All Aboard??? Is The Train (literally) About To Leave The Station???

(A Friendly and Important Disclaimer Note (in addition to legal language below):   If you’re reading this post and are not currently investing with Soos Global (which, of course, is something we should discuss!), please bear in mind that while we share details on changes made to our portfolios, it's important to consider that our portfolio decisions are taken in a much broader context of our overall portfolio strategies and our assessment of each of our investor's unique financial profiles.  As such, what we do, and when we do it, is specific to our investor portfolios and is NOT intended, in any way, as advice for use by others.  Readers are reminded that all comments posted here are for information and entertainment purposes only!  Any commentary, especially those that include specific mentions of 'buying' or 'selling' or 'positions', is made solely for those limited informational and entertainment purposes, and NOT as advice.  We're delighted to hear thoughts and comments.  Thx!)

In the past, I’ve shown variations of the chart below of Norfolk Southern’s (NSC) stock price, noting the shellacking that the rail stocks have been taking this year, in most cases due to the dramatic decline in commodity prices in the energy sector, and especially with regard to lower demand for coal transport in the face of cheaper natural gas and oil.     To be a bit more concrete on the order of magnitude of the issue, take a look at the second chart below from the Association of American Railroads website ( www.aar.org ) showing the monthly volumes of carloads of coal that have been hauled by rails in the past few years, noting how dramatic the decline has been in 2015! 

Yesterday, to compound the issue for rail stocks, the US EIA (Energy Information Administration  www.eia.gov ) released a report stating that both coal demand and production are likely to continue to fall.  They noted:

Slower growth in world coal demand, lower international coal prices, and higher coal output in other coal-exporting countries have all led to a decline in U.S. coal exports. Lower mining costs, cheaper transportation costs, and favorable exchange rates will continue to provide an advantage to mines in other major coal-exporting countries compared with U.S. producers……EIA expects a 7% decrease in total coal consumption in 2015,… Lower domestic coal consumption and exports, combined with a slight increase in coal imports, are projected to contribute to an 86 MMst (9%) decline in production in 2015.

Going through the Association of American Railroads  list of other items hauled by rail, we do see some increase in rail traffic, for example in the auto sector, which thanks to the Fed’s NZIRP (Near Zero Interest Rate Policy) has been a strong economic sector.  (See third chart below).    We also see an increase in intermodal transportation (combination of containers and trailers on rail, ship, trucks, etc.).The question for rail stocks, or at least one big question, is just how much of other items’ hauling demands will be able to replace the business lost by the decline in coal traffic.  Housing and auto related sectors are already filling in some of the void, but with the Fed on the trigger to hike rates, there are concerns that both of these sectors might have already seen their peaks in terms of benefits from low-to-no-interest loans. 

Rails clearly have a ‘barrier to entry’ advantage which ought to have significant value in a world where goods must still be transported and where the internet cannot act as a disrupter by delivering tons of commodities to one’s doorstep!  So any increase in US economic growth in sectors requiring real goods, in contrast to services, ought to be good for rails.  And even if the US economy continues to plod along at current rates of growth, one has to wonder if the 30+% discounting in price (in some cases, even more!) is already pricing in the worst of the commodity rout into rail stock prices.

Again, each investor will have to opine for themselves….but it’s at least worth considering if the train is about to leave the station.

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
Disclaimer: Please read and consider important information related to all communication made by Soos Global on this site by clicking here.
Additional Disclaimer: currently long many stocks/ETFs and NSC.  Positions may change at any time without notice.   

McKinsey's Report on Corporate Profit Outlook is Today's Business!!!

McKinsey published a report earlier this week entitled "The New Global Competition For Corporate Profits".   The report "projects that the global corporate-profit pool, which currently stands at almost 10 percent of world GDP, could shrink to less than 8 percent by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years".

By referring to a drop in corporate profits as a percentage of GDP from 10% to 8%, and by marking the time-frame as 2025, one could be lulled into complacency and consider this to be little more than an academic exercise, not relevant for trade-able ideas today.  But one would be horribly wrong!!  The impacts of global forces especially in and among Emerging Market countries is already impacting corporate profitability in a meaningful way.

While many examples abound, one just caught my eye last night regarding anticipated smartphone sales in 2016.  The following report was released by TrendForce last night: "TrendForce Finds 2016 Global Smartphone Shipment Growth Down to 5.8% and Expects Even Apple to Face Single-Digit Growth Next Year.

One section of the report is subtitled: "Rising Chinese brands are bringing in a new round competition that will phase out some weaker players".

This highlights the ideas made in McKinsey's report about new local competitors representing formidable headwinds for incumbent players.

From an investment perspective, the focus ought to be on finding multi-national companies that are established 'incumbents' and who are already leveraging operating efficiencies, economies of scale and global interconnected footprints that allow them to maintain and grow market-share.  Equally of interest ought to be new local competitors who will leverage local indigenous advantages in order to establish themselves as viable long-term players against larger, more multi-national incumbents.  (The challenge, of course, of finding countries with acceptable corporate governance standards underlies the search!)

McKinsey's report is clearly today's business, and with equity markets having given up much ground in recent weeks, the valuation search has become more compelling.
Will keep you posted as our search progresses.
Best,
Ed


If you have any questions, or comments, please keep them coming in!!

Please continue to visit Soos Global Market Musings for updates.

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(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
Disclaimer: Please read and consider important information related to all communication made by Soos Global on this site by clicking here.
Additional Disclaimer: currently long many stocks/ETFs.  Positions may change at any time without notice.  

Are You A "CATASTROPHOBE"? I'm NOT!!! Here's Why....

Just a quick summary of thoughts as we close out the week, and the summer, and head into the holiday weekend…but first a word from our friendly compliance folks:

(A Friendly and Important Disclaimer Note (in addition to legal language below):   If you’re reading this post and are not currently investing with Soos Global (which, of course, is something we should discuss!), please bear in mind that while we share details on changes made to our portfolios, it's important to consider that our portfolio decisions are taken in a much broader context of our overall portfolio strategies and our assessment of each of our investor's unique financial profiles.  As such, what we do, and when we do it, is specific to our investor portfolios and is NOT intended, in any way, as advice for use by others.  Readers are reminded that all comments posted here are for information and entertainment purposes only!  Any commentary, especially those that include specific mentions of 'buying' or 'selling' or 'positions', is made solely for those limited informational and entertainment purposes, and NOT as advice.  We're delighted to hear thoughts and comments.  Thx!)

In a recent email exchange with an investor who had asked 'what's it like in the markets these days',  I said 'brutal'.  

Given the activity of the past few days, and especially reflecting on the past two weeks,  I'll ditto that and double it!

Incredible volatility persists. Even in futures markets, usually the bastion of supreme liquidity, bid/offer spreads have widened, price swings, sometimes on minimal volume, have been extreme, and reaction to news and data seems to be binary….it's either euphoric or panic, with heavier leaning towards the latter.

It's helpful, if not critical, at times like this, to step back from the intraday and day-to-day activity, and take a look at the bigger picture.  

The bottom line is that the world is a bit of a different place now than when the Fed first started talking about hiking rates many quarters ago.  Back then, US growth was starting to pick up nicely, China was seemingly still growing strong enough and continuing its reforms, Europe was recovering from recession and dealing with periodic flare-ups on Greece, and corporate earnings were growing w/outlooks that were positive.  Now, recent earnings were a yawn, outlooks/guidance by many firms were outright depressing, China is in a battle with markets over policy credibility and their growth rate is slowing markedly, and US growth, while extant, is underwhelming and not yet at a level that could be considered the locomotive for the rest of the world.

So where does that leave investors?  In my mind, the 'quick-fix' mentality of many investors, expects to see a rapid rebound from these past two weeks' correction and a return to  a surging bull market, viewing the recent selloffs as mere corrective pauses in an otherwise bull run. 

I don't agree.  I believe that rough waters will continue to surge around markets, not just for many days ahead, but likely for many weeks or even months!  To be clear, I do not agree w/those who I call  'catastrophobes'  who say that we're headed for a catastrophic global economic meltdown coupled with a bear market that will persist for years.  I do think, however, that the days are over where just because the Fed kept rates at near-zero and other Central Banks accommodated eagerly meant higher stock prices.  We're likely going to be in a new chapter of global growth where the subtleties of policy responses and initiatives will likely play a larger role.  Take China's recent devaluation of the Yuan.  That was viewed by many as the right thing to do, but the execution of that policy change was handled miserably and, in turn, set off a globally negative market response.  The same action, handled better, might actually have been greeted by markets as a good thing in helping to promote China's growth through an increase in exports which had in fact been struggling due the Yuan's linkage to the strengthening USDollar.   If the subtleties of the policy response had been better articulated (vs the silence that accompanied it!) perhaps it would not have raised concerns about an all-out currency war and deflation-contagion.

Whether today's NFP data was enough to feed the Fed the fuel they are looking for in order to hike short-term rates, is still not clear, but whether it's in September or in coming months, a small one-and-done rate hike of say 25bps should not, imho, impact US growth, earnings or global economic growth meaningfully.  I would not view it as a 'foot on the brakes', but rather as a normalization of rates in the short end of the curve which is viewed as necessary in order to more properly allocate capital on a risk-adjusted basis.  Credit-differentiation is almost impossible when everyone is borrowing/lending at near-zero interest rates!  So I understand the interest in raising short-term rates.  But, as I've said often in previous missives, to think that long-rates need to go up, especially in an environment where commodity prices have plummeted and in which labor excesses (despite labor market improvements) are still plentiful, seems unfounded.  Deflation remains public enemy number one, not inflation!

With that in mind, I view the recent markdown in equity prices as bringing valuations more into line with global realities.  I'm optimistic, mildly, about US growth, I'm increasingly (from a near-zero starting point!) optimistic about Europe's growth, I'm concerned but not panicked about China, and I remain very optimistic about the prospects for continued global emerging growth of middle class consumers.   As such,  I remain cautiously long equities around those themes, though I have reduced the percentage in the portfolios overall, keeping names that I expect to hold while we ride out the storm.   These are largely stocks that have historically behaved defensively with strong balance sheets and good dividends.   I also increased the allocation to fixed income (and similar 'yieldy assets') as part of the defensive move.  And finally, I still have a larger than usual cash allocation which I've been using to nibble when valuation markdowns appear overdone.

I believe that we're in the middle of a storm….not a "perfect storm" of the catastraphobe variety, but a storm that should keep volatility and negativity in play.  At this time, however, I'm battening down the hatches and taking precautions to ride it out, all the while on the lookout for a break in the clouds and smoother sailing.

With that as a natural segue into a still-summertime weekend…..

Enjoy the long weekend and get ready for 'seatbelts and helmets' at Tuesday's opening bell!

Best,

Ed

If you have any questions, or comments, please keep them coming in!!

Please continue to visit Soos Global Market Musings for updates.

(Sign up to "Follow by Email"!  And share with others!)

(Please note: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals).
Disclaimer: Please read and consider important information related to all communication made by Soos Global on this site by clicking here.
Additional Disclaimer: currently long many stocks/ETFs.  Positions may change at any time without notice.