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JL
asked a very economically intuitive question, “Are their any
index’s for us Rail/Trucking such as BDI for bulk shipping?”
Because of my experience with those industries
I immediately thought the answer would be no but decided to do
further research and came across some interesting findings.
There
appears to be no general pricing index rail services in the United States.
To get a better grasp on how pricing is determined in the industries I
talked to the Chairman of the Board of a leading railroad engineering
company. He joked that the railroads “Charge until
they squeal.” He said he was unaware of any general index,
that most prices are set between private parties according to the needs of
the contracts and unlike bulk shipping by boat there are large variances in
the rail industry with the types of cars, distances and products to be
shipped.
He
suggested I investigate the Association of American Railroads for more
information whose members account for more than 96% of intercity rail
freight service and essentially 100% of passenger service and includes such
large railroads as CSX (CSX), Burlington
Northern Santa Fe (BNI),
Norfolk Southern (NSC),
Union Pacific (UNP),
Canadian Pacific (CP),
Canadian National Railway Company (CNI)
and Kansas City Southern (KSU).
The
railroads have played a significant role in the development of American
jurisprudence. Railroads are the backbone transportation
infrastructure. If anything is moved on a regular basis in America then
it is probably done by railroad. As railroads matured during the 19th
century they had a large effect in shaping entire branches of the law such as
eminment domain, tort and interstate commerce. With an industry so
entwined with the law it is not surprising that 49 U.S.C 10708 provides the Rail Cost Adjustment Factor (RCAF).
Under
the code “(a) The
Board shall, as often as practicable, but in no event less often than quarterly, publish a rail cost adjustment factor which shall be a
fraction, the numerator of which is the latest published Index of Railroad
Costs (which index shall be compiled or verified by the Board, with
appropriate adjustments to reflect the change in
composition of railroad costs, including the quality and mix of material and
labor) and the denominator of which is the same index for the fourth quarter
of every fifth year, beginning with the fourth quarter of 1992.
(b) The
rail cost adjustment factor published by the Board under subsection (a) of
this section shall take into account changes in
railroad productivity. The Board shall
also publish a similar index that does not take into account changes in
railroad productivity.”
Interestingly
back in July I was asked by a reader whether to sell their railroads.
As I give only general and not specific advice I assumed the portfolio
is equally weighted between BNI, CSX and UNP, all purchases were
made February 4, 2004 and one year performance began July 2, 2007
to present. Dividends are only closely estimated so the returns are
probably overstated but fairly immaterial. For this article, I decided
to revisit the earlier conclusion to sell. As of August 15,
2008 the one year returns were 22.59% in FRN$ and (25.06)% in goldgrams
(gg). Returns as of December 28, 2008 were (21.85)% in FRN$ and (44.25)%
in goldgrams. It appears they made the correct decision selling the
railroads.
The
American Association of Railroads also releases a weekly volume freight report. The same stasis
that appears to be affecting the Baltic Dry Index and Long Beach Port appears to be
infecting the railroads with carload freight down 16.7 percent from last
year. ”Cumulative volume for the first 51 weeks of 2008 totaled
16,372,331 carloads, down
1.9 percent from 2007; 11,393,179 trailers or containers, down 4.0 percent;
and total volume of an estimated 1.71 trillion ton-miles, down 0.9 percent
from last year. On Canadian
railroads, during the week ended December 20 carload traffic totaled 59,159
cars, down 24.8
percent from last year, while intermodal volume totaled
41,086 trailers or containers, down
11.2 percent from 2007.” It appears that
empty ships lead to empty railroads and empty trucks. The Canadian
economy appears to be slowing even faster than the American counterparts.
The deflationary credit contraction is unmovable and
unstoppable. No amount of bailouts, currency printing whether physical
or electronic, TAFs, TALFs or CRAPs are going to make any difference.
As the Financial Insanity Virus spreads the worldwide economy is
slowing into stasis at a faster rate.
There
have been significant declines in the prices of CSX
(CSX), Burlington Northern Santa Fe (BNI), Norfolk Southern (NSC),
Union Pacific (UNP), Canadian Pacific (CP), Canadian National Railway
Company (CNI) and Kansas City Southern (KSU). This raises the question
of whether any of these railroads are currently a good value?
Because
of the heavily regulated nature of the railroads, the deflationary credit contraction which has barely
started and the decline in discounted future cash flows in terms of gold to
expect from the railroads I
do not think the railroads are currently a good value.
They do have significant and valuable capital investment that
will be extremely useful and profitable in the future especially in context
of Peak
Oil. Railroads have been the backbone of the United States economy
for over 150 years and so long as there is any functioning economy they will
continue to be in the future. When
will the railroads be a good value?
During
a deflationary credit contraction the last layer to
evaporate will be the currency through hyperinflation. This is a
currency event and requires neither a functioning economy nor an increase in
the velocity of the currency. Gold is a currency and like all commodities is produced
because it adds value to society. The primary value gold adds to
society is in performing mental calculations of value.
Based
on current performance and balance sheets and assuming no significantly
material changes I would consider purchasing the railroads at the follow
prices: CSX (CSX) at .276gg, Burlington Northern Santa Fe (BNI) at
1.042gg, Norfolk Southern (NSC) at .544gg, Union Pacific (UNP) at .617gg,
Canadian Pacific (CP) at .252gg, Canadian National Railway Company
(CNI) at .235gg and Kansas City Southern (KSU) at .152gg.
Where
those prices will be in FRN$ is anybody’s guess as the FRN$ is an unreliable tool for
performing mental calculations of value because it has no
definition. Until good values come around simply avoid the derivative illusion and burrow to the safest and most liquid assets
which will only increase in purchasing power. But be sure you own the real thing
and not some encumbered flimsy impostor like GLD or SLV.
Disclosures:
Long physical gold and no other positions.
Trace Mayer
RuntoGold.com
Trace Mayer,
J.D., holds a degree in Accounting from Brigham Young University, a law
degree from California Western School of Law and studies the Austrian school
of economics. He works as an entrepreneur, investor, journalist and monetary
scientist. He is a strong advocate of the freedom of speech, a member of the
Society of Professional Journalists and the San Diego County Bar Association.
He has appeared on ABC, NBC, BNN, many radio shows and presented at many
investment conferences throughout the world.
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