Warnings from the Shops and Shippers

by: Trader Mark October 15, 2008 | about stocks: CSX    
Trader Mark

Trader Mark

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Before the main story:  yet another 4%+ day - the volatility right now is simply unprecedented... 6% daily swings is starting to be the new norm. Simply jaw dropping moves.

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Many US economy bulls were pointing to the strength in railroads this spring as summer as a sign that the US economy was just fine, thank you very much. We took the opposing view, saying most of the strength was simply shipping stuff overseas to foreign customers and suppliers. In April 2008 we wrote:

I contend people are mistaking the boom in rails due to international growth (hauling out our farm products, coal, fertilizers, and the like) for a "sign that the US economy is going to rebound any minute now". The rails benefit from the wealth effect being created overseas by governments and people - wanting our resources. But hopeful bulls, straining for any signs of strength to offset all the weakness, point to the strength in transports as a reason for glee.

We were correct, and the problem now is even the foreign customers and suppliers are slowing down. So companies such as CSX (CSX) are getting hit. We mentioned yesterday everyone would watch Intel (INTC) but that we were more interested in what CSX had to say. I am not that interested in what they are doing as a business in terms of offsetting the economy, but what they have to say about the economy itself. Remember, we now have 2 domestic industries in depression - housing and autos. The stock is down near 13% today but it's hard to read too much into that since everything is down... again. (Emphasis mine; my comments in italics.)

  • Freight railroad operator CSX. Corp. said Wednesday it expects volume to continue to slip next year, but executives predicted that higher prices and productivity will be able to offset the shortfall.
  • In a conference call, CSX's Executive Vice President of Sales and Marketing Clarence Gooden said the weakening automotive and housing markets should continue to impact the railroad in 2009, in addition to "some weakness" in the industrial sector next year. (Industrial weakness is a new theme we have not seen them say in the past.)
  • And although strength in export coal, phosphates, fertilizer, ethanol and agricultural shipments should continue, he said, volumes could fall by about 2 or 3 percent compared with this year. (You know what they say - 2-3% volume drops in commodities = 70% drop in stock prices. Ok they don't really say that, but that's what is happening.)
  • One of the biggest volume losses for the railroad continues to be automobiles, Chief Financial Office Oscar Munoz said, as production and demand wane in that sector. CSX said its auto volumes dropped 23 percent in the third quarter, while total volume fell 2 percent.
  • Other factors likely to drag on the final quarter of the year are a slowing international business and lingering impacts from Hurricanes Ike and Gustav, which slowed chemical shipments across the Gulf Coast region.

We've been saying this market has not priced in the recession, but what is frustrating is this bad news is such a 'surprise' to everyone. I guess since we were early on the case it seems like old news - but it appears to be new news to everyone else. Hence constant selling. Retail sales reported today, on a non related note, were putrid.

  • Retail sales fell off a cliff in September, plunging by the largest amount in three years as worried consumers shunned the malls and auto showrooms in the midst of the country's financial meltdown.
  • The Commerce Department reported Wednesday retail sales decreased 1.2 percent last month, nearly double the 0.7 percent drop that had been expected. Even excluding auto sales, retail sales showed widespread weakness, falling by 0.6 percent or double the decline outside of autos that had been expected.
  • Sales at department stores fell by 1.5 percent following an even bigger 1.6 percent drop in July. Sales at furniture stores fell by 2.3 percent. Sales at appliance stores slid 1.5 percent.
  • Retail sales have now fallen for three consecutive months, the first time that has occurred on government records that go back to 1992.

This is what has had me worried - in an economy that is 2/3rds based on 'shopping', without a healthy consumer things are going to be quite dire.

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This article has 3 comments:

  •  
    Oct 15 02:55 PM
    No doubt. I don't think America will be able to shop its way out of this economic turmoil.
    Reply | Link to Comment
  •  
    Oct 15 04:00 PM
    Trader Mark -- Do you think Volkswagen warrants an article? Drastic increase in price in the last month with little explanation, possible deal with Porsche, and its relationship with hedge fund momentum plays -- is this a short opportunity?
    Reply | Link to Comment
  •  
    Oct 16 11:43 AM
    Year to date, CSX auto and truck shipments are down 19% to 281,000 car loads Horrors!. But the total carloads is 3,849,000. Does not look like the auto industry is a significant portion of the traffic, even if CSX can carge more per carload than most other freight. Do the shipments of components to the assembly plants constitute a large volume? Maybe, but a large percentage of these shipments are shorthaul and go by truck.

    What about steel manufacture to make the components? CNI will be hit much harder because they own the old Duluth, Missage and Iron Range and the Bessemer and Lake Erie railroads that are about dedicated to taconite ore shipments. I show 48,000 carloads of mettalic ore for CSX YTD - that is NOT statistically significant. Coal shipments for steel manufacture? These are short hauls again - from Kentucky, Ohio and West Virginia to steel mills in West Virginia and Ohio.

    I am more interested in the other part of the 1,403,000 carloads of coal, most of which is going to domestic power plants, paper mills as well as export - and most of this is long haul. I watch those CSX coal drags go past that are going from Kentucky to Florida and I smile with contentment.

    With a new coal fired in southwest Georgia going up soon, prospects look even better.
    Reply | Link to Comment
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