We’re in a more sober era now, and it’s all part of the process of deleveraging, which continues apace.

The Wall Street Journal echoed these sentiments on Thursday (see “Drought of Credit Hampers Recovery“), though they also rightly point out that this is a two-way street.  Not only are some consumers choosing to spend and borrow less, but many banks are more or less forcing them to by limiting the amount of credit available.   Read the rest of this entry »

In case you needed more proof that inflation is not much of a concern at the moment: “Great Time for U.S. Consumers: America Is on Sale.”

“There has never been a better time to be a consumer,” writes Rachel Beck.  “What’s happening now has been building for years. Wal-Mart Stores Inc. introduced ‘every-day low prices’ many years ago.  Amazon.com redefined the idea of bargain prices during the late 1990s when it helped introduce online shopping.  After the 2001 recession, automakers introduced zero-percent financing to boost sales.  McDonald’s “Dollar Meals” made fast food even cheaper.  But until the Great Recession came along, consumers hadn’t seen anything yet.”

As we  have written in prior posts, this is the New Normal.   And it’s part of the process of deleveraging and deflation.  Cut-rate prices erode the profit margins of both manufacturers and retailers, which reduces the retained earnings they can use for capital investment.  Eventually, weaker and less financial agile competitors fail, taking excess capacity offline and enabling businesses to raise prices again.

Needless to say, we’re not there yet, and we won’t be for a while.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

The War on Deflation is still far from won, despite the  stimulative efforts by the Federal Reserve (and what gargantuan efforts they were — the monetary base has more than DOUBLED since the onset of the crisis).  Consumer prices in all but basic staples and highly volatile commodities like gasoline continue to be extremely weak.  With consumers stubbornly refusing to open their wallets, retail stores simply have no pricing power or bargaining leverage.

Today, Wal-Mart announced that the company would be cutting the prices of 100 popular toys to below $10 this Christmas season.

The fourth quarter of 2009 should prove to be interesting.  Year-over-year, we might see some degree of improvement over 2008 — but this is only because 2008’s numbers were already so incredibly bad.

Still, we would expect much of the same: bigger than usual discounting this Christmas season in an attempt to persuade reluctant investors to fork over their money.  They’ll have to work for it this year.  Welcome to the “New Normal” holiday sale.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We’ve written several posts over the past few weeks on the “New Normal,” or the conditions we see going forward of weak demand, sluggish growth, and mild deflation.  There will not be a “V” shaped recovery and probably not a “W” either for that matter.  If we were going to assign an alphabetical  description, it would probably be that of an “L,” ever so slightly tilted counterclockwise.

Of course, even this might be optimistic, according to a new IMF report.  According to the IMF, global banks have only taken approximately half the losses that they will eventually have to take on their bad mortgage-related loans.  HALF!

What this tells us is that the banks are zombies and will remain impaired for quite some time.   For banks to be a constructive force in the economy, they have to be willing to lend.  But with their equity already small and still shrinking, they are in no position to do so.  This means that deleveraging and deflation are going to be with us for a while.

The only way to “fix” the banks is to inject massive amounts of new capital into them — real capital, as in massive new amounts of common stock, not short-term liquidity injections by the Fed or Treasury.  The problem is, issuing new common stock dilutes the existing shareholders…and drives down the share price.

On the upside, we may possibly see some young, healthy banking upstarts filling the vacuum left by the big banks.  This certainly happened during the last banking collapse during the S&L debacle of the late 1980s/early 1990s.

But how many small upstarts does it take to replace the lending capacity of a Citi or a Bank of America?   Certainly too many to be realistic.

So, while the economy does continue to incrementally improve, the fragility or the financial sector remains the elephant in the room.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Barron’s relates a description of Japan’s future by a hedge fund manager familiar with the country:

Within 50 years or so…high-tech aircraft will be taking Chinese and American tourists on fly-overs there to view the dilapidated remains of what was once the world’s second-largest economy.  By then, all that survives will be blighted metropolises like Tokyo, populated mostly by the elderly, and decaying, weed-choked highways, bridges and bullet-train right-of-ways, spectral reminders of a once-vibrant society that lost its way.  (From “Is the Sun Setting On Japan?“)

This is a theme that HS Dent has been covering for years, and for good reason.  We see something along these lines befalling parts of Europe and, to a lesser extent, even the United States. (The U.S. will get older, though it will not actually shrink any time soon).  As Barron’s continues, “The old saw about demographics being destiny certainly applies to Japan, which is graying at an alarming rate because of longtime low fertility rates; its post-World War II baby boom petered out almost a decade before America’s ended in the mid-1960s.”

Demographics certainly are destiny; they are the future that has already been written.  And this future, as Japan has proved, is one of less consumer spending and a higher rate of savings.  This — combined with the hangover from a bursting debt bubble — should insure that the U.S. economy will grow at more modest rates in the decade ahead.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy