Ship versus Rail transport.

Hamilton

Clearly the railway companies have , in the main, enjoyed pretty good times since the second great recession. Shipping companies have not. There are a few obvious reasons that may explain why two different sectors of transportation have such different experiences. One is that railway companies usually own the track, a very costly proposition in terms of investment in land, and an obvious cause of reduced mobility. Railways are to some extent always regional monopolies. Secondly the investment in rolling stock is, relatively small compared to the whole.

Ships operate on the open sees and can change their route mid-stream if they care to do so. Relative to the infrastructure, mostly owned by governments and not the shipping companies themselves , the cost of the “rolling stock”, that is the ships, is enormous. Consequently shipping companies are far more sensitive to prevailing interest rates and the hog cycle. This cycle occurs in most businesses that have alternating over- and underinvestment as the result of too rosy or too gloomy outlooks, more so now with low rates to stoke the fires. Mitsui & Co. is a good example, the largest and from Japan.

mitsui 2012mitsui ship

After a 14 year triangle we get a moon shot followed by a shot in the head. Schumpeter’s creative destruction is at work here. These boats do not come cheap and getting rid of them kills your P&L. And the freight rates, expresses very eloquently by the Baltic Dry Index, which has nothing whatsoever to do with the Baltic.

baltic dry index june 2012

It is now,as expected (see previous blog) at a new low and almost at the lows of late 2008. Frontline FRO and TNP are two other shipping companies. FRO (see prev blog ) is working itself down to equality between  A and C in a large A-B-C correction. It is getting close. TNP, Tsakos Energy Navigation Ltd is one of the bigger operators, Greek as so many are, registered in Bermuda. It seems to need one more leg down but yields 11%.

fro jul 2012tnp jul 2012

The trade to do might well be short the rails and long one of these ships.

GLD, Gold update and K, Kinross

Hamilton

GLD jul 2012

We have seen some very incorrect wave counts that would suggest the GLD is presently in a one year long contracting triangle as opposed to some form of a 1-2,1-2. Assuming, for the sake of argument that this is an acceptable count,  the above labelling would be the most plausible. This would have to be a 4th wave and, given the duration, probable one of high degree. A thrust should follow soon and swiftly take the GLD to just above the old high of 192 or to a new high of 225 or so. An almost immediate return to 150 would follow.

The problem with this count is that it has no counterpart anywhere! Not a single large cap gold miner has a pattern that comes close. Nor does that other precious metal silver which already has retraced 50% from the recent peak. K, Kinross is a good example even if some would cry foul given this stock idiosyncratic problems. Here is the chart;

K jul 2012

No count is ever certain but as more pieces fall in place confidence in the accuracy increases. So this stock drops from $45 to $1 in what has to be a 5-wave move! This is confirmed by the wedge or wedges that are always 5 waves (or Cs). 5-wave moves do not stand alone, there always has to be a second one (as in a flat or zig-zag). In between there is invariable a 3 –wave counter-trend rebound that often retraces 50, 62 or even more % of the preceding drop. There is also a tendency to go to the level of either the 4th wave or the 4th wave of 3. It more or less did all of this! Therefore it is safe to assume that we are in the second 5-wave leg down which should terminate <$1. At about $10 we will get overlap. Should this second 5 wave leg develop as a wedge, that will not matter. In the event that we are actually in a double zig-zag (in blue) overlap at this time would also not matter. Given that this stock is already down some 75% or more, the outlook on GLD shown above is downright impossible, but then impossible things seem to happen more often lately..

UNP, Union Pacific Corporation

Hamilton

unp 2012

This railway goes back 150 years. It was listed as a stock back in 1870. It’s performance beats that of either CNR or CP, at least in terms of stock appreciation. The operation ratio has dropped from about 80 a couple of years go to 70 in the first quarter of this year. Profits were up an impressive 39% y-o-y. Given the stocks tripling since the recent lows we would exit or stand aside. The count may not be perfectly correct but reversion to the mean, or the potential for that to happen, is a good enough reason.

CP, Canadian Pacific Railway and CNR, Canadian National Railway

Hamilton

CP jul 2012 lcnr jul 2012 l

The charts do not have the same time frame! CNR is the larger of the two and the only one with East to West and North to South capabilities. Up to 1995 it was a crown corporation. But it is CP that has adopted the beaver as the animal to emulate for its smarts, engineering capabilities and enormous level of energy, in short all those things that Canadians have in abundance. But  in the opinion of one Mr. Ackman of Pershing Square, a hedge fund, the company has very little of those attributes. So after a few years of yanking at its chain he has managed to crown the ex-CEO of CNR as the new CEO of CP, a fellow by the name of Hunter Harrison , a 67 year old no nonsense American from the South. All this is interesting simple because it is so un-Canadian, otherwise we will not comment on the merits of all this.

However, looking at the charts and adjusting for the time difference, the performance is not that dramatically different as both start between $10 and $20 and move up to $80 to $90. The operating ratio was the tricky part, at which  the beaver consistently underperformed. Lots of excuses from snow to no-snow, from bulk goods to normal freight etc. etc. failed to explain that and ultimately a change at the top  was the only solution. Unfortunately that  will probable do absolutely nothing for the shareholders. CP (see a previous blog) probable topped out months ago while CNR is also ready for a big correction. CP completed a B-wave while all this was happening and CNR a 5th wave. Both could lose about $50 in the next few years. In detail;

cp jul 2012 scnr jul 2012 s

CP had a nice run-up  as all this was going on and perhaps all the good things coming from this, supposing there are some, are already discounted in the stock. This one looks like it will turn out to be a buy on rumour, sell on fact situation regardless of whether or not there will be a fact other than this recent CEO appointment.

By the way, if you look closely at the channel drawn in the big Yahoo chart of CP, you will notice that the above expectation would be fulfilled just by regression (reversion) to the mean – often referred to as the surest rule in the stock market – , at about the mid-point of that channel. Nothing really to write home about.