Buffett's Favorite Indicator Points Down

When you run a business as large and diversified as Berkshire Hathaway (NYSE: BRK-B  ) (NYSE: BRK-A  ) , you naturally keep an eye on the broad economy. In March 2008, Warren Buffett said the economy was in recession -- nine months before the National Bureau of Economic Research confirmed it. At the beginning of June, Buffett's favorite indicator of economic activity declined sharply -- hardly a good omen for the V-shaped recovery, a beast that remains elusive, despite numerous claimed sightings.

Watching the trains go by
The indicator in question is freight car loadings, which reflect the amount of goods transported over the railway system. According to David Rosenberg, chief economist at asset manager Gluskin Sheff, the latest data for the week of June 5 shows a rate of decline over the past 13 weeks that would work out to 25% on an annual basis. This is particularly troubling, since, as Rosenberg notes, " This metric is closely linked to the only [two] areas of the economy that have been major contributors to the recovery: Exports and inventories."

Growth is slowing
In other words, this is bad news for more than just railroads such as Berkshire's own Burlington Northern. It could be a signal that the pace of the recovery is slowing considerably.

With European nations collectively choosing to walk down the path of fiscal austerity in response to their sovereign debt crisis, and the parallel rise of the dollar, I think the risk of double-dip recession in the U.S. has increased markedly over the last six weeks. A similarly cautious tone prevailed at the GAIM conference in Monaco on Tuesday -- one of the leading gatherings of the hedge fund industry. Many fund managers are reducing their risk after a challenging month of May.

High-quality, defensive theme
In that context, I will repeat my suggestion that investors favor high-quality businesses in defensive sectors. Not only are they more resilient to a volatile economic picture, but they're also selling at a discount to the broader market. The following table contains four examples of such companies:

Company

Price/ Earnings (2010 EPS)

Dividend Yield

Kraft Foods (NYSE: KFT  )

14.6

3.9%

Pfizer (NYSE: PFE  )

7.1

4.6%

United Technologies (NYSE: UTX  )

14.7

2.5%

Wal-Mart Stores (NYSE: WMT  )

12.7

2.3%

S&P 500

16.5

2.0%

Source: Capital IQ, a division of Standard & Poor's, Standard & Poor's Indices, and State Street Global Advisors.

A double-dip recession is far from inevitable, but it would be a mistake to dismiss the idea out of hand. Job creation, which is critical to a durable recovery, remains extremely weak. As such, investors are well advised to continue playing a tight game.

Investors should expect disappointing returns from U.S. stocks over the next several years. The good news is that there are alternatives for your money. Tim Hanson explains how to make more in 2010.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Berkshire Hathaway, Pfizer, and Wal-Mart Stores are Motley Fool Inside Value recommendations. Berkshire Hathaway is a Motley Fool Stock Advisor selection. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 17, 2010, at 3:57 PM, ElCid16 wrote:

    I personally would have liked to see you delve a little deeper into the data behind the article. It seems the only concrete piece of information presented is: "the latest data for the week of June 5 shows a rate of decline over the past 13 weeks that would work out to 25% on an annual basis."

    Up until 13 weeks ago, was there a substantial increase in rail traffic? Does rail traffic typically slow duing the spring and pick up later in the summer/fall? Has the 13 week decrease been a result of the dollar strengthening vs the euro, meaning that this could be temporary blip?

    Knowing very little about rail traffic, I find it hard to draw correlation between 13 weeks of slowing rail traffic and the potential for a double dip recession. Maybe with a bit more information, I too could see the correlation that you are drawing here.

  • Report this Comment On June 17, 2010, at 4:52 PM, p2i wrote:

    I read last week that an organization which tracks credit card sales at truck stops reported credit card sales were up 3.1% month over month in May. Trucks transport 68% of goods in the USA. Fuel prices declined during that period from the peak on May 6.

  • Report this Comment On June 17, 2010, at 4:56 PM, BigFatBEAR wrote:

    BP also seems to have a relatively low P:E, not to mention a tasty yield. :)

    At current prices, I think it's a great long-term investment. I'm betting the chances of it going bankrupt are 10%, while the chance that it goes back to 60 within 5-10 years are pretty stellar.

    Demand for oil and gas will grow in developing countries, and eventually will increase again in the US.

  • Report this Comment On June 17, 2010, at 5:01 PM, p2i wrote:

    Answer to EICid16:

    The rail traffic had been increasing. It's not all bad news. Railroads have been adding cars and hiring workers. " The Association of American Railroads this week reported that May's 15.8% year-over-year monthly carload growth was the second-greatest monthly gain in United States demand since the AAR began tracking volume in 1990, and the all-time greatest monthly carload increase was in April--just the prior month. "

    Read here for more information:

    http://news.morningstar.com/articlenet/article.aspx?id=34044...

  • Report this Comment On June 17, 2010, at 5:15 PM, DaytonFlyers wrote:

    Where did this data come from? For the week ending June 12, the AAR has traffic up 10.5% year-over-year.

  • Report this Comment On June 17, 2010, at 8:44 PM, p2i wrote:

    The rail traffic does fluctuate seasonally with lower volume starting in June. But volume is up YOY. Highlights from the report on Weekly Traffic of Major U.S. Railroads for the week ending June 12 (Week 23):

    1. Carloads originated last week of 288,973 were 10.5% above the comparable week in 2009, and cumulative year-to-date carload volume is 7.2% above last year.

    3. Intermodal Units Originated (trailers and containers) at 223,075 were 17.7% above the same week last year, and cumulative year-to-date volume is 11.3% above 2009.

    4. Estimated ton-miles were up in Week 23 by 12.5% vs. 2009, and by 8.2% so far this year compared to last year.

    5. This marks the 15 consecutive week (starting in late February) that rail traffic (both carloads and intermodal units) is above the comparable week last year.

    6. For the 19 commodity groups tracked by the American Association of Railroads, 17 are up year-to-date compared to last year, and only two have decreased (paper and pulp, and coal). The strongest gains have been in shipments of metallic ores (85%), metals (65%) and motor vehicles (35%).

    7. Canadian and Mexican rail volumes have also registered strong gains, both last week and year-to-date.

    8. Combined North American rail volume for the first 23 weeks of 2010 on U.S., Canadian and Mexican railroads totaled 8,463,154 carloads, up 10.2 percent from last year, and 5,940,938 trailers and containers, up 12 percent from last year.

  • Report this Comment On June 17, 2010, at 9:07 PM, p2i wrote:

    David Rosenberg is a short's pawn?

    “There has been a sudden and sharp turndown in railway car loadings in the latest data that came out for the week of June 5th,” Gluskin Sheff’s David Rosenberg points out. Lest you think this is just a bear crying wolf, weekly reports from Association of American Railroads back it up.

    The trade group reported that for the week of May 27, loadings leveled off after 12 straight weeks of gains, still up 10.6% from a year ago. But for the week of June 5, they’re down 8.9% from mid April. “Remember – this metric is closely linked to the only to areas of the economy that have been major contributors to the recovery: exports and inventories.”

    Down sharply from mid April? !@#$ their down from 2008's same week. Just pick a time and compare.

  • Report this Comment On June 17, 2010, at 10:53 PM, cquarnstrom wrote:

    Simply, Warren Buffet does NOT have "indicators"! Never has. He has always bought companies based on each comp's intrinsic value no matter what "the market" thought of them. That is why, if one had invested a mere $10,000 in 1980, he would be worth $5,000,000+ more today than whatever he has. It is also why he is worth $50B (from zilch) and you are not!!

  • Report this Comment On June 25, 2010, at 5:49 PM, philkek wrote:

    The rich get richer and the poor get poorer. These educational MF articles & comments tell me the statement is still true. Smarter fools than me are writing here. I do not know if Mr. Buffet uses favorite indicators or not. I think the old law of supply and demand tells it like it is and trend is down. Mr. Buffet does values homework well. The millions of people out of work in a slowing economy hints at double dip coming. Mr. Buffet once reportedly said, "Learn the business or get out." That is my 2c worth. Fool on.

  • Report this Comment On June 26, 2010, at 8:07 PM, mpg57 wrote:

    Have you ever delt with the rail road and just in time orders. It does not happen. That is why rail is down and trucking is up. It is called customer service. Something the RR still has to learn.

  • Report this Comment On June 26, 2010, at 8:20 PM, dividendgrowth wrote:

    You can forget about using rail traffic to predict market movements. Just a few examples:

    Rail traffic began to decline in late 2006, but it took another year before the market finally topped. In this last stretch of bull market, many leading stocks went up several times.

    In fall 2008, when the market was having its monumental crash, rail traffic actually increased vs 2007 until November. It only cratered after Thanksgiving, at which point the market was already very close to the bottom.

    Then in Spring 2009, rail traffic looked absolutely horrible, and we had the greatest market rally since 1933!

  • Report this Comment On June 26, 2010, at 9:40 PM, lowmaple wrote:

    the market rally at this juncture may not be able to depend on a very rare run up on low quality stocks as this last rally as these stocks have already moved

  • Report this Comment On June 28, 2010, at 12:51 PM, Robonaut1 wrote:

    Hmm...

    AAR report: Intermodal, rail freight volumes are on the rise

    Intermodal traffic on major U.S. railroads rose to the highest levels since the economic recovery began. Intermodal loadings climbed to 284,891 containers and trailers through the week ended June 19, up from 281,064 a week earlier, according to the Association of American Railroads. Freight rail-car traffic increased 9.2% over the same period. RailwayAge.com (6/24) , The Journal of Commerce (6/25)

    Doesn't seem like the indicators are down.

  • Report this Comment On June 28, 2010, at 1:03 PM, stan8331 wrote:

    There are a lot of folks out there right now who'll glom onto any seemingly negative bit of info as predictive of an inevitable double-dip. Makes me think that an actual double-dip is somewhat less likely...

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