James Cullen's  Instablog

After Buffett’s investments in a handful of major railroads – Union Pacific (UNP), Norfolk Southern (NSC), and most notably Burlington Northern Santa Fe (BNI) – the industry garnered plenty of attention. The attractive industry dynamics and a myopic focus on the major players makes me interested in the small number of publicly traded regional railroads – among them Kansas City Southern (KSU) and Genesee & Wyoming (GWR).

Why railroads? Foremost, it’s an industry with significant tangible barriers to entry, and it provides a vital economic service. Although fixed asset investment is substantial, I also believe that the general consensus underestimates the variability of the typical railroad’s cost structure – yes, there’s operating leverage there, but there is also room to reduce headcount as unit volumes decline. Below is a graph of quarter-over-quarter revenue growth compared to QoQ operating expense growth for two major carriers (Norfolk Southern and CSX), one larger regional (Kansas City Southern) and the short-line amalgamation G&W.

In a note to file under the “Playing for Time” theme, the Curious Capitalist notes:

I haven’t said much about what I’ve been doing personally here of late. In sum, the general theme is that I’ve been scaling out of positions the entire summer, and am now 100% cash. Had I not sold anything, I would be up more on the year than I am at present – but that’s pretty much par for the course in a rally that has been as sharp and persistent as this one.

There’s still a strong undercurrent of disbelief at this rally, so in that sense not much has changed since March, when the world was bearish and nothing but pain existed for equity holders. The difference now (besides much higher prices) is that there’s a growing contingent with a belief that the recovery is at hand, or their more speculative counterparts who don’t believe in a recovery but are afraid of missing a higher move.

A growing number of financial stocks that are essentially worthless have seen their option values multiply several-fold; the well-documented list includes Fannie Mae (FNM), Freddie Mac (FRE), AIG, Citigroup (C), and Lehman (LEHMQ.PK), and August trading volume has been heavily concentrated in those names. I’m not discounting the option value of a stock; real-world outcomes are probabilistic and stock prices should reflect that. But it does speak to speculation returning to the market, and that’s a sign of caution in a time of great uncertainty – and make no mistake, the short-term bandages are only hiding long-term problems.

I go to school just outside Boston, and my family lives near Philadelphia, so I do a fair amount of travel between the two cities. Lately, I’ve noticed one bothersome change – the amount of traffic created by construction projects has greatly increased the length of the drive. Given the poor shape most state budgets are in, and the emphasis on infrastructure spending in spending stimulus funds, my intuition says that the stimulus funds are financing this construction, which is in turn causing traffic.

Now, my trips are done later at night – I usually work during the day, have dinner, and pack before getting on the road. I’m usually traveling between 8 p.m. and midnight, since it fits my schedule and will theoretically minimize rush hour traffic issues. The favored time to do this roadwork, however, is overnight, when it impacts fewer people than during the day. As much as I don’t like that, at least there’s some forethought there.

One of the dangers of the government allocating funds as it will is that the need for economic value to be created might not be considered. We will spend in the name of taking action, even though taking action is more costly than not doing so, in terms of opportunity costs – the money must come from somewhere, after all.

I recently finished reading Stephen McClellan’s revised and updated book Full of Bull: Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio. McClellan spent over 30 years as an analyst of technology stocks, and had a front row seat to the evolution of the modern sell-side analyst.

McClellan covers a diverse set of topics, and although there are occasions when the book doesn’t flow right – he frequently jumps back and forth between advice and sometimes tenuously-connected anecdotes – that’s a minor problem at worst. More glaring - and perhaps a consequence of when it went to press (February 2009) or his personal investment outlook - is the negative undertones and myopic focus on the current bear market. I wonder if recent market events have changed his disposition…

The best lesson this book offers is for the individual investor who believes they can benefit by listening to headline recommendations of upgrades and downgrades – i.e. new “buy” (or equivalent) calls. Wall Street analysts, as McClellan says, aren’t judged by the accuracy of their stockpicking, but instead by client relations and related business they generate. Helping individual investors is at the bottom of their priority list.

One phrase I keep coming back to is “playing for time” – I see it as a good description of the strategy (or lackthereof) underlying most of the economic policy decisions that emanate from Washington.

What areas are being targeted, and how is it being accomplished?

Real Estate