Research Library
Below is our research library, listed in reverse chronological order. Please use the search box to look for research on a specific company or topic, or use the Calendar, Archives, or Sector links at left to browse for research from a specific time period or sector. If you are a Wolfe Trahan client and can not access any of the links in our library, please contact to request our PDF decryption plug-in.Friday Freight
This weekly report summarizes the most recent views and research of Wolfe Research. Included are (1) three to five snippets or key takeaways from our team’s recent channel checks with traffic managers about their experiences with purchasing, competition, and service from Airfreight and Logistics, Rail, and Truck capacity providers; (2) notices of upcoming industry events; (3) key takeaways from some of our notes from the past week; (4) recent stock performance for our transport universe; (5) updated comparison tables for the airfreight and logistics group, railroads, and trucking; and (6) fuel trends for West Texas Crude Oil, On-highway diesel, Rail diesel, and Jet fuel.
On Track, Week 20 Ending May 22: Has Y/Y Rail Volume Growth Peaked?
Total Week 20 Rail vols increased 16.2% y/y vs. +18.9% and +17.9% the prior 2 weeks. Vols are up 17.7% over the past 6 weeks, down slightly from +17.9% last week and marking the first week of deceleration in this metric in 14 weeks. All of the deceleration was in the U.S. as the Canadian comps remain easier. We expect vols to generally continue to decelerate but to remain strong starting over the next few weeks through year-end.
Musings On The Euro And Sovereign Risk
The S&P 500 futures are up tremendously this morning on the news that “the Chinese authorities are committed to the Euro for the long-term”. We’re not exactly sure what that means but since the market is oversold and the VIX is up a lot in the past month that might be enough to give equities a nice lift. The Euro’s problem brings back an old debate amongst the strategy team as we once highlighted (summer of 2008 or thereabouts) that the Euro was effectively the same thing as a CDO. It is an amalgamation of various credit qualities, which is effectively called, or was at least, AAA or German-like quality.
There were always Euro-skeptics around to say that it would not survive its first recession as it was built on faulty foundations. An alternative take on that is highlighted in the chart above. It shows the spread between the percentages of companies at risk of bankruptcy according to the Altman Z-score in the S&P 500 vs. Eurozone equity markets. Interestingly, the spread in 2000 at the Euro’s inception was zero and it now stands at almost 25%. This is hard to explain even for us. One explanation is that the fiscal crisis in Europe has much greater effects than it does in the U.S. because the share of government spending in the economy is that much greater. In essence, it boils down to the company level fairly quickly.
This is not to say the USD is the beacon of strength it used to be. The U.S. has its own fiscal issues to deal with and there are plenty of similarities between the finances of states in the U.S. and that of European countries. They are all running enormous deficits and none of them have direct authority to print money. The other similarity is at the labor level where the U.S. has always had the advantage of labor mobility over Europe. The housing downturn has impaired labor mobility in the U.S. as too many folks have negative equity in their house and therefore cannot sell to take a job in another state. While this will eventually resolve itself, it will likely hinder the coming recovery and may lead to labor shortages in some states and an overabundance of unemployed in others. No easy path out of this one.
The First Inning Of Underperformance For The Tech Sector
Of all our recommendations in 2010, there is not one that has garnered more pushback than our underweight call on the Tech sector. Interestingly, there is no single-line of reasoning when it comes to supporting Tech. Some like the sector’s risk-reward profile because they believe it is attractively valued, others believe we are on the cusp of a major upgrade cycle for tech spending, and lastly there are those that argue that it is less cyclical than it used to be (true) and possibly even defensive (we are not convinced). Our biggest issue with the Tech sector is fairly simple. It remains highly cyclical. Indeed, the relative performance of most Tech stocks is still very strongly correlated to leading indicators of the economy and LEIs are just entering a deceleration phase, one we believe will last for the bulk of 2010.
The Conference Board’s Leading Economic Indicator Index decelerated in April for the first time in a year. Additionally, the first reads on the month of May from indicators like the Empire Manufacturing Survey or the Richmond Fed index show that the softening trend will likely continue. We have a long list of series that are anticipatory of leading indicators and the vast majority of these argue that this “new” trend is here to stay. This is ultimately Tech’s biggest macro headwind and investors tend to shy away from highly cyclical stocks in times of decelerating LEIs and toward those that offer stability.
All that said, equities are extremely oversold at this time according to most indicators we follow so we would expect it to find a footing and stage some sort of comeback in the coming weeks. This rally will likely be led by the cyclical segments of the market (including Tech) and should provide investors a unique opportunity to shift their portfolios into more defense names. It’s more fun to be bullish on Tech. We get it. It’s just not typically rewarding when the economic tide begins to retreat and that appears set to take place. Let’s hope 2011 brings a revival in LEIs and Tech leadership by the same token.
Parcel Paradise
This 245-page primer report lays out our thesis for investing in the express stocks — UPS, FedEx, and TNT. We provide detailed background and market share data on the express industry, as well as histories of UPS and FedEx. We then discuss historical volume and yield trends, explore relevant regulatory/legislative issues, and review current and historical valuations and stock performance through cycles. We also lay out our thesis on why better pricing fundamentals for UPS and FedEx could be the most important drivers of their stocks over the next five years. We conclude with detailed profiles of each company and explain why we currently favor UPS over FedEx.
The Rail Regulatory Cheat Sheet
We expect Senator Rockefeller’s pending rail regulatory bill to become active in the Senate again, possibly before July 4th. This 2-page rail regulatory “cheat sheet” is perfect for your bulletin board as a handy reference piece. We lay out 12 key regulatory issues important for the railroads that are apart of Senator Rockefeller’s pending STB Reauthorization Bill. We discuss the key issues, along with potential changes to the bill as it goes through the Senate and potentially the House and the likely winners and losers among the rails. We also list current rate cases pending before the STB.
State of the Freight: Second Quarter
This 70 page report analyzes the results of over 150 shippers that filled out our second-quarter survey during mid-April. Within the report, we discuss in detail: pricing, volume, service and capacity trends across our transportation universe. The report looks at inventory restocking trends and how they could impact demand and supply through 2010 and into 2011. We also discus firming rate expectations across mostly all modes of freight, recent tightening of TL capacity and rising issues with rail service levels.
Inside Freight: Comprehensive Safety Analysis (CSA 2010) – A Deeper Look
The FMCSA’s CSA 2010 initiative is designed to improve safety on highways, creating a rating system for truckers based on safety standards. The FMCSA assigns a safety score to carriers using 7 safety performance categories which is based on violations and state inspection and crash reports. Implementation is expected in late C10 and early C11.
How To Position For A Coming Revival In U.S. Deflation Fears
One of the greatest fears of the investment community is that all of the money growth over the past few years will come back to haunt us in the form of much higher inflation. In fact, one of our clients once brought a one billion dollar Zimbabwean note to a group lunch to raise a debate on the issue. While this was interesting and entertaining at the same time, we do not see any reasonable comparisons between what is taking place in the U.S. and the hyper-inflation of Zimbabwe, the Weimar Republic and al. To the contrary, we believe that deflation is a much more plausible scenario in the coming year in the developed world. The investment conclusions between inflation and deflation are dramatically different.
The mechanism that transforms money growth into inflation can take several forms but basically boils down to two things: 1) the money multiplier; and 2) currency. The money multiplier (M1/monetary base) in the U.S. sits at an all-time low, courtesy of the deleveraging cycle taking place. Meanwhile, the dollar has appreciated 16% percent in recent months as the world economy has begun to price in a slowdown. In fact, many of the U.S.’s trade partners have greater problems than the U.S., or they are more cyclical than our economy and have begun to weaken. In all, this leads to lower import inflation in the U.S.
Truth be told, the biggest influence on the inflation/deflation debate is not the dollar or the multiplier but rather China! The ebb and flow of the Chinese economy basically dictates the path of commodities, which has an enormous influence on U.S. CPI. Leading indicators in China, including the stock market which is down 23% from its peak, argue for slower growth ahead and that might just mean lower Food and Energy prices in the U.S. This of course will only accentuate already anemic core inflation and probably leaves CPI in negative territory by year end. So, we like Treasuries and believe the yield curve will flatten from the long end as it has in the past month. We do not see how the Fed can tighten policy under this scenario. Easy money, yes. Deleveraging, yes. Deleveraging wins. At least for now.
Under the Hood: Searching for Value
Global Auto Production Expectations At Risk. In addition to global macro concerns around China and Europe, signs of a slowdown in the auto sector have begun to appear with April sales in Europe declining 7% y/y and reports that May sales in China are weakening further after slowing in April. If May U.S. sales do not improve to a high-11M SAAR with 5 wknds (BEA’s May SAAR factors are little changed from 06 and 07 which had 4 wknds), NA auto production expectations could fall.
