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Spring fever has reached a pandemic stage this year, spreading wildly among investors to fuel a most unsustainable equity rally. To prevent the fever from progressing into fiscal illness, I recommend a strong dose of reality.
As a Fool tracking scores of bellwether companies from steelmakers to shippers, I receive a daily dose of reality that suggests danger on the horizon for those swept up in this understandable outbreak of optimism. I derive no pleasure in sounding the alarm, but do so out of concern for my fellow Fools.
CSX (NYSE: CSX ) opens earnings season for the railroads, and this week delivered a 23% decline in comparable net earnings to $246 million. Both revenues and overall freight volumes declined 17%. In an eerie sign of the times, the company pointed to "significant weakness in industrial production, housing starts, and consumer spending, as well as in the agriculture and energy sectors." That's a pretty inclusive list, essentially encompassing the entire gamut of businesses on which the railroads rely.
Looking forward, CSX sees sustained double-digit declines in freight volumes amid plummeting demand, increased competition from the trucking sector, and even deterioration in demand for coal. Coal, which recently gained significance to railroads as one of the least-impaired among freight categories, is also facing a reality check.
The emerging dichotomy of coal demand -- weak in North America but stronger in Asia -- is confirmed by additional production cuts by miners Peabody Energy (NYSE: BTU ) and Cliffs Natural Resources (NYSE: CLF ) . Parallel weakness among American steelmakers, operating below 45% of capacity, offers further corroboration. While investors delight in a rally fed by spring fever, the core businesses that drive the railroad sector have caught the flu.
In January, when railroads last reported earnings, I warned of challenges developing with the industry; and predicted that investors would find more favorable entry points. Every stock I mentioned -- Burlington Northern Santa Fe (NYSE: BNI ) , Norfolk Southern (NYSE: NSC ) , Canadian National Railway (NYSE: CNI ) , Union Pacific (NYSE: UNP ) , and CSX -- soon derailed before carving 52-week lows precisely on March 9, 2009.
Something magical happened to railroad stocks on that date, sparking a 30% to 50% rally for the group. What happened on March 9? The Dow found a temporary bottom at a 12-year low. However, getting in now on a rally that I see as unsustainable is one case of spring fever you do not want to catch.