Wednesday, November 04, 2009

Buffett on right track?

Going into the Western Pacific's evening, after a day in which most of Asia's markets took a beating and the US futures were forecasting a hard day's night, Mr. Market pulled another one out of the hat, the hat being styled and worn by Mr. Bear.

Despite the apparent gloom of the traders, Mr. Market once again pulled off a bear hug, and this time on the excuse of the anti-trader, always opportunistic Warren Buffett.

The headline story was that Buffett was purchasing a US railroad. Not just any old purchase, this one was his largest purchase ever. The traders skipped right over the part where Buffett said the purchase was an “all-in wager on the economic future of the United States”, and landed on the notion that transports ultimately lead the industrials in the stock market race.

And so, it was on for tranes, planes and transports generally, saving Mr. Market from a fateful descent, lightly touching down only 17 points.
U.S. stock market gets positive message from Buffett Berkshire Hathaway Inc.'s blockbuster deal for Burlington Northern Santa Fe Corp. should offer a positive jolt to the broader U.S. stock market, which tends to follow the lead of the transportation sector.

"Rails in particular, but transportation in general tend to lead the market," according to Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.

"This is Buffett putting his stamp of approval on this bull market and the recovery," said Howard Ward, chief investment officer for growth equities at GAMCO Global Growth Fund.

About the only thing that Buffett ever says about the stock market is that he pays it absolutely no attention. To him, "the market" is a bunch of Gotrocks helpers helping themselves to others' savings.

Jeff Mathews is an avid and critical follower of Buffett. He is not the only one to ever chronicle Buffett's moves as v-e-r-y long term plays, quoting Buffett-isms such as this: "The only thing I know is over time things will look better and better."

So, while Guambat is in no position to judge Buffett's rail purchase, he is plainly under the impression that Mr. Market is thoroughly wrong to think that his foray into transports is some kind of "stamp of approval" on the current "bull market".

Guambat has already pointed out the Titanic failure of the Baltic Dry Index' seafaring woes. Now, Guambat is looking at the Landlubber's like kind index for US freight, the Cass Corporate Freight Shipments Index.

The freight logistics guys are not influenced by the hype of the marketeers when it comes to looking into the big picture of Buffett's purchase. They appreciate the long term significance.
Railroad shipping: Buffett, Berkshire Hathaway set to buy BNSF

As one of the largest U.S. Class I railroads, BNSF is heavily involved as a provider of intermodal services and transports the most grain of all U.S. Class I railroads, as well as high levels of coal. It was established in 1995, when Burlington Northern Inc. and the Santa Fe Pacific Corporation merged. This merger created a network comprised of more than 34,000 route miles across-ranging from the Pacific Northwest and Southern California into the Midwest, Southeast, and Southeast-across nearly 30 states and into parts of Canada.

Brooks Bentz, a partner in Accenture's supply chain practice, said while the transaction sum is large, the bet Buffett is taking on BNSF is not. Bentz explained that the U.S. population is expected to rise from 300 million to a forecasted 420 million by 2050, with many of these people living in congested areas like the East Coast, Gulf Coast, and West Coast.

This growth, he said, will continue to put stress on a weathered transportation infrastructure system which is woefully underinvested in. These factors, coupled with expected peak oil production by 2011 and conventional oil supply potentially expiring by 2050, which will drive up energy prices, will benefit the railroad industry, as fuel costs could go way up, highways will be more congested, and shippers will need lower-cost alternative modes of transport for many goods. If Buffett has considered these elements, said Bentz, he will be encouraged that BNSF is a good investment, adding that it can be viewed as a "can't miss" regardless of what is happening with the economy.

Meanwhile, in the micro-second world of Mr. Market, the freight business, as reflected in the Cass Freight Index, doesn't look quite so flash.

While the Cass Freight Index had a month-on-month bounce in September, raising some of the pom-poms from the freight cheerleaders, is was off again in October.
Reversal in October sends Cass measure to lowest point since May

The closely watched Cass Freight Index of U.S. shipping slipped 4.7 percent in October to its lowest point since the spring, reversing several months of gains and signaling the economic recovery remains fragile. On a year-over-year basis, the spending index was down 22.9 percent compared to October 2008.
Moreover, that May benchmark was a bit of a stinker:
Cass index shows transportation weakening, spending falls at record pace

The closely-watched Cass Freight Index fell a record 25 percent in April compared to the same month a year ago, and freight spending also dropped at a record pace, throwing a new cloud over hopes that an economic recovery could be stirring.

Furthermore, one critical observer took a look at the whole Cass Freight Index series since inception and was puzzled by it.
Cass Freight Indices Bouncing

Here's a chart of all the available data. My first impression is that while these indices are in synch with the bounce we have seen in so many other areas of the economy this year, they are of limited value.

I am perplexed as to why the Shipments index has drifted lower over the past 20 years, considering that economic activity (real GDP) has expanded by 90% since 1990. It is interesting that the Expenditures index is now up by exactly the same as the rise in the PCE deflator since 1990 (55%), but why it should have risen so dramatically in 2006, about two years before the big spike in oil prices, is puzzling.

Puzzling indeed. Although the cost of moving the freight has increased only in line with inflation over the last 2 decades, the numbers of shipments has remained stagnant. What, if anything, does that say about a long term freight play?

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