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.On Track, Week 38 Ending September 25: Rail Volumes Back to 2008 Levels
Total Week 38 Rail vols increased 13.8% y/y, up from +12.8% and +12.4% the prior 2 weeks and the strongest y/y week in the past 5. Overall rail vols are up 13.2% QTD with 1 week left in the qtr., decelerated from +18% growth last quarter but about 2-3pp higher than our expectations. On a 2-year stacked basis, weekly volumes are now back to 2008 levels. Y/Y growth also remained stronger for the U.S. rails vs. the Canadians.
FDX: Strong Potential Margin Improvement…in F2012
FDX hosted its 1st Analyst Day in over 3 years yesterday in Memphis. The meetings were well attended but mostly informational with FDX taking the opportunity to remind investors of its long-term strategy to grow margins and take market share. FDX showed off its deep bench with presentations from 14 senior managers.
YRCW: TNFINC/YRCW Release Details of Tentative Agreement – Still a Long Way to Go
Last night, YRCW and the Teamsters announced that the Teamsters Negotiating Committee (TNFINC) and YRCW reached a tentative labor agreement through Mar. 31, 2015, subject to ratification in late Oct. The plan calls for a resumption of 25% of pension obligations in Jun. ’11, extension of 15% wage reductions offset somewhat by yearly increases, changes in work rules, but more importantly, requires both a renewal of its expiring ABS facility and a $300M capital infusion prior to Mar. 31, 2011. Mgmt also announced a 1:25 reverse split effective Friday.
A Fairly Textbook Rotation In Financial Markets Thus Far
As our readers are well aware, we are big believers in the business cycle and use it as the foundation for our thesis on financial markets. It is now very clear that leading indicators peaked this past spring. The debate at this juncture is whether they will remain in deceleration mode (mid-cycle slowdown) or reach negative territory (double-dip). While LEIs may have peaked in the spring of this year, for us that does not change the importance of tracking changes in these indicators as they help shape expectations of economic prospects. This is a big week for LEIs. The Dallas and Richmond Fed Indices were both reported lower on Monday and Tuesday respectively. The Chicago PMI will be released today and our favorite, the ISM, will be reported on Friday … stay tuned.
Over the past few months the equity markets have been on a rollercoaster ride, volatile but mostly range-bound. This is fairly typical of market performance just after a peak in LEIs, which is typically around 1% as the market postulates the next step in the cycle. While in aggregate, a peak in leading indicators typically coincides with a market that dredges along, intra- market leadership historically turns, often on a dime. One of the shifts in investor preferences that occurs at a peak in leading indicators is evident in the style trade. As shown in the chart above, when LEIs peaked in the spring of this year, growth stocks began outperforming their value counterparts. While this may seem like an obvious example, some of the changes that take place under the surface are more subtle. For example, the performance of quantitative factors often shifts with the ebb and flow of the business cycle. In today’s report, we will look at some of the trends that have developed since the peak in LEIs and look at what the market is saying.
AAWW: Reflections on Meetings with Management
Last week, we hosted meetings with AAWW mgmt. On the heels of its raised C10 guidance, mgmt was generally upbeat as airfreight demand remains very strong and visibility for a strong peak season is high. However, uncertainty persists heading into 2011 given very tough 1H military comps and likely delivery delays of the new 747-8F aircraft.
The False Security of The “Long Safety” Trade
It is a fact to say that this month has seen the best performance from the S&P500 in about 70 years. Indeed, the market has risen a tad over 9% in just four weeks. This now leaves the index up 3% on the year, or about 4% if one is annualizing. It is also a fact that the bond market has handsomely beaten equities this year (10-year Treasury up 14% thus far) while gold has rallied a full 19%. Interestingly, the best performing strategies in the equity market since the peak in LEIs have been those associated with defense. Indeed, sectors like Telecom Services and Utilities have led the pack since April while dividend-paying stocks are the rage at this time. While the month of September is encouraging, the performance of the so-called “defensive plays” is not exactly a ringing endorsement of a healthy trend.
For most folks, a rally in defensive segments is better than no rally at all. I think we would agree. That said, my colleague Michael Kantrowitz points out that there are few examples in history of great returns in equities while counter-cyclicals are leading the show and dividend-paying stocks are outstripping beta. It sometimes works for a short while but it rarely adds up to much for the index as a whole. We would continue to emphasize what is working as the defensive plays mostly fit with our theme of stability over cyclicality and keep exposure limited on the overall market.
This week will shed further light on leading indicators for the month of September. If anything, our proprietary WTLEI is up on the month thus far so an upside surprise here would not shock us. Still, our work on series that are anticipatory of leading indicators are still quite clear about the trend ahead and it calls for lower leading indicators alas. We interpret this as saying that sub-par returns should be expected in stocks and the best risk-reward remains the “long safety” trade.
Inside Freight: YRCW Reaches Tentative Pact with Teamsters; Survey Results on FedEx LTL Restructuring
On Friday, YRCW and the Teamsters announced a tentative agreement (subject to ratification) for ongoing wage and pension relief beyond 2010. Specifics are not yet known, with a ratification vote expected in late October. If ratified, a big “if” in our opinion, YRCW’s chances for surviving through C11 and beyond would increase materially.
Friday Freight
This weekly report presents the most recent views we are hearing from industry insiders and summarizes the research of Wolfe Trahan. Included are (1) key takeaways, selected shipper comments; (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 & 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 37 Ending September 18: Rail Volume Growth Holds Steady as U.S. Rails Outgrow Canadians
Total Week 37 Rail vols increased 12.8% y/y, in line with the prior 2 weeks but with U.S. rail vols accelerating and Canadian rail vols decelerating into tougher comps, a trend which is beginning to occur. Overall rail vols are now tracking up 13.5% QTD with 2 weeks remaining, about 2pp higher than our expectations, although y/y comps are increasingly difficult going forward. Sequentially, vols were up 10.5% due to Labor Day weekend last week. On a 2-year stacked basis, volumes were down 3%, an improvement from recent weeks.
Attention Stock Pickers: Questionable Earnings Practices On The Rise
Did we miss the announcement of another government stimulus package? Perhaps one that gives investors a tax credit on the purchase of equities in the month of September? Probably not, but aside from the 14.4% gain in September of 1939, we are headed for the strongest September on record. More likely, the market is rebounding from a really bad August and a better than expected ISM reading on Sept 1. That said, the visibility of the current recovery remains poor due to its low quality, inorganic nature (lots of pull-forward gov’t stimulus, unemployment benefits, tax break, etc.). In that same vein, we have seen decay in the quality of earnings in the past few quarters – which brings into question the sustainability of some companies. We are at the point in the cycle where digging through economic and earnings trends becomes paramount to determining their quality and sustainability ahead.
The need to use valuation screens at this juncture is especially important because earnings accruals have been on the rise in recent quarters. This implies that the quality of earnings is questionable and that valuation screens could present misleading results. Quality screening is a critical step in quantitative screening, especially in an environment where leading economic indicators (LEIs) are decelerating. The difficulty in screening for quality is defining what quality is. The problem is that there is often confusion and misrepresentation of quality as it is difficult to quantify. Nearly all factor screens are improved by adding a quality overlay, regardless of the capitalization or the sector. The following pages cover the methodology and usefulness of quality screening and also illustrate the historical performance of QOR-score backtests. The beauty of the quality screen is that it enhances the returns of just about every valuation strategy we can think of. It even managed to enhance the returns of free-cash-flow, which we consider to be the best overall factor (before the introduction of the QOR anyways).
