By SIMON CONSTABLE
Has the lackluster U.S. economy finally become the little engine that could?
A quick look at the rail freight business suggests something good is happening. The only question is how long it lasts.
Movement of rail cars around the U.S. has surged so far in 2014 in a way not seen for years, as you can see from the chart.
Rail shipments — which include everything from coal, petroleum products, grains and auto parts — jumped 5.8% in May versus a year earlier, to a weekly average of 296,579, according to D.C.-based industry group American Association of Railroads. In April, they rose 6.9%.
Why should we care?
“It suggests the economy is expanding,” says John Osterweis, chairman and chief investment officer of San Francisco-based Osterweis Capital Management.
Based on past experience he’s likely not wrong. A MarketWatch analysis of industrial production and rail car shipments from January 2001 through April this year shows that 63% of the variation in the growth of shipments is explained by changes in growth of industrial production. (The analysis is known as regression analysis, if you are interested.) The relationship makes intuitive sense also because much, but not all, of the things shipped are used in industrial processes.
It isn’t 100% because some of the items shipped aren’t used in industry, such as grains or road aggregates. In addition, there are timing differences — some things go into inventory and take a while to work their way into finished products.
The takeaway is that as rail shipments go, so goes manufacturing. But for investors, watching the rail data is just better. Why? For starters, the rail data comes out weekly, while the industrial data for the U.S. comes out half way through the following month. Even better, outside of rail stock analysts, the shipments data hardly get any attention.
To profit from the trend, if it continues, go for stocks in the transport sector such as “rails, transports, airplanes and industrials,” says Steven Pytlar, chief equity strategist at New York-based brokerage firm Prime Executions.
He doesn’t mention specific names, but likely beneficiaries would include FedEx, CSX, Norfolk Southern and Alcoa.
Then later in the economic cycle he says go for sensitive areas of the economy like energy and materials such as Exxon Mobil and BHP Billiton. He reasons that late in the economic expansion, cost pressures start to rise and such companies tend to be good inflation hedges.
See original story here.
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