Source: Google Images
As we closed the week on December 1st, transports surged as expectations for tax reform acceptance emanates. Last week I was on it, expecting transports to get frothy, especially once a bill was up for presidential signature. After this past week’s move, it is clear that the market (transports clearly) are not considering anything other than a 100 percent assumption for a bill passing. The stakes just got higher and anything less will lead to serious selling pressure. Even the renewed threat of Flynn and Russia was not enough to strongly dent the recent rally.
On the economic front, demand remains robust and pricing is picking up steam for multiple areas. This has not translated seamlessly to all transport industries, and/or layers of capacity and service providers. As an ex ample, some asset-based companies are still grappling with increasing operating costs (purchased transportation, insurance/claims, driver wages, etc.), while others are benefiting from increased pricing more directly. As we approach 2018, there is room for further economic growth, with acceleration being a possibility.
I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance stood at 17.3 percent, as highlighted in green. Just as quickly as transports lost steam, the tables have turned. The anomaly continues to be the NASDAQ Transportation (^TRAN) index, now up 24.9 percent. Both the NASDAQ (^IXIC) and Fidelity Contrafund (FCNTX) remain strong, up 27.2 and 30.2 percent; technology continues to be a leading performer for the year.
The Dow Jones (DJT), SPDR S&P 500 ETF (SPY), Vanguard 500 Index (VFINX) and Vanguard Total Stock Market ETF (VTI) were all up 18 to 22.6 percent. Mid and small cap indices remain slightly lower, but have displayed strength of late. Transports indices continue to lag broader markets, but gains were substantially higher this past week.
For 47th week of 2017, the spread between the SPY and the S&P Transportation ETF (XTN) declined with the SPY up by 1.6 percentage points. The SPY increased by 180-basis points (bps) to 18.3 percent; while the S&P Transportation ETF improved by 680-bps to 16.7 percent for 2017.
This was my statement last week, “transports continue to display greater volatility than broader indices, with just over one month left, there is no telling how things will end up”. How true it was as transports rocketed higher. I have been focusing more on tax reform over the past few weeks as transports are clearly aligned to positive expectations for tax reform to improve business through perceptions. As far as the market is concerned, tax reform is a done deal.
Rail operator performance was up for the week with the exception being Canadian National (CNI) which was flat and now down for two consecutive weeks. Last week I highlighted Canadian National’s recent congestion issues as evidenced by lower performing train speeds, but this week there was a negative reaction to Canadian Pacific’s (CP) executive hires.
Week forty-seven of 2017 witnessed the twelfth consecutive YoY growth trend from week 35’s negative result (only the second negative result for the year). The rate of improvement improved from the previous week. The most recent monthly Class I rail traffic report can be found here. I like Canadian National and Kansas City Southern (KSU) heading into 2018.
Railcar manufacturers and lessors were up across the board following operator performance. The range of stock price activity for this peer group is an indication that some uncertainties remain. While rail traffic has improved strongly from last year’s lows, an uptick in orders is not clearly identifiable for the horizon. Additionally, as we get longer into the expansion cycle, fears of another pullback are the backs of investors minds.
Heading into 2018, my top pick out of this group remains Greenbrier Companies (GBX). I too am a little cautious though as to how much more upside remains over the next couple of years.
The majority of truckload carriers were up for second consecutive the week, with exceptions being some of the smaller peers. As I stated last week, trucking companies were very volatile as news broke regarding Michael Flynn. The contradiction between tax reform and Flynn’s plea were clear indications of how perceptions for federal policies and uncertainties are correlating to this industry.
From a federal mandate perspective, it is looking like the ELD (electronic logging device) rules going into effect in the next couple of weeks will be felt stronger during 2018. Experts are anticipating that anywhere from 2 to 8 percent of capacity may be impacted. I like select larger peers for next year.
Less-than-truckload ((LTL)) carriers followed truckload peers higher for the week. While both Old Dominion Freight Lines (ODFL) and Saia (SAIA) continue to dominate volume and stock price performance, investors need to continually pay attention to more diverse larger peers. The boom in e-commerce is likely going to propel LTL companies through 2018.
Contrary to truckload peers, LTL operators have not been impacted as much from cost increases. This is attributed to lower driver turnover and insurance premiums, lower purchased transportation costs, and a more consolidated industry.
Air freight, package and delivery companies were up strongly for the week, with the only exception being Deutsche Post DHL Group (OTCPK:DPSGY). DHL Group has been a little volatile as the stock price has risen north of the $45 per share level. As the company trades on the over-the-counter (OTC) market in the U.S. coverage is not strong and investors are likely not as aware of fair value.
Both FedEx Corporation (FDX) and United Parcel Service (UPS) got a very nice bump up this past week. Expectations are for a strong holiday shopping season – which is perceived to lead to an increase in package deliveries. There is a lot to like for this peer group heading into 2018.
Contract logistics companies saw very strong gains for some peers this past week. This was notably observed by CH Robinson Worldwide (CHRW), Expeditors International (EXPD) and Echo Global Logistics (ECHO). Hub Group (HUBG) also witnessed strong performance – despite robust results, XPO Logistics (XPO) has sustained its leading results for 2017.
What is on my mind is XPO’s next major acquisition deals, which are on the horizon. Management will take a measured approach towards identifying optimal candidates. But once identified, I expect negotiations and deal making to occur quickly. I’ve got my ideas of who could be on the list, but we’ll just have to wait and see.
For the container shipping industry, last week’s performance was mostly negative with exceptions being Matson (MATX) and Costamare (CMRE). Matson got a boost as its two Kanola newbuilds began construction at General Dynamics (GD) NASSCO ship yard. I continue to express confidence in Matson’s near-term investment return potential as the company will be positioned well to compete in all of its core markets with substantial investments ongoing.
The pull back for CAI International (CAI) has me intrigued, but there are still uncertainties whether demand will remain as robust in 2018; and whether overcapacity issues will resurface. The recent decline for CAI is appealing as the company is expected to grow profits substantially next year.
Airline stock performance was mostly positive for the week with exception being Vuela Compania de Aviacion (VLRS). Positive performance was not equal as Alaska Air Group (ALK) and American Airlines Group (AAL) were laggards. The market continues to digest labor and capacity challenges for these peers.
Rising labor costs and energy prices remain the largest threat to cause near-term headwinds for airlines. The group has been beaten up pretty badly so valuations are better in tune with these risks; Alaska Air is going to remain my pick for 2018.
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.
Through the forty-sixth week of 2017, total traffic was up 4.3 percent with carload traffic up 3.6 percent, down 10-bps; and intermodal traffic up 5 percent, which was flat. Week forty-seven performance improved from the previous week.
These numbers continue to not be far off from the total traffic originated results of 4.7 percent for the first forty-seven weeks of 2017 for North America rail traffic, published by the Association of American Railroads (AAR) data. Investors should remember that total traffic carried includes both originated and received carloads and intermodal units. Additionally, U.S. traffic was up 3.3 percent and Canadian traffic was up 10.6 percent, closely tracking the carried rail traffic when combined. Mexico traffic was up 1.4 percent, as improvement remains in positive territory.
Container traffic was up 4.9 percent, which was flat. Domestic intermodal pricing for both eastbound and westbound averages have remained strong of late. Average pricing is up double digits for both directions from last year. Fuel surcharges remain stronger as a solid contributor with oil prices higher.
Week forty-seven witnessed weekly coal carload traffic at 104,000 carloads carried. This reflected a -2.9 percent decline versus last year, the eleventh consecutive decline. Grain performance was down, at -16.8 percent versus last year. Similar to coal, weekly growth from this point forward will be choppier; this was the fourteenth consecutive week of negative performance.
Motor vehicles and equipment carload traffic performance was up 2 percent versus last year; breaking nineteen consecutive declining weeks. Chemicals were down -1.6 percent, petroleum products were up 7.9 percent, the eighth consecutive week of positive performance, and crushed stone, gravel and sand remained on a roll, up 40.3 percent.
Source: DAT Solutions, DAT Trendlines
The convergence of what lies ahead for 2018 as it relates to the trucking industry, is setting investment opportunities up for positive performance. The key factors to consider are the pace of cost increases, versus contract pricing renewals. Additionally, investors need to be paying attention to fair valuations in the midst of these changes. While the herd mentality will persist, some company valuations will get stretched placing greater risk for downside volatility.
Diesel prices increased and were up 20.9 percent versus last year as of November 27 th, a 0.6-percentage point increase from the previous week. Spot market pricing remained up strongly. For the week through November 25 th, spot market loads remained up over 110 percent YoY, while capacity was up a percent. Dry van, flatbed and reefer rates were all up over 20 percent from last year for October.
Air cargo demand has been on fire since the summer of 2016. For 2017, the year is shaping up to be the strongest performance since the Great Recession rebound in 2010. Unlike the declining freight rates for global container shipping and select commodities for rail operators, air cargo rates have witnessed sustained strength as a direct result of volume growth. This has mirrored the trucking industry’s recent price surge. The theme remains through 2017, that despite improving prospects, all freight modes have not witnessed increasing rates simultaneously.
Industry experts continue to be impressed with air cargo’s recent run. For fourteen consecutive months now, airfreight growth has consistently been above the 5 percent mark. For fifteen straight months, air cargo tonnage has outpaced capacity.
Source: Alphaliner – Top 100 Operated Fleets
Pricing for spot market container rates have remained in a downtrend since the peak in mid-January, per the Shanghai Containerized Freight Index (SCFI). As we head to November, the comparable baseline will remain much higher for the remainder of the year.
YoY, Trans-Pacific freight rates have remained down greater than 25 percent for shipments from Shanghai to the West and East coasts. These current lows remain slightly below last year’s drop in December. Asia to Europe rates have declined by greater than 10 percent for North Europe and the Mediterranean. Trans-Atlantic rates remained modestly negative for eastbound and positive for westbound service.
Despite the recent downward trend, spot rates did see an increase this past week. The sustainability of the increase is uncertain as most experts believe that it was driven by pre-preparations for the Chinese New Year. However, experts, remain cautious as to how capacity expansion will be handled, as well as the ability for pricing discipline to remain.
As stated last week, “Early numbers for the month of October performance has been mostly positive. The Port of Los Angeles was down 8 percent, while Long Beach was up 15 percent. East Coast seaports including Savannah and Charleston both saw strong positive results with the former seeing growth at over 30 percent from last year for total TEUs”. The updated October report will be out later this weekend, but prospects remain highly positive.
The new ELD mandate going into effect this month could have an impact on cargo distribution from seaports to their inland destinations. This will be challenging as capacity may tighten, leading to further equipment challenges as chassis and containers are repositioned. The most recent monthly North America seaport TEU report is located here.
The iShares MSCI Mexico Capped (EWW) was down by 180-bps for the week. The index continues to outperform the iShares MSCI Canada ETF (EWC). The Mexico index is now up 14.8 percent for the year versus the 12.3 percent result for the Canadian index; which reflected a 20-bps decline.
As an apparently much calmer and less confrontational North America Free Trade Agreement (NAFTA) round of meetings has passed, we may be in the eye of the storm. Despite uniform agreement to opening up NAFTA for renegotiation, the realities of all sides coming to consensus remains a challenge. As the Trump administration has been frustrated with multiple political processes, it would be no surprise if public rhetoric resurfaced with more demanding negative tones. As time goes by, the window with Mexico’s current administration may be closing as well, which could lead to further delays.
Just as my uncertainty with how transports would finish 2017, an exponential rally took place. The clear correlation with the assumption that tax reform will be passed has been the primary catalyst for transports greatly getting closer to parity with broader indices.
As we begin to think about 2018, prospects remain bright for continued economic expansion. There are those thinking that recession and/or a major contraction is imminent, but they do not speak much to the significant energy/freight recession which occurred during 2015/2016, resulting in a major missed investment opportunity. Geopolitical risks remain the more likely unknown catalyst to lead to contraction.
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Disclosure: I am/we are long ALK, CNI, DPSGY, FDX, GBX, HUBG, JBHT, KSU, MATX, SNDR, 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.