Danger: The Rally Train is Prepared to Derail!

Apr. 17, 2009 9:29 AM ET
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Contributor Since 2008

Danger: Step Away from the Railroad Tracks

If you haven't already, please take heed. This rally is running on fumes, and has the potential to steamroll your nest eggs if you decide to adopt this unsupported -- though completely understandable from a psychological perspective -- spirit of optimism that seems to have hypnotized investors.

With so many headline-grabbing events transpiring at once, I'm finding that fewer investors seem committed to scrutinizing earnings reports, but ignoring the information coming out of these bellwether companies is like putting on a blindfold and basing investment decisions on the worthless babble of public figures like Cramer and Kudlow.

I know Fools are smarter than that, but some may understandably find themselves succombing to the temptation of positive thinking and looking to will this depression out of existence. Depressions are in part psychological phenomena, in that they are self-perpetuating events for as long as excessive leverage remains locked up in the system. Psychological factors, however, are only an impediment to recovery after the de-leveraging is complete, and since the injection of $13.5 trillion has sought to prevent that very de-leveraging process (succeeding only to postpone it, by the way), we are nowhere near the point where all it would take to turn things around would be the will of the people. The will of the people, as powerfull a force as that can be, is simply no match for a $1 quadrillion mountain of worthless toxic derivatives.

This Train is About to Derail

What I'm trying to convey here is so much bigger than any one sector, but railroads are an incredibly effective barometer for economic activity, and when considered in conjunction with my reports from similarly indicative sectors, which I'll link below, some irrefutable facts about the current degree of weakness in the American economy can easily be ascertained. Please be patient as we start by looking at railroads.

This is by no means intended to single out CSX, which like the rest of the North American rail companies is extremely well-run and as efficient an operator as can be reasonably expected. I'm using CSX simply because it's first to report earnings, but each successive railroad earnigns report coming out over the next week or so I'm quite confident will confirm my causes for concern. The factors colliding to build this troubling environment for railroads are indiscriminate in their looming impacts upon the entire sector.

In case you missed it, here's the link again to my latest article.

As I point out therein, I sounded the alarm on the railroads first back in January, noting major deterioration of the underlying freight categories. As I predicted, those volumes have only continued to deteriorate further, with even the former standout coal experiencing a major downturn. At the time, I was blasted by more than a few investors for daring to suggest that those stocks would head further south, but south they went. I find it very curious when an entire sector reverses direction in a single day in tendem. Sometimes, as in the case of gold and silver back in October and November, we saw convincing sector-wide reversals on precise trading days that were based upon identifiable developments. The railroads, however, reversed on March 9th not because anything material changed for the sector, but merely because investors began piling into an equity marketplace that had retreated abruptly to a 12-year low. This was a psychological event driving a 30-50% rally in a sector for which fundamentals have only grown bleaker. That, my Foolish friends, is a recipe for disaster. Incidentally, nothing fundamental has changed that would account fo this overall rally either... it's all one big psychological reprieve supported by a desperate spin machine.

For the record, here are the four articles from January warning of lower share prices coming for the railroads. If anyone happaned to heed those warnings and wait until early March to dip into railroad stocks, A.) you're welcome, and B.) run while you can! :)

Bound for Glory, but This Train May Stop

Get a Better Deal than Buffett

Less Gravy on the Train

Railroads' Brakes Beginning to Screech

I've been sounding this broader warning about just how impaired our domestic economy has become through related sectors like steel, coal, and equipment manufacturers:

Blog posts:

Peabody Issues Global Report Card

China is Heating Up

The Ultimate Commodity Update

And related articles:

Peabody's Play Within a Play

The Sheriff of Steel Strikes Again

Terex Goes on the Offensive

The Ultimate Commodity Update

Evidence is mounting in droves, we have an enormous amount of financial pain to wade through before we can even begin to think about recovery. This wil not reverse in an instant the way the Dow did recently. When it happens, it will not come as a surprise to anyone because we will have been in the thick of it for an extended and grueling period.. forced to go back to paying attention to fundamental indicators like the earnings reports from bellwether sectors. Buckle your seatbelts, Fools, and gt off the railroad tracks, cause this rally train is bound to derail.

As always, I am sorry for being the bearer of bad news... it is not arole I enjoy in the least. I am neither a pessimist nor a perma-bear by nature, but I do consider myself a realist. When I find real evidence piling up the way it is right now, I consider it my duty to sound the alarm for all of you.

Good luck, consider easing into some larger cash positions for the next stopping point south of 6,000 on the dow, and look for shelter in precious metals in the meantime... they're conveniently on sale.

DYODD, but those are my $0.02


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