Rail Transport CDS Levels and the Dow Theory 16 comments
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Charles Dow, co-founder of Dow Jones and Company, wrote a collection of 225 editorials in the Wall Street Journal between 1851-1902 that, after his death, were collected, organized and represented as the “Dow Theory”. It is, in essence, a combination of what is now known as technical analysis combined with what we call sector rotation in modern parlance.
One of the major tenets of Chuck’s conclusions is that “stock market averages must confirm each other.” Back in the day this meant that a new high (or low) in the index of the 30 stocks in the Dow Jones Industrial Average had to be followed by a similar peak or nadir in the index of transport companies. Much to the bears' dismay, that occurred again yesterday but that’s not the point of this piece.
Instead I wanted to delve a little deeper into the “transport” part of the story as the major form of transport when Mr. Dow was deliberating his theory were the rails and they still are an extremely important component of the U.S. economy. That most people’s initial investment in the rail companies went the way of “I have an idea.com” is a story for another day but is still proof that economically sound ideas survive bubbles all the time.
As the latest earnings front passed through Burlington Northern Santé Fe Corp (BNI) and Union Pacific Corp (UNP), both reported but like everyone else in this last batch of income avowals, it wasn’t about what just happened but what is to come.
Both BNI and UNP said that the dramatic drop in volumes they had seen over the past year had begun to stabilize but that signs of a recovery in demand for freight were far from full-fledged.
“Things clearly have stabilized when you look at business demand and there are signs of pickup potential. Still, I don’t see it turning around quickly,” said Jim Young, CEO of UNP.
Of the earnings themselves, BNI reported earnings of $1.18/shr vs. $1.00 for the same period last year. UNP saw their bottom line shrink to $469MM from $531MM a year earlier.
On the CDS side of things, given both companies’ exposure to macroeconomic factors, it is no revelation that CDS levels peaked and stock prices hit their lows on March 9th of this year. From there, painting in broad strokes, CDS levels have fallen as their stocks rose.
What is interesting is that in both cases CDS levels hit their lows for the year on July 31st and have since risen even as shares continue to make new highs.
Given the empirical evidence, this situation is not one that usually lasts for long so at some point either the stock will fall or the stock’s rise will be confirmed by falling CDS spreads.
Just like Chuck’s theory, the CDS/equity model looks for confirmation.
Enjoy the weekend.
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It would be helpful if bloggers defined their abbreviations on first usage, as in the AP stylebook (if there still is such a thing). This is a common problem in jargon. It is the same as saying, " I'm a knowledgeable inside person and you're NOT." I know I'm not, that's why I read anything and everything. And have been for 400 years.
What is CDS? Not being snide: I want to learn things and this doesn't help.
Left to guessing I suppose CDS is a measure of non-utilization of rolling stock. It might relate to fuel consumption, though, or track utilzation..
CDS are credit default swaps - the cost to insure the debt of a company against default. Not being snide, they've made headlines the last nine months or so, thus the straight-to-abbreviation usage.
On Aug 14 09:19 AM Edward, Lord Clarendon wrote:
> JIM:
>
> It would be helpful if bloggers defined their abbreviations on first
> usage, as in the AP stylebook (if there still is such a thing).
> This is a common problem in jargon. It is the same as saying, "
> I'm a knowledgeable inside person and you're NOT." I know I'm not,
> that's why I read anything and everything. And have been for 400
> years.
>
> What is CDS? Not being snide: I want to learn things and this doesn't
> help.
>
> Left to guessing I suppose CDS is a measure of non-utilization of
> rolling stock. It might relate to fuel consumption, though, or track
> utilzation..
Based upon your analysis I guess the laws of gravity will pull these stocks back down to their 50 day moving average.
These stocks still amaze me as they are still 100% UP from their 2005 levels. L.O.L. I can remember when these stocks went 20 years never going above $40 even in good economic times. But as Bob Dylan sang, "The times are a changing".
Learn how to use Google and pick up the business section of the paper in the last 2 years.
Secondly, just because my automobile insurance goes up, doesn't mean I'm a greater risk to the insurance company. It may mean the insurance underwriting cartel has an oligopoly. Think oil.
On Aug 14 01:48 PM MacroEconomist wrote:
> Edward, sometimes its better to keep your ignorance a secret.
>
> Learn how to use Google and pick up the business section of the paper
> in the last 2 years.
On Aug 14 09:19 AM Edward, Lord Clarendon wrote:
> JIM:
>
> It would be helpful if bloggers defined their abbreviations on first
> usage, as in the AP stylebook (if there still is such a thing).
> This is a common problem in jargon. It is the same as saying, "
> I'm a knowledgeable inside person and you're NOT." I know I'm not,
> that's why I read anything and everything. And have been for 400
> years.
>
> What is CDS? Not being snide: I want to learn things and this doesn't
> help.
>
> Left to guessing I suppose CDS is a measure of non-utilization of
> rolling stock. It might relate to fuel consumption, though, or track
> utilzation..
On Aug 14 11:24 AM James Cullen wrote:
> Edward,
> CDS are credit default swaps - the cost to insure the debt of a company
> against default. Not being snide, they've made headlines the last
> nine months or so, thus the straight-to-abbreviation usage.
Law school had the same thing, the "Blue Book." Grad school had "Turabian."
Herein, I am the dunce freely admitted. Yet willing to ask questions and listen.
ELC
On Aug 15 03:09 AM cam addis wrote:
> What does AP stand for?
On Aug 14 01:48 PM MacroEconomist wrote:
> Edward, sometimes its better to keep your ignorance a secret.
>
> Learn how to use Google and pick up the business section of the paper
> in the last 2 years.
Lead & Teach nicely !!! Your resume just may land on Edwards desk some day !
Would that be something ...
Oh Macro what does QALY stand for ???
That to has been in the news alot recently . Everyone better get to know this one !!!
check it out sat 8/15 IBD editorial section.
Cheers ,DuffBeer
I think you mean the pricing of credit default swaps for railroad stocks. How about the volume? Most of us don't have access to see volume figures for privately traded securities like CDS.
elc
On Aug 15 07:23 PM macro -N- ietzsches wrote:
> ROFL whole series from aug 14 9:19 am on needs to go straight to
> educatedcomedycentral....
On Aug 16 03:46 PM BigGuy wrote:
> CDS Levels?
>
> I think you mean the pricing of credit default swaps for railroad
> stocks. How about the volume? Most of us don't have access to see
> volume figures for privately traded securities like CDS.