Friday, September 9, 2011

Riding The Rail Stocks : CSX, KSU, NSC, UNP

Railroads have been of a central part of the United States economy for centuries. In the beginning railroads were the titans of technology, transforming the world in a similar way that companies like Apple and Google are doing today. Railroads changed the way people traveled, the speed of information, and promoted the rapid growth of cities. Fast forward to today and railroads are once again in vogue, albeit for slightly differing reasons.

Basic Economics
Basic economics tells us that when a similar good or service can be provided at a lower price, customers will gravitate towards the source providing the lower price. When it comes to railroads, they are a cheaper and cleaner form of transportation than any other ground alternative. On average, railroads are three times more fuel efficient than trucks. In 1980, U.S. railroads moved a ton of freight an average of 235 miles per gallon of fuel. Twenty years later, the comparable figure was 404 miles, a 72% increase. A single inter modal train has the equivalent capacity of 280 trucks; rails are better for the environment and help alleviate highway congestion. On top of that, railroads possess significant safety advantages over trucks especially when it comes to the transportation of hazardous materials.

How Investors Benefit?
So what do the above advantages of railroads over trucks mean for investors? If you believe that over time, fuel costs are going to go up and that businesses will look for more efficient ways to transport their goods, then railroads are going to be winners for a long-time coming. As fuel costs rise, the economics of rail transport over trucks grows significantly. Railroads can also handle vastly more freight per employee. And if the U.S. economy remains stuck in a low-growth environment, rail transportation becomes even more attractive to customers looking to trim costs.

CSX (NYSE:CSX), Norfolk Southern (NYSE:NSC) and Union Pacific (NYSE:UNP) make up the "big three" as the largest publicly traded players in the game after the acquisition of Burlington Northern by Berkshire Hathaway in 2009. They all trade at reasonable valuations today of between 13 and 15 times trailing earnings. Earnings estimates for all three see quality profit growth in 2012. The dividend yields are decent, ranging from 2 to 2.5%. Kansas City Southern (NYSE:KSU) is the smallest of the Class I railroads, a classification assigned to the biggest rails in terms of revenue. It boasts a market cap of $7 billion but is being valued at 23 times trailing earnings and pays no dividend. Yet KSC serves some valuable port cities especially in Mexico where freight traffic is growing at a higher rate than in the US.

The Bottom Line
The investment story behind rails is not new. Share prices have advanced rapidly since the economy pulled out of th recession. Short-term traders may not want to look at the rails. But the long-term picture remains solids due to the economic advantages that rails possess over trucking.

John Embry: JP Morgan Trapped Short in Silver, Gold Strongly Bid

With continued volatility in both the gold and silver markets, today King World News interviewed John Embry, Chief Investment Strategist of the $10 billion strong Sprott Asset Management. When asked about the action in gold and what he is doing with his own money Embry replied, “I’ve been buying gold shares, I mean this is no different than the smash that we had a couple weeks ago when they (the cartel) took it from $1,900 to $1,700. One of the reasons for the takedown is they know what’s coming. You’ve got the Fed meeting on the 20th and 21st but they are not going to solve anything. It’s the same suspects doing the same games and it will end the same way.”

John Embry continues: Read More @

The 5 Fundamental Truths Of Trading

If you hold these core trading beliefs you will tend to do well in trading:

I. "Anything can happen" – the market can go up, down or sideways from any point and negate my edge;

II. "You Don`t need to know what is going to happen next in order to make money"
III. "To win in the markets you need an edge" - an edge is nothing more than an indication of a higher probability of one thing happening over another
IV. "There is a random distribution between wins and losses for any set of variables that define an edge"
V. "Every moment in the market is unique" – so the last trade is independent from the next

This is a short version of Mark Douglas` studies on how to be a successful and consistent trader. It`s very important to know what our beliefs about the market are so I suggest you sit down for a couple of hours and start writing your trading beliefs, the way you think the market works. It`s the first step to write a concise business plan that will structure your trading business.

If you want to know your trading personality type you can also try this short quiz, available on Dr. Van Tharp`s website: Trader Profile.

On other topic, the market is still volatile and a down open was bought on the first hour of trading. Ben Bernanke will speak later today, so stay tuned. I am holding long positions on Yahoo (YHOO) and Domtar USA Corp (UFS). I am bullish on Nvidia (NVDA) and still picking it as long intraday plays (I have been doing it for a couple of sessions) and also structurally bullish on Mosaic (MOS) and CF Industries (CF). CF is more of a momentum play and I will be looking to buy both on weakness.

Finally, I am still eyeing natural gas. September`s seasonality is strong and Natural Gas has been following the seasonality script pretty well since early in the year. It`s just trying to go through 4.000 USD. (United States Natural Gas Fund (UNG) is trading at an important level, breaking 10.00 USD).

Have a great trading day and I hope you enjoy the new layout. Blogging is a very intense experience and from time to time we just need to redecorate the saloon...

Market Timing Signals: Miscellaneous Updates

The STA Intermediate Buy/Sell Signal

Lance Roberts of Streettalk Live posted an interesting article on his website earlier today, Another Domino Falls For The Market. The graphic he featured is the STA (Streettalk Advisors) Intermediate Indicator. The indicator, Lance explained to me, is a 21-34 week Exponential Moving Average crossover in the S&P 500.

What's interesting about this timing strategy is that it didn't give any whipsaws last summer (just barely). The 10- and 12-month simple moving averages did (see charts).

Visualizing Monthly Moving Averages: Percent Above and Below the Signal

Speaking of the 10- and 12-month SMAs, yesterday a long-time reader, asked about a pair of charts I occasionally featured in connection with the monthly market timing signals I report on at the end of each month. They show the percent above and below the signal for the 10- and 12-month simple moving averages in the S&P 500. So, with a hat-tip to Lyle for the suggestion, here they are again.

Note: I created the two charts above from the historical data available at Yahoo Finance, which splices a few years of S&P 90 data to the S&P 500, which began in March 1957, to give us that round-number 1950 start date.

Salvation For Western Pension Funds

In the prequel to this commentary, I pointed out to readers that the current “Western pension crisis” threatening the economies of many/most Western industrialized nations has two primary drivers. First, with nearly ¼ of the GDP of these various economies consumed in paying interest (in one form or another), these economies can never generate the same average level of return we experienced when our economies were in relative health. Greatly exacerbating this problem is the propensity for pension fund managers to buy the worst investments in the marketplace.

As I previously explained, most of the blame for this second problem lies in the fact that these pension fund administrators have allowed their decisions to be “heavily influenced” by the Western financial crime syndicate – i.e. multinational bankers. When one gets their “investment advice” from career criminals, it doesn’t take a psychic to predict a bad outcome here.

Obviously the first step back on the long (painful) road towards solvency for these pension funds is to totally divorce these funds from any/all connection to these fraud-factories. Don’t buy any shares in the banksters’ own hopelessly insolvent operations. Don’t buy any of their fraud-saturated “financial products”, and don’t listen to anything they say about markets or the economy – since the percentage of time these banksters are either wrong or simply lying exceeds any accurate information they distribute by at least a factor of ten.

There is another more fundamental problem here, however, which I refer to as “other peoples’ money syndrome”. This is a very common, human failure where otherwise responsible individuals will show markedly less concern and diligence when handling other peoples’ money than when handling their own. (more)

Fitch warns of downgrades for China, Japan

Fitch Ratings warned on Thursday that it might downgrade China's credit rating within two years as the country's banks struggle with debt loads following a lending surge to help lift the economy during the 2008 financial crisis.

It also said that Japan, weighed down by a public debt load twice the size of the $5 trillion economy, faced a greater-than-even chance of a downgrade in part due to a political impasse that is stalling plans to clean up its finances.

Asia's two biggest economies are in the ratings firing line alongside Europe and the United States as they deal with massive debts built up during the global financial crisis.

Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, told Reuters in an interview that China's local currency debt rating could be downgraded over the next 12 to 24 months.

"We expect a material deterioration in bank asset quality," he said. "If the problems in the banking system pan out as we expect or are even worse over the next 12 to 24 months, then that would incline us to take the rating downwards." (more)

Canadians living paycheque to paycheque

Most Canadians are living paycheque to paycheque and would be in financial difficulty if their pay was even one week late, a new survey suggests.

A poll commissioned by the Canadian Payroll Association released Thursday found that 57 per cent of respondents couldn't deal with a one-week delay in their pay. The figure jumped to 63 per cent among workers between 18 and 34 years old. For single parents, it jumped to 74 per cent.

Financial planners recommend having an emergency fund with enough money to fund three months' worth of expenses, should the need arise.

Almost three quarters of respondents said they have saved less than a quarter of their retirement savings goal.

"This is particularly troubling when you realize that 71 per cent of the respondents are over the age of 35, with the bulk in their main saving years between 35 and 54," CPA chair Dianne Winsor said.

As a result, 40 per cent of respondents said they will likely now retire later than they had originally planned. In 40 per cent of those cases, the main reason cited was not saving enough for retirement.

While 60 per cent of respondents said they were trying to be better savers, a full 40 per cent said they were not trying to save any more.

The 10 Best Random Trading Strategies

S&P downgrade. Risk off. Hurricane Irene. Risk on. Obama's next speech. Risk off. German court ruling. Risk on. Italian austerity? You've got to be kidding.

The markets are moving so fast these days that fundamentals are out the window and meaningless grasping at headlines is the only hope for investors to avoid the coming global economic train wreck. Which makes it a great time to be in the headline business. Unless you have to rank them.

7. A paralyzed President faces a hostile nation with nothing more than a warmed-over stimulus plan and an oratorical insistency that has long since triggered the automatic mute button. Risk on. Dow industrials average rises 276 points.

2. A well-baked Lothario thumbs his nose at Europe while playing politics with an austerity plan that's the only hope of dragging Italy out of a widening chasm dubbed Lehman 2. Risk off. Markets plunge. A week later, the Italian parliament passes said plan with almost no teeth in it whatsoever. Risk on. There will be another one soon enough.

10. A revered central bank turns its back on global markets and institutes a rigid currency floor against the euro in a desperate attempt to save itself from being dragged into recession by the popularity of its currency, the Swiss franc. Risk off. Nobody likes a currency war.

5. Comment on Swiss National Bank move from Maurice Pomery, chief executive of Strategic Alpha, speaking to the Financial Times. "After currency wars come trade wars, and as we see the exporting world pressured, as the developed world contracts, tensions will rise." Risk off. Great Depression redux, anyone?

8. Gold falls $50. Risk on. Forget precious metals or the Swiss franc. The Norwegian krone is the new global safe haven. The downside is they only come in coins, and you have to take delivery.

3. The markets are so bad, and Fed chief Ben Bernanke so unwilling to flood the financial industry with a third round of bond-buying, that investors are looking to emerging markets, such as Brazil, for badly needed liquidity to keep them afloat. Everybody now in unison with Roy Scheider: "I think we're gonna need a bigger boat." Risk off.

1. The trigger to the collapse of Europe, the global financial system and capitalism as we know it lies with the financial stocks. Heads they lead us out of purgatory into a new, frenzied era of profits, housing bonuses and derivative trading products. Tails we look back fondly on the collapse of Lehman. Place your bets. Risk on.

9. Forget Greece. There's a mergers-and-acquisitions boom coming in the tech sector as the doors to tens of billions of dollars of corporate cash hoards are thrown open to spend on buying Yahoo (YHOO - News), Hewlett-Packard (HPQ - News), Research in Motion (RIMM - News), Netflix (NFLX - News), and AOL (AOL - News) at crazy cheap prices. In the end, there is only Zynga, and we are all merely characters in its Animal Farm game. Risk on.

6. When investors do return to fundamentals, and they always do, they will find the bond bubble still there and Treasuries will be the last place to be, as yields leap and China cashes in some chips. Stocks, overlooked now for more than a decade, will finally attract attention again and the dollar will trend shift back into its traditional reserve currency role. Companies will start hiring again and someone will offer to buy your house. Risk off. Hope is not an investment strategy, as they say.

4. Buy-and-hold is not dead. It's just not fun, as proven by its performance since 9/11 a decade ago. But considering what everybody was thinking about the future after Sept. 11, 2001, it hasn't been the worst investment plan either. Afghan heroin poppies? Now those were a bad investment. Risk on.

Obama Goes Big — and Political — with $450 Billion Stimulus Plan

President Obama is finally laying out his latest plan to boost economic growth. The particulars of the American Jobs Act are important, and meaningful for an economy laboring under slow growth.

The administration believes the package, worth about $450 billion, is good economics. The centerpiece: extending and expanding the existing payroll tax holiday for another year. Instead of paying 4.2 percent on the first $106,800 of income, Americans will only pay 3.2 percent. (The usual rate is 6.2 percent) There are also tax cuts for business, funds for infrastructure and states, and money to support mortgage refinancing.

But, as a senior administration official described it to me this afternoon, the American jobs Act was also designed to be good politics. And with just 14 months until the 2012 presidential elections, the political calculus is almost as significant as the economic one.

President Obama frequently anticipates Republican criticism of his proposals by bargaining with himself instead of making declarative proposals. In this instance, he's anticipating the criticism — any measure will cost too much and add to the already large deficit! — by pairing the legislation with specific offsets and reforms, like the closing of corporate tax loopholes, and higher taxes on the wealthy. The plan he presents will be deficit neutral. What's more, ten days from now, he'll go to the Congressional deficit supercommittee and present plans on larger long-term fiscal reforms.

Many business groups objected to the payroll tax holiday on the grounds that it benefitted employees and did nothing for struggling employers. This time, Obama is going the extra mile for companies. The American Jobs Act offers a more generous payroll tax holiday for companies than for individuals. Businesses will receive a 50 percent reduction — paying 3.1 percent — on the first $5 million of payroll. (The theory: big businesses have plenty of cash and small businesses can use the help.) In addition, companies that add new positions will be exempt from all payroll taxes for the first year. That's a significant cut. Businesses will also be able to take advantage of accelerated depreciation, and tax credits for hiring veterans and the long-term unemployed. (more)

Crude oil supplies tumble by 4 million barrels

Crude oil supplies fell last week, while gasoline supplies grew, the government said Wednesday.

Crude supplies dropped by 4 million barrels, or 1.1 percent, to 353.1 million barrels, which is 1.9 percent below year-ago levels, the Energy Department's Energy Information Administration said in its weekly report.

Analysts expected a decline of 1.7 million barrels for the week ended Sept. 2, according to Platts, the energy information arm of McGraw-Hill Cos.

Gasoline supplies grew by 200,000 barrels, or 0.1 percent, to 208.8 million barrels. That was 7.2 percent below year-ago levels. Analysts expected gasoline supplies to fall by 900,000 barrels.

Demand for gasoline over the four weeks ended Sept. 2 was 2.9 percent lower than a year earlier, averaging nearly 9.1 million barrels a day.

U.S. refineries ran at 89 percent of total capacity on average, down 0.2 percentage point from the prior week. Analysts expected capacity to drop to 88.1 percent.

Supplies of distillate fuel, which include diesel and heating oil, rose by 700,000 barrels to 156.8 million barrels. Analysts expected distillate stocks to increase by 600,000 barrels.

Benchmark oil rose 56 cents to $89.90 per barrel in New York.