The written word can be more powerful than a steaming locomotive.
Consider the impact of analyst Meredith Whitney's rally-sparking buy recommendation for Goldman Sachs (NYSE: GS ) this week. Had investors delved deeper into Whitney's remarks than just the keyword "buy," their enthusiasm may have been limited to just the one company: "Our more bullish outlook on Goldman Sachs shares is deeply rooted in our sustained bearish stance on the U.S. economy and the state of U.S. financials at large."
Leading off earnings for the railroad sector, CSX (NYSE: CSX ) seemed to draw attention away from horrendous sector fundamentals with the issuance of a single vague statement within the earnings release: "there are some signs that we may be seeing the bottom in many markets." Keyword: bottom. Beating earnings expectations thanks to huge cost reductions, CSX shares played along dutifully by surging 7% Tuesday. Once again, however, I believe the real story lies beneath keywords and the predictable expectations game.
Thanks to the surreal persistence of this broader equity rally, railroad stocks have essentially lurched sideways for the past three months despite all my warnings about deteriorating fundamentals. I cannot account for market sentiment, so I will continue to present the facts:
- With the continuing woes of key customers like General Motors and to a lesser extent Ford (NYSE: F ) , automotive volumes for CSX in the first half of 2009 dropped an alarming 47% from the prior year.
- The domestic steel industry is impaired enough to have Nucor (NYSE: NUE ) CEO Dan DiMicco predicting the "granddaddy of all jobless recoveries," and CSX saw metal freight volumes for the quarter fall 53% accordingly.
- Accounting for 30% of revenue, coal is huge business to haulers like CSX and Norfolk Southern (NYSE: NSC ) . Total coal shipments by rail were off by 14% when I expressed concern back in April, but declined an astonishing 21% for CSX in the second quarter.
The four-week rolling average for coal volumes has since recovered to a 6.5% decline, presenting unusual volatility for a relatively inelastic commodity like coal. Hopefully, any Fool invested in railroads is paying close attention to coal, which has been affected by utilities destocking inventory and substituting cheaper natural gas (on top of changes to power demand).
An easing slope of decline like the very recent boost to coal volumes, along with promises of coming rate hikes, is reason for a sigh of relief, but not premature celebration. There are places in the world where bellwether industries are sensing some real recovery, but on the domestic front a double dose of caution remains the order of the day.