More Rails in Summer/Before the Earnings Wave

July 12, 2018

Greetings:

Instead of a shot heard ‘round the world (to commemorate Independence Day), this trade war started with a shot to the foot.” —(Republican) Gov. Kasich of Ohio

This is just a brief note before the Q2/18 Preview, out Monday, followed by the deluge of earnings….with the World Cup now over, for all intents and purposes, we can refocus on America: trains, business and baseball.  Well, these days politics gets in the way of course – the expanded (an additional $200B in tariffs from the original $34B) trade fight with China….Meanwhile CSX continues to be a flurry of activity….

What’s real and what’s not?  The impact is beginning to be felt in the economy and on the rails – and in mysterious ways.  Soybean exports boomed in May and June, up to the July 6 retaliatory tariff form the biggest customer, China – the two-month total was up 50% YOY!  The soybean surge was half of the narrowing of the trade “gap” in May – and may contribute 50-60bps to the inflated Q2/18 GDP number (speaking of inflation….but that’s another story).  Up to May YTD, the USDA reported soybean exports down 10% (and wheat, at this point apolitical but still weak, down fully 22%).  Holy inflection, Batman!! Is this for real?  Sadly, no….This appears to be stockpiling and pre-buying (and its driven the Baltic Dry Freight Index up 50% in that same period) - - much as we saw in imported steel from Mexico/Canada/EU, and from JFK on Cuban cigars before the “Missile Crisis” in 1962.   June grain carloadings were up 5% in the US – let’s see what the rails think in the next few weeks….see below for an excellent editorial co-authored by the AAR and some unusual friends, as they join the business chorus requesting an armistice in this “great” trade war….

  • One piece of good/interesting news – the incoming trade minister of Mexico under AMLO said in an interview that she would work with the outgoing government in NAFTA negotiations and could see an agreement by October or November, ahead of the AMLO government taking power on 12/1.  She also said that a “NAFTA-lite” was possible, or even breaking with the alliance stance with Canada, a bilateral deal might be possible….

Intermodal – Good Times (but Good Enough??) – intermodal is obviously doing well – running up 6% (June, Q2, YTD)  in the US & Canada.  Canadian growth may have slowed a bit (+3% in June), but that’s not the worrisome part:  US containers were up 5% in June, and trailers (TOFC) up 24%.  What’s bad about that?  Well – with rail speeds still down (YOY, vs 2016, vs 5-year average), one can infer that the domestic business is doing fine, but not fine enough – and as reported by Larry Gross, some of that TOFC business is because the market is going crazy (spot rates up 50%+) and it is the only available capacity (and thus unlikely to be a secular sticking point, as it were).  Meanwhile, Union Pacific has reported that its SoCal-Chicago major IM lane bookings are sold out….for the year.  Meanwhile, the driver shortage (again, I don’t understand how 94% turnover as reported for Q1/18 by the ATA – fully 25% below the 2007 peak - constitutes a shortage – see last week) has captured the national imagination, with “Fortune” (“Who’ll Keep on Truckin?’”) noting that there are some 500K long haul drivers but that’s still 50K short, and the FT “Big Read” noting that truck tons are up 8% YTD – as are wages.  Rates, meanwhile, are up 50%, and the C-8 truck backlog is the highest since 1999.  The game-clock is ticking on IM….

CSX remains a flurry of energy, activity and (re)thought – in the last few days CSX has filled some key leadership roles – notably naming PSR veteran mark Wallace, well-known to the investment community, as EVP Sales & Marketing.  In addition, they announced that they were converting the converted flat-switching yard in Nashville back to a hump yard (see their hump-timeline chart, attached, issued prior to the announcement).  This to me shows a flexibility of thinking post-revolution, along with their decisions on IM terminals in NW Ohio and eastern North Carolina (and perhaps the Baltimore tunnel?); I say Huzzah!  CSX is hosting a hi-rail trip over some of the NYS lines in its 2nd short line segment sale package (I have to admit here that the fact that it began in Montreal made me think that a third package had been authorized, which sadly also showed my geography limitations without a nearby map).  Details soon?  In any event, all of this combines to convince me that a strategic re-think is underway and that’s almost always a good thing….

Also of note, before the Preview & the Q2/18 earnings wave:

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com 

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