Pages

Showing posts with label freight. Show all posts
Showing posts with label freight. Show all posts

Sunday, June 23, 2019

How Can The Market Be at An All Time High and There Be A Freight Recession - Part II

In my previous post I outlined why I believe freight is slowing.  Certain signals in the marketplace are telling us employment adds are decreasing, inventories are increasing and the PMI is decreasing.  All of these are signs of a slowing economy.  (For the record, I do not believe by any stretch the economy will contract - it is just we should not get used to GDP growth rates of 3% into the future).  This slowing has resulted in less loads per truck and prices going down.

So, how can the stock market be hitting an all time high?  I believe it is due to 3 reasons (Warning, I know a lot more about freight than I do about investing but here goes):

  1. The alternative investment (10yr as a proxy)
  2. % of the economy which has nothing to do with goods
  3. The Fed.
What is happening:

Let me start off by showing what is actually happening:


This chart compares the Dow Jones Transportation Index to the DJ30 and the S&P500.  This is a one year return graph and ends on June 21.  As of June 21, the DJ30 is up 6.66%, the SPX is up 7.1% and yet the DJT is DOWN 3.91% Bottom line is investors are shunning transports yet still embracing the overall economy.  Why?

The Alternative Investment:

Investors are going to invest.  That is what they do and they have two macro alternatives.  First, they can invest in the "risk" markets (i.e., stocks) or they can invest in what is generally considered the "risk free" or "near risk free" investment.  I will use the 10yr as a proxy for this second grouping.  What we have seen recently is not only a 10 year treasury at multi year lows but we are also hearing the Fed discussing lowering the rates even further.  This will drive investment dollars away from the "risk free" and into the markets. 

It is no coincidence towards the end of last year when the Fed was not only raising rates but also calling for 3 rate hikes in 2019 the stock market tanked.  Investors were deciding to move away from risk assets as the risk free was looking pretty good.  Not so much any more as the 10yr is now bouncing around the 2% level.

The graph to the left is the graph of the 10 year treasury rates as of Friday, June 21.  This movement of rates down has caused money to flow back into the risk asset markets and specifically look at the major move down since mid May.  This is when the Fed made it pretty clear the only action they likely will take is a move down in rates. 





% of The Economy Which Does Not Have Anything to Do with Shippable Goods:

This one is a bit nuanced.  Let's just look at 30 years ago and think about what it meant for the economy to be growing at 3%.  It was intuitive that the growth had to have much to do with autos, real hard electronics, housing etc. etc.  These are all very "hard" goods which drove the economy. 

Today, when we the economy grows at 3% more of it has to do with finance, services and the infamous FANG stocks (Facebook, Amazon, Netflix and Google - Alphabet).  Only one of these, Amazon, ships anything.  The rest make their money in the "virtual" world.  Very important to the economy but not so important to trucking.  The graph below illustrates this:

Non Shipment Economy
The inverse of this graph is to ask how much of GDP is due to MFG:


Both of these graphs tell the same story.  GDP can grow at a high rate and not have shippable product tendered to carriers.  - Economy grows yet a freight recession sets in. 

The Fed

What else can I say?  The Fed has made a huge 180 degree turn around in the last few months and whether that is due to political pressure or real economics I will leave it to the real economists to figure out. But, reality is, the Fed has signaled rates are going down and they have somewhat backed themselves into a corner as it would be outright lying if they did not do this.  This means more money will continue to go into inflating the asset bubble and less money will go into bonds. 

I hope I have now explained (sorry for the two part length) why the freight recession likely will continue however the economy, as measured by the markets and GDP, will continue to do quite well.  

Summary:
  1. Economy is slowing
  2. Investors have to invest in the market to get any kind of return due to the "risk free" paying so low.
  3. Investors are shunning the transports
  4. This drives the market to records
  5. Less and less of the GDP has to do with "shippable goods"
This is a link to Part 1 of this posting (for those reading on a reader)




How Can The Market be at All time High and There Be a "Freight Recession"? - PART I

The question posed in the title can be a perplexing problem and I am sure is of interest to both those who make a living running trucking companies as well as those who invest in them.  If the market is a forward looking index (like they teach you on school) then the fact it has bid up stock prices would indicate it believes the economy is "booming" and if the economy is "booming" then there must be a lot of freight moving.  I will attempt to explain why this connection (Market to freight volumes) is no longer true. 

There will be two parts to this posting. The first will be to show the macroeconomic data I look at which tells me the freight market is slowing.  The second part will be to show how the stock market could hit an all time high while the freight market slows.

There are 3 real reasons why the market (i.e., the SP500 and the Dow) is disconnected from what we, the "transporters of freight" see in the market:

  1. The alternative investment (i.e., 10yr).
  2. The % of the economy which has nothing to do with "goods". 
  3. The Fed
Before I address each one, let's look at the data which supports why there is a "freight recession".  For this I look at 3 different indices.  First, my favorite, the "Total Business: Inventory to Sales Ratio" (St. Louis Fed).  This measures how much activity is being used just to build inventories and the assumption is companies will not build inventories forever.  When they stop building, the freight stops.  Here is what the graph looks like back to 2015:

Inventory to Sales Ratio - St. Louis Fed
This graph clearly indicates (looking at the boom and bust cycles) inventories decrease then, in a recession, they increase.  The shaded areas above are key recessions.  You can see leading up to 2016 the economy was slow and it actually was close to the peak of the 2001 recession in 2016.  Then came the "sugar high" of expectations and tax cuts and the inventory was burning down until close to the end of last year.  Since then, the economy has been building inventory.  Not a good sign for the economy overall but more importantly, for this blog, not important for the freight industry.  I feel like I should not have to say this however just to be clear, companies do not build inventory forever.  So, even if freight does not slow immediately there would be a clear expectation from the rational investor that freight will slow.  Freight has slowed. 

Second, let's look at the PMI trends.  As a reminder, the PMI (Purchasing Manager's Index) generally gives you a look at whether the economy is expanding or not.  A reading of 50 or above is generally good and below that is contraction.  The index I like to look at is the MFG PMI:

MFG PMI - Tradingeconomics.com
I do not think I need to explain what is happening here suffice to say the decrease started around December of 2018 and has accelerated since then.  

Since so much of the freight indices are tied up in hauling manufactured goods it is no doubt looking at this chart that there would be far less freight to haul and far fewer loads per truck then we would like.  

The final piece of economic information is our labor force and the net change for employment.  For this, I like to use a 3 month net change from the bureau of labor statistics.  Why 3 months?  Because BLS adjusts the previous two months as they get better data so by going to a 3 month net change you take into account most of the adjustments. 

While employment is incredibly robust and generally "all is good" there are some signs of cracks:

3 Month Net Change in Employment - BLS
While there is still net positive adds what this is showing is the net positive is slowing quite a bit.  Could be we have just run out of workers or it could be, based on the data above, employers are starting to be very cautious about adding any more employees. 

To give you an example of this, the last three months (Mar, Apr, May 2019) readings were 521, 433(p), 452(p) (p - preliminary readings) respectively.  All three of those were below the lowest reading measured in 2018 which was 565 (January 2018).  Another indication of a slowing economy.  

Ok, so, the bottom line for this PART I is clearly the economy is starting to slow.  Not in a recession (yet) but clearly slowing.  I have opinions on why and I will leave those to myself but this is why you are seeing the FED not only not increasing rates but the conversation is now about lowering rates. 

Stay tuned for PART II which will discuss the 3 reasons why the market, even though all these indicators show a slowing, hit new highs. 

Monday, October 24, 2016

CASS Report from September is Somewhat Grim - Macroeconomic Monday

OK, I am late to the party on this one, sorry but when I read it I thought I had to write, albeit, late.  The Cass Freight Index Report from September had virtually no good news in it.  The best thing they had to say was (actual quote), "... the YoY contraction [in expenditures] appeared to be less bad [than August]".  When all you can say is "It is not as bad as last month", you know it is bad.

On To the Numbers:

  • Shipments were down 3.1% YoY
  • Expenditures were down 3.8% YoY
And the industrial recession is on.  I think they rightfully state that the culprit may be the contraction in inventories.  I have written many times about the growth in inventory relative to sales and I think companies have realized they need to get rid of those inventories.  This means most product is already here and in the warehouses / stores and this reduces the need for transportation immensely. Why buy new product when you are so dramatically overstocked. 

Destocking takes bps out of GDP
This graph, from CASS, tells the story that destocking, while slowing down, is still a drag on the economy.  CASS says they are continuing to be concerned about too many autos, elevated inventory relative to sales and the fact that the consumer has not really dove in with both feet (or open wallet).  

Now, the key issue will be whether the Fed increases interest rates in December as everyone expects them to.  That will be a real problem as the economy, even if you think it is good, is truly running on just about one cylinder. 

What does this mean for shippers and providers:

I think the data is clear, and has been for at least two years now, and it is telling us that the shippers are in control (especially in ocean freight) and will be for the foreseeable future.  Of course, this is nothing to write home about as this means the economy is soft.  However, if you are shipping and you have a nice business you should take advantage of these soft times.  Believe me, when it swings, you better duck.  And, as all my readers know, you will not get benefit because you overpaid in a slow environment. 

Actions:
  • If you have not bid freight in a while - do it now. 
  • Lock in rates for two years if you can - a nice hedge
  • Move to a market based fuel system to take out any fuel fluctuations in the rating structure
  • Watch tender turn down rates.  This will act as a great "early warning" telling when / if the tide turns (don't expect this until 2018)

Monday, June 27, 2016

Macroeconomic Monday® Special Edition - Watch the Debt

I have read two major books recently on the economy - one old and one new. Both appear to be seminal books on what drives economic booms, busts and panics.  The two books are:  1) The Makers and The Takers: The Rise of Finance and The Fall of American Business by Rana Foroohar. 2) Manias, Panics and Crashes: A History of Financial Crises by Robert Z. Aliber.

The theme of both books is excess debt plays a huge role in the build up to any recession (or worse, depression).  The cycle goes something like this:

  1. Recovery begins through stimulus or some other external event (think war spending).
  2. The cycle takes off and should become self sustaining (Although we never saw that this cycle)
  3. Eventually it starts losing steam. In order to keep it going, we need to incur higher and higher amounts of debt. 
  4. In order to keep the higher debt going,  we have to allow sub-prime to participate. Not only does debt go up but debt quality goes down
  5. Eventually, defaults begin.
  6. People begin hoarding cash and spending less as they fear the economic downturn.  This causes  more defaults as layoffs begin. The downward spiral begins. 
  7. Voila!  Recession or worse and then we start all over again. 
This has been the case for hundreds of years (despite people wanting to go back to the "good old days",  hard depressions are less harsh now and certainly less frequent).  As we see freight volumes going down and with that, freight rates going down, I have to ask, are we starting to see this cycle in its later stages?  Certainly, we are at the tail end of an expansion but what does the debt data tell us?  

In this and subsequent editions of Macroeconomic Monday® I am going to attempt to explain where I think we are.  Today, we will look at three topics:  The overall debt (Household) in the nation, the makeup of that debt and finally the quality of auto loans.

The graph the the left depicts the issue at hand.  As you can see from this chart our overall household debt is almost at pre-recession levels. Two other key points are clear from this chart:
  1. The debt level relative to 2003 is incredibly high.
  2. The amount of debt due to student loans has grown exponentially (yes, this is a big problem - student loans cannot be discharged in bankruptcy and do not have physical assets behind them).
Mortgage debt is still inflated and the very interesting part of this chart is the growth of auto loans. The key part to this, as explained in the graph below, is more and more auto loans are made to the sub-prime sector of the economy. 

This graph shows more detail on the auto sub-prime loans (When you see your friend get that new BMW, you have to wonder where the money came from).  You can see that auto sub-prime really telegraphed the previous recession and then people clamped down on their borrowing to right their personal balance sheets.

However, really since about 2011 this has changed and the sub-prime borrowing started taking off again. This was almost fully due to automobile companies needing to keep the "post recession party" going.  

So, our first lesson is pretty clear, and stark.  Personal debt is growing and total debt is almost at the pre-recession levels. For one of the biggest and riskiest categories (auto loans), sub-prime debt is increasing. Finally, student debt, which stops or delays household formation, is clearly at unsustainable levels.

Following our guidance in the two books I mentioned above, this is the "brake" on the economy which never lets the flywheel turn on its own.  It is also why markets go into turmoil every time Janet Yellen even remotely mentions increasing interest rates. This brake is why freight volumes are down, we have over capacity in transportation and rates are starting to plummet.  If people do not buy, companies do not make and therefore freight capacity exceeds volumes and rates go down. It is that simple. 

So, the next time someone says to you "things will get better next year", remember the debt story. They cannot get better when more and more money is going to pay interest on debt incurred for items already purchased.  And, of course, this is why you are seeing negative interest rates as central banks realize that is the only way to fight this.  But, more on that next time.  



Friday, October 9, 2015

Where Will The September Index Land?

Just posting the August numbers as a reminder since we should have September shortly.  However all indications are freight was soft as well as the economy in general.  August showed a month over month decline in shipments of 1.2% and a decline in expenditures of 2%.  The Year over Year (YoY) was even more pronounced with shipments decreasing 4.6% and expenditures down 8%.

Even with the rebound in stocks recently, the Dow transports are down 9.7% this year and the total market only down 2.36%.  Bottom line, the freight transportation volumes continue to be softer than predicted and I am not sure there is any "push" for the retail season.

Looking forward to the September numbers and here is hoping I am wrong.

Monday, July 15, 2013

Read into The Earnings Statements - Freight is Soft - Beyond the Hype

I found something very intriguing for shippers in the JB Hunt earnings release and it had to do with the ICS (Integrated Capacity Solutions) earnings.  Essentially, the group is a broker so they act a lot like an actual shipper.  They have loads and they go to the open market to procure those loads.  Here is what the results say:
  • Revenue - $132M up 20%
  • Operating Income - $4.2M up 113%
That is telling as the OI is increasing at a dramatic pace over the revenue.  Why is this?  In their words:
"Operating income increased 113% over the same period 2012 primarily due to increased revenue and improvement in gross profit margin. Gross profit margin increased to 11.8% in the current quarter vs. 10.6% last year. A softer carrier environment contributed to the increase. " [Bold is mine]
So, those who are closest to the market are telling you there is a soft carrier environment out there.  A good line to have when a carrier comes in to tell you how tight the market is and why they need a rate increase.  With Revenue in a quarter of about $130M that makes this entity a $520M shipper - many shippers have a lot more freight than that and should be able to get the same results.

I am not picking on JB Hunt here, they are an incredible company, I merely use these results and statements to show what is really going on  - beyond the hype. 

Monday, June 10, 2013

Macroeconomic Monday® - A tale of Two Economies

There are two economies developing and it is very important you do not confuse the two.  The first economy is the financial  economy.  This is Wall Street, investing, arbitrage and commodities.  When bundled together this economy is on a tear.  It is booming and if your business is just to make money with money the Fed has become your friend and your company is most likely doing very well.

The drawback to the financial economy  for my readers is just this: There is no freight.  There is no freight in the booming of Wall Street.  Nothing is produced, shipped and delivered beyond bits and bytes of data which magically turns into money in your bank account.

There is the second economy which is the physical economy.  This is the area where my readers and I have participated for most of our lives and this area is operating in a murky, up and down environment and is not nearly as "booming" as the financial economy.  While the financial economy, in a lot of cases, is at a pre-recession level, the physical economy is not.

Here is why it matters for us logisticians.  If the physical economy does not improve we will continue to mired in a low freight environment while at the same time believing the economy is booming.  This is why shippers need to keep a real eye on the actual physical economy and not let the financial economy sway their opinion.  Will capacity continue to decrease?  Yes.  However, and unfortunately, demand for goods seem to be decreasing as well.

You need look no further than the unemployment rate to know why.
 The graph to the left shows us in a stubborn range of unemployment.  As many economists have discussed this also does not reflect the underemployed, those who have stopped looking and those who are employed but are too scared to spend due to a fear of losing their job.

The simple fact is when unemployment is this high people will hold onto money and not spend it.  When they do not spend, their is nothing to move.  And, this translates into lower freight volumes.

This can be reflected in my infamous love affair with the inventory to sales ratio.
 This ratio has stayed flat for a while and recently had a small uptick.  We will be getting a new reading this Thursday but the trend line is clear:  Businesses thought sales would increase, inventory went up and the sales did not come.

Again, more indication of a lack of freight demand.  This also means that when demand picks up there will be a lag in freight demand as inventories will need to clear out.

The summary is simple:  While last week may have ended with a bang on Wall Street, it was a thud on main street - inventories up, unemployment up, construction spending did not keep pace with expectations and manufacturing actually contracted.

In a real perverse way, you know the physical economy is doing poorly when the market is up because the market is being driven by the expectations for the FED to keep rates low and keep the quantitative easing program going.  When physical economy results come in below expectations, the traders believe this will keep the Fed going, which will then boost the market.  If you see the market collapse then, perhaps, we will see a signal in the growth of the physical economy as the market collapsing will be an indicator the traders believe the Fed will be backing away.

What is down is up!


Friday, May 17, 2013

Vacation Got the Best of Me - Maersk Looks into A Dim Future for Containers

Ok, just for my regular readers, I am back.  Took a bit of a vacation and toured around Europe for a while.  Sorry for the lack of posts and I will begin getting back to my normal cadence.  Now on to business and the first one will be the state of ocean freight.

A recent article in the Wall Street Journal cited Maersk warning of subdued demand in ocean container traffic.  And, of course, I have been warning and talking about this and about the lousy economics of this industry since I published "The Sick State of Ocean Freight" back in March. An industry which is far over capacity is now launching new Mega ships and increasing the overall fleet size - not a formula for success.. unless.....

Maersk says they are overcoming the excess capacity by increasing rates.  Huh?  This is one of the few industries which, dare I say, colludes, and everyone knows it.  In fact, it is quasi legal so when you are negotiating don't necessarily expect the laws of economics to work.  We have all learned when supply exceeds demand prices go down.  According to the Wall Street Journal:
"Excess tonnage, estimated at 10% above current demand, has kept rates under pressure and all but seven of the biggest 30 players lost money in 2012. Cumulative losses over the past four years have run to about $7 billion."
It goes on to say that Maersk has said:
"Still, Maersk posted a better-than-expected first-quarter net profit as it pushed through higher prices to customers. It expects container transport demand to remain subdued this year amid challenging conditions.
Essentially Maersk is saying the customer will pay for empty ships through higher prices.  I am sure if they were under capacity and over demand they would say you will pay higher prices to "reserve a spot" on an already oversold ship.  Apparently the story goes not matter what is happening in the market place you will pay higher prices.

If you remember my multiple discussions on "Anchoring" you will see this activity in action.  They are, through these public statements trying to anchor the buyers thoughts.  Essentially start all conversations with the premise that rates are going up in some fashion and now it is just a question of how much.

Don't fall for it.  As i have said over and over again use the laws of economics, understand your lanes and understand the economics of your lanes and then use that as the starting position.  You will have a much better outcome.

Thursday, April 11, 2013

The Incredible Shrinking Freight

PCs replace mini and mainframes,  Laptops replace desktops, tablets replace laptops, smartphones replace tablets...  and so the saga goes.  The incredible shrinking freight.  PC sales are horrible.

Wednesday, March 20, 2013

The Sick State of Ocean Freight

I do not spend a lot of time on ocean freight and I probably should spend more.  Suffice it to say I know it is in a dramatic over capacity situation and has been for a few years.

Recently, I read an article over at Supply Chain Brain titled: Economics 101: Did Ocean Carriers Miss The Lesson and it really brought home just how "sick" this industry is right now.  The critical fact is capacity is growing by about 7% and demand may grow by 1% if we are lucky.  The ships are already underutilized, new "mega ships" (like the Maersk 18,000TEU "Triple - E" ship) are coming on line and demand does not seem to be growing.  Add that they have parked what they can and have "slow steamed" as much as they can (short of just drifting in the current) and I think you see this is the makings for a bad industry.

The good news is if you are in procurement for ocean freight you should be delivering great results to your company bottom line.  Oh, and those GRI's which seem to pop up every now and then - you can ignore them thank you.  They cannot possibly stick.

If you have a minute.. watch below as the behemoth is being built:


Tuesday, March 5, 2013

Why I am Not Concerned About The "Driver Shortage"

The myth that has existed in trucking for over 15 years is some year we will get into such an acute driver shortage that freight will be at a standstill and you will be lucky if a truck shows up to pick up anything you have to ship.  In fact, many trucking company executives have parlayed that story into a reason why shippers should pay higher than market prices today for freight for fear that when that day comes only those who over paid in the past will be serviced.

That was 15 years ago and the time has yet to come and if you bought into the story you have "overpaid" for 15 years and the crunch (and your perceived promised reward) has yet to come.   Of course, as always, the story has other aspects to it.  I do not doubt that the driver pool is shrinking and people do not want to drive long haul trucks.  However, the good news is the market is taking care of this problem in 4 ways:

Miniaturization:  This phenomenon is everywhere whether it be in packaging, the product itself or the actual and complete disappearance of the the physical product.  I bought a stereo for a new place I have and it consisted of a Jabra® Soulmate and my iphone.  The entire thing can fit in the palm of my hand and it gives off as much sound as a stereo that came in 3 boxes 10 years ago.  This would not be seen if you looked at GDP numbers or sales numbers of companies because from a revenue and profit standpoint, the company did as well as when they were selling massive boxes.  However, from a freight standpoint, they can fit a months sales into 3 trucks. Or, better yet, it is all sent via UPS.

Of course, we all know this is happening in packaging and other aspects of the freight.  And, the disappearance of freight is becoming very real with iPods, Kindles and now 3D printing.

Focus on Profit v. Revenue Growth of Shippers:   I keep hearing that once the GDP gets to 3% we will have a massive shortage and I am not convinced.  If you look at the financials of the major shippers you will find they are doing very well (as are the transportation companies).  Why are they doing well? It is generally not a growth in product sales / revenue story but more of a growth in profit story. They are managing costs and increasing prices (despite the Government telling us there is no inflation).  This means you cannot equate a great quarter to increased freight.  It is not as connected as it was at one time.

Intermodal:  This, of course, is the grandaddy of them all.  The movement to intermodal continues and seems to be picking up speed.  Shippers who were afraid of it just two years ago have capitulated and even segments of supply chains (i.e. inbound) which historically shunned this mode are now buying into it.  Bottom line:  This is the major counterweight to any type of driver shortage.  This is gone beyond a nice "substitute" for truck freight and has now become the "category killer" for truck freight.  Acceptable length of hauls (LOH) are decreasing (one bid wanted intermodal rates on lanes 400 miles or greater), service is increasing and overall people are moving so much freight over to intermodal that truck is really just catching the local P&D and interplant moves.  P&D and interplant moves are nicely served by local niche players and the need for a nationwide network for a truckload carrier diminishes dramatically.

Economics 101: This is the final reason I am not worried.  If the driver shortage becomes very acute and the demand exists driver wages will increase bringing more drivers into the market.  I am a firm believer in market equilibrium and market clearing prices.  Yes, driving is a hard job.  However, as we have seen in the oil fields in North Dakota, people will do hard jobs if the pay is right.  So, bottom line is, no need to pay "extra" today because if needed, you will absolutely have to pay extra tomorrow.  And any sales person who tells you that because you paid extra now you won't have to pay extra later is either lying to you or just does not understand economics.

My conclusion:  Watch the economy, watch the market, and watch your freight but do not buy into the scare of "pay up now" to be serviced later.  It makes no economic sense and it makes no sense given the current situation of transportation companies.