The Economic View from the Railroads

After yesterday’s about face erasing all of Wednesday’s rout and adding a few additional points to the SPX, does it mean that Ken Chenault, CEO of American Express (AXP), was right all along when he said: “Today, while there is still reason to be cautious about high unemployment levels, we are seeing broad-based improvements in credit quality, the trends in card member spending are encouraging, and there are signs that the recession may be approaching an end,” while discussing 3Q09 earnings?

After all, haven’t we been bludgeoned with the eco-snippet that 70% of our GDP is driven by the consumer and while possibly at the higher end of the spending spectrum, don’t most “card members” use their cards for consuming?

The market, since 10/22, seemed more wiling to focus on the negative side of the equation with Burlington Northern Santa Fe’s (BNI) earnings conference call being one of the key drivers off the cliff earlier in the week. John Lanigan, CFO of BNI, also talked about “key drivers” during that call to say; “The weakness in our consumer product’s higher rated segments was a key driver of the change in mix”. John also talked about revenues generated from carting coal which “were down $107MM or 10%”. The reason for the second was that: “Volumes are down, driven by lower demand for electricity generation, mild weather, effects of the recession and historically high inventories.”

So Ken thinks the consumer is beginning to spend but John doesn’t. If as they say there are three sides to every story, I’d like to see what’s on the side of this coin because both of these executives of major corporations cannot be right simultaneously.

Additionally, just in case you missed it, JL’s comment regarding coal and electricity generation did disastrous things to the likes of Arch Coal (ACI), Peabody Energy (BTU) and Massey Energy (MEE) this past week.

In all of this darkness there is a light at the end of the tunnel and in this case it is a good thing that it is a train! Globally, there is a push towards increasing the amount of high speed rail transportation. UNIFE, an international trade association, said recently that worldwide spending on trains, tracks and equipment should reach E122BN this year which is up 18% from 2004 and projects that figure to grow to E150BN by 2014. Mind you that is not total spending over the period but each and every year. Stimulus, shimulus, all that money has to keep somebody working!

“The market is really developing, that’s a huge growth rate during these times”, said Edzard Luben, GE’s VP of High Speed Train Sales. (How about having that on your business card!)

High speed rails are a focus here in the U.S. as well and a target of Uncle Sam’s Stimulus for Rails project affectionately named USSR (just kidding). There have been $57BN worth of rail improvement requests but with only $8BN available there might not be enough speed to go around.

Most of the tracks in the lower 48 were built to handle lumbering freight trains and the operators of those lines; Union Pacific (UNP), CSX Corp (CSX) and Norfolk Southern (NSC) along with the aforementioned BNI are concerned that what is currently laid, can’t be used. “We do have very serious concerns” about the safety in certain stretches, Louis Renjel, CSX’s VP for strategic infrastructure said.

With freight trains running at about 50mph and Amtrak’s fastest hitting 80mph there is still a big difference with the European-style bullet trains that run at 200mph or even the 110mph Amtrak would like to have trains running on certain routes.

With spending on rail systems totaling E816BN ($1.183TN) between now and 2014 and Ken’s consumer’s showing “signs that the recession may be approaching an end.” It might seem as if yesterday’s eclipse of Wednesday’s black hole is a signal of things to come, but then again, 2014 is pretty far down the track.

A few quick CDS/equity combos. BNI’s stock recovered $1.06 yesterday of the $10.88 it lost between 10/14 and 10/28. The CDS closed at 45bps on 10/14, 57bps on 10/28 and 28bps last night so the credit guys aren’t buying yesterday’s stock blip.

There is some difference in the C/E combos for ACI, BTU and MEE with the later’s CDS rising by 1bp yesterday from 600bps on Wednesday even though the stock bounced with the market. BTU is the exact opposite as the CDS has fallen steadily since early September while the stock has exhibited a bit more volatility. If the CDS is to be believed then the recent sell off in BTU could be an opportunity. BTU is now mining in Australia and given China’s demand for the stocking stuffer that might be what is reflected in the CDS.

Enjoy the weekend.

Comments

[Texas_Techn...:]

Lanigan is CMO at BNSF (Marketing)...and NS coal traffic may be down due to eastern utilities switching from eastern soft coal to western hard coal (less polluting)...so NS may be not recover some of this traffic.

Oct 30 11:08 AM

[mellow Dave:]

Wish I knew what CDS and C/E combo mean.

Oct 30 06:57 PM

[john s. gordon:]

a lot of NS coal traffic is for export.
a lot of eastern utilities use SW virginia-E kentucky met coal because it is low in sulfur, but the mountaintops are being destroyed & the valleys filled up with waste rock.
> jack

Oct 31 09:24 AM