Source: Google Images
As we closed the week on March 3rd, markets have remained in a positive trend for the year.
I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance has been slightly below most benchmark comparisons at just over 4.5 percent, as highlighted in green. The NASDAQ Transportation (^TRAN), NASDAQ (IXIC) and Fidelity Contrafund (MUTF:FCNTX) have remained in the lead, all up nearly 10 percent and highlighted in blue. Many other indices were up close to or above six percent.
2017 is off to a great start for investors who continue to buy and hold, and/or consistently increase their positions in their investments. This has been a theme for a while now.
The market rhetoric from some pundits is that an inevitable correction is on the horizon. Macro-economic and transports data suggest that this is not true. There are questionable pieces of information such as the debate as to whether the current unemployment rate is reflective of the true working population. But things are still picking up on the demand side.
For the eight week of 2017, the spread between the S&P 500 ETF (NYSEARCA:SPY) and the S&P Transportation ETF (NYSEARCA:XTN) lessened with the S&P 500 ETF up by three percentage points. The S&P 500 ETF improved by 80-basis points (bps) to 6.7 percent; while the S&P Transportation ETF increased by 110 bps to 3.7 percent for 2017.
Transports did experience a strong week. The substantial positive performance was derived the day after President Trump addressed the U.S. Congress. This should be an indicator for investors. As markets become more volatile to the upside, transports will likely outpace broader market indices.
All rail operators displayed improved performance for this past week, with the exception being Genesee & Wyoming (NYSE:GWR). Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) as the owner of BNSF witnessed the most robust improvement, in-line with the SPY's performance. CSX (NYSE:CSX) and Norfolk Southern (NYSE:NSC) remain ahead of this group up 38 and 13 percent, Canadian National (NYSE:CNI) has improved to nearly seven percent.
Week eight of 2017 was stable for Class I total traffic carried. I still like Canadian National over Union Pacific, and believe that Canadian Pacific and Kansas City Southern offer the highest upside potential at current levels. I also expect Genesee & Wyoming to make new deals in the U.S. in the near-term.
Railcar Manufacturers & Lessors
Contrary to rail operators, most railcar manufacturers and lessors witnessed negative performance for the week. This was led by American Railcar Industries (NASDAQ:ARII) and Freightcar America (NASDAQ:RAIL) which were declined substantially by 14.6 and 13.8 percentage points respectively. Freightcar America's poor earnings performance impacted its peers. Both Gatx Corporation (NYSE:GATX) and Westinghouse Air Brake Technologies (NYSE:WAB) were moderately positive for the week.
I still view most of the railcar manufacturers and lessor peer group as overvalued. For railcar manufacturers in particular, it could still take a couple years before things pick up from an order perspective. If stock prices deteriorate further, The Greenbrier Companies (NYSE:GBX) and American Railcar Industries could become interesting. I see both providing a better margin of safety seven percent lower from today's prices.
Most truckload carriers were lower to marginally positive for the week. Exceptions included Celadon Group (NYSE:CGI) and USA Truck (NASDAQ:USAK) up substantially by 14.8 and 9.3 percentage points apiece. Analysts have speculated that these two truck carriers represent some of the best acquisition targets for industry consolidation. Speculating on who and when a deal will occur is a tough way to make money. Nonetheless, consolidation is likely to occur in the near-term.
Swift Transportation (SWFT) has been the laggard for larger peers, this trend remained during the week. The current price level is compelling, especially when considering average analyst price targets. But investors should be patient and consider the Schneider National (NYSE:SNDR) upcoming IPO.
Less-than-truckload (NYSEARCA:LTL) carriers were mixed during the week. Both ArcBest Corporation (NASDAQ:ARCB) and YRC Worldwide (NASDAQ:YRCW) witnessed moderate improvement, while other peers were weaker. The strong performance of the PMI Composite bodes well for LTL carriers, as they typically have much higher exposure to the industrial sector.
YRC Worldwide continues to be a risky bet with short-term upside potential; investors need to consider that the company will always lag its non-union peers for margin performance. LTL pure plays are not looking compelling at the moment.
Air Freight, Package & Delivery
Air freight, package and delivery companies were all marginally higher, with the only exception being United Parcel Service (NYSE:UPS), which was flat. Atlas Air Worldwide (NASDAQ:AAWW) and Air Transport Group (NASDAQ:ATSG) have continued to lead this group. Over the balance of 2017, I still like FedEx Corporation's (NYSE:FDX) chances at competing for this lead.
Based on retail sales statistics, e-commerce continues to market share versus traditional retail. But overall growth was not very robust this past quarter comprehensively. Atlas Air Worldwide has asserted itself as the better air cargo lessor to own at current prices. Any drop below $55 would be compelling. FedEx Corporation is the second-best opportunity at today's prices.
Contract Logistics, Forwarding & Brokerage
Most contract logistics companies were down for the week, led by Echo Global Logistics (NASDAQ:ECHO). The exception for the week was XPO Logistics (NYSEMKT:XPO) which was up moderately. Investors should view Radiant Logistics (NYSEMKT:RLGT) move higher for the year as purely speculative, like small truckload carriers.
XPO's average analyst price targets have risen to the $60 per share level. I am not certain that this level should be expected to hold, but the stock price will likely head north of $55 this year. Aside from XPO, not much else is that attractive.
Container Shipping Lines, Charter Owners & Container Lessors
The container shipping companies continue to be the most volatile industry for transports. This group was mostly higher for the week, but keeping true to the volatility theme, Danaos Corporation (NYSE:DAC) witnessed 13.2 percentage point decline. Triton International (NYSE:TRTN) was also significantly weaker by greater than 10 percentage points.
Despite all the optimism for 2017 in the container shipping industry, there are still structural issues related to capacity. Average spot market rates for shipping containers has held well, but declines have continued. Container lessors have gotten ahead of the group and are overvalued. All other peers will continue to be impacted by this year's supply and demand factors.
Airline stocks were all strong for the week with the exception being Delta Air Lines (NYSE:DAL). The strong volatility for Controladora Vuela Compania de Aviaion (NYSE:VLRS) continued with a 6.8 percentage point improvement during the week. Chatter has surfaced regarding Warren Buffett looking to acquire an airline. This could occur, and I would suspect that it would involve one of the more consistent performers such as Alaska Air Group (NYSE:ALK) or Southwest Airlines (NYSE:LUV).
The primary threat to airline operations for 2017 continues to be the possibility of increasing oil prices leading to higher jet fuel costs. Air traffic travel continues to be positive for most airlines as recent announcements have been provided. Timing of fare hikes, unionized labor and protests at airports remain other challenges.
Key demand-based indicators that are monitored include Class I rail traffic, trucking industry tonnage, shipments, and loads, air cargo tonnage, container shipping line twenty-foot equivalent units, TEUs, North America seaport TEUs, shipping lane port calls, North America cross-border trade, and freight rates for most of these indicators.
U.S. & Canada Class I Rail Traffic - Carloads & Intermodal Units Carried
Through the eight week of 2017, total traffic was up 2.4 percent with carload traffic up 4.2 percent, flat from last week; and intermodal traffic up 0.4 percent, a 40-bps decline. Week eight performance displayed a marginal decline, but was stable for the most part when considering the trend year-to-date (YTD).
These numbers continue to be not far off from the total traffic originated results of three percent for the first eight weeks of 2017 for North America rail traffic, published by the Association of American Railroads (NYSE:AAR) data. Investors should remember that total traffic carried includes both originated and received carloads and intermodal units. Additionally, U.S. traffic was up 2.3 percent and Canadian traffic was up 7.5 percent, closely tracking the carried rail traffic when combined.
Container traffic was up 0.5 percent, a 40-bps decline. Domestic intermodal pricing for both the west to east and east to west average has remained mostly flat week-to-week over the past couple of months. Compared to last year, pricing has been up in the high single-digits over the past few weeks as of the end of February.
Week four witnessed weekly coal carload traffic at 104,000 carloads carried. This reflected a 11.5 percent increase versus last year. Coal is expected to be much stronger than in 2016. Grain performance was down 2.8 percent versus last year.
Motor vehicles and equipment carload traffic performance was up 0.5 percent versus last year. Chemicals were flat, petroleum products were down three percent and crushed stone, gravel and sand was up 30.5 percent.
Source: Cass Information Systems, Cass Freight Index
The positives for the trucking industry today include continued growth in retail sales and the decline in the inventory to sales ratio. The decline for inventory to sales is now at a low not seen in the last two years. Many experts have felt that the higher inventory levels placed a drag on freight last year.
Dry van truckload pricing has remained soft through late February which is typical for seasonality. Performance has been marginally lower versus last year. The contract dynamics between shippers and trucking carriers has continued to be a hot topic. Shippers have squeezed all that they could from truckers to get lower rates as demand has been soft. Some experts are expecting the second half of 2017 to witness capacity tightening which would turn the tables.
On another positive note, North American Class 8 orders rose in February by 28 percent versus last year. This results reflected only the third time over the last two years where performance was positive YOY. The weak performance during 2016 may contribute to positive results throughout 2017. The need to be compliant with the electronic logging device (NYSEARCA:ELD) mandate going into effect this December may have some impact on this as well.
As the fourth quarter results continue to pour in for global air cargo carriers, it is becoming clear that some witnessed strong negative impacts to margins. This point will be something that air cargo carriers continue to attempt to pay attention to, in order to focus on the most profitable trade lanes.
As is the case in the container shipping industry, structural issues remain with capacity still outpacing demand. Carriers continue to be focused on expanding capacity to compete in providing the greatest flexibility for customer needs, especially just-in-time e-commerce deliveries.
Container Shipping Lines
Source: Alphaliner - Top 100 Operated Fleets as Per March 4, 2017
Average spot market container pricing has continued its decline into early March. Despite weekly declines, on a YOY basis, average spot market freight rates continue to be up substantially. Rates were up as high as 70 percent versus last year for the Trans-Pacific lane, up as much as 300 percent for the Asia-Europe lane, and were moderately negative for the Trans-Atlantic lane.
Like domestic intermodal pricing in the U.S. and global air cargo pricing, container pricing may similarly witness stronger results during the first half of 2017. In the near-term, we will also begin to see how new vessel sharing alliances begin to impact supply and demand.
North America Seaports
North America seaport TEU traffic for January was highly robust. This was true for both laden imports and exports. Performance was strong across all regions including West, East and Gulf coasts. This start to the year is very different from 2016, where West Coast seaports got off to a much quicker start then other regions.
Vessel sharing agreements will have impacts on monthly TEU performance as port calls will adjust accordingly. Investors should keep an eye on how this plays out regionally. It is unlikely that shifts will be cataclysmic, but competition may lead to pricing impacts for both trucking and domestic intermodal.
North America Cross-Border Trade
The iShares MSCI Mexico Capped (NYSEARCA:EWW) witnessed a positive week versus the iShares MSCI Canada ETF (NYSEARCA:EWC). The Mexico index is now up over nine percent for the year versus the less than three percent results for the Canadian index.
Despite the political rhetoric surrounding the North America Free Trade Agreement (NAFTA), transport companies are continuing to invest in Mexico. The value of goods traded between the U.S. and Mexico in 2016 reached $525 billion per the U.S. Census. Many experts and companies do not expect substantial changes to NAFTA. If border adjustment taxes to emerge, and if Mexico does retaliate by increasing their own taxes or fees, trade will continue.
The tables have clearly turned versus last year where transports outperformed broader market indices by a wide margin. We did see some strong volatility to the upside after President Trump addressed the U.S. Congress. During this day, transports spiked much higher than broader indices. If markets do move higher, the potential is st ill there for transports to outperform.
Disclosure: I am/we are long CNI, FDX, XPO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.