Sunday, January 29, 2012

Oh The Freight That You’ll Move

Oh the freight that you’ll move….

You can move in on a truck
With a driver who’s named Buck
You can put it on a train
You can fly it on a plane
You can put it on a ship
And hope it will not flip
You can flow it in a pipe
(Well actually you can’t do that because building one more pipeline would harm the environment and eventually kill us all!)

The first estimate of 2011 Q4 GDP came in at 2.8%.  Because replenishment of inventories was a large portion of that growth, it is a good time to check in on the freight market.


·  The American Trucking Association Tonnage Index increased 6.8% in December.  This was the biggest gain in 13 years.

·   The Pulse of Commerce Index (based on commercial diesel fuel use) rose 0.2% in December

·  FTR (Freight Transportation Research) Truck Loadings Index increased 0.2% in December and was up 4.9% yoy.
What it means:  The ATA index number is useless because it is being seasonally adjusted according to historic factors and things are still far from normal.  Businesses are still trying to balance their inventories, but things may be getting more stable.  Truck freight is growing at a rate of 2.5-3.0% a year and was strong in December.


·  Carload freight in December was up 7.3 year-over year. Intermodal increased 9.4%.

·   FTR December carload index + 1.0% (2.9% yoy).  Intermodal +0.4% (3.7% yoy)

What it means:  Carload freight is growing again after stagnating for six months in the middle of the year. It is still almost 11% below the peak year of 2006.  Intermodal (mostly imported consumer goods) has almost fully recovered and is very close to 2006 levels.

Port Traffic

Import freight at the ports had a strong month in December after being slow the previous six months.  Export traffic continued to grow, though at a slower pace than earlier in the year.

What it means:  Consumer spending is starting to pull through more imported goods.  However, exports slowed some in December and need to continue to grow for manufacturing (and job creation) to improve.

Baltic Dry Index

This index measures the price of moving raw materials by sea by comparing the demand for freight with the supply of shipping capacity.  Historically it was a useful indicator for future world economic growth.  In recent years it has been much less accurate due to Chinese growth and swings in the supply side.

The index has fallen 43% in the last month.  This would indicate the global economy is about to crash.  Realistically, it is reflecting a slowdown in the Chinese economy (especially iron ore demand) and a recession in Europe.  Economists in the U.S. think these events will restrict domestic economic growth, but not stop it.

·  November total inventories rose 0.3%, sales up 0.3%.  Wholesale inventories up 0.1%, sales up 0.6%

·  ISM (Purchasing Manager’s) Manufacturing Report stated that inventories were decreasing and that customers’ inventories were too low.  It also reported that imports and exports are growing and new orders are increasing.
The Scoop

Economists are concerned with the inventory build-up in Q4, 2011.  But this increase was due to inventories being too low in Q3.  Sales were higher than expected in Q3 which is a good thing.  Sales continued to grow in Q4, so businesses added to their inventories.  There is no evidence businesses are overstocked.  Freight was strong in December so companies are expecting stronger sales in January.

 Consumer confidence is increasing as is employment so sales should continue to increase.  We are one-third into Q1 and there is no indication yet that the economy is losing any steam.  China and Europe are concerns.  Iran remains as issue, but the more power it loses in this game, the louder it yells (similar to a 7 year-old on the playground).

The Forecast

My expert panel is predicting GDP growth of 1.9% and 2.1% in Q1 and Q2.  I think we can squeeze out an extra half point to 2.4% and 2.6%.  I know this is much higher than my forecast in October.  However this is when the much respected Economic Research Cycle Institute said we were going into recession.  ECRI either was too early on their prediction or else they’ve got some “splainin” to do.
The Model T also improved some in December after being stable for several months.

Monday, January 16, 2012

This Sugar Substitute May Not Be So Sweet

(I am co-authoring this post with Dr. Reginald Sheeply, Professor of Economics at Scotland University)

Last summer I vacationed in Hershey, Pennsylvania home of the world famous Hershey Chocolate Company. And while my family was fascinated by all the chocolate, I was fascinated by the company’s marketing, quality control standards and deep commitment to American manufacturing.  I was also inspired by the story of Milton Hershey who finally was a huge success in the candy industry after several devastating failures. 
We ended our day at “Chocolate World” with a visit to one of the largest candy stores in the world.  We are all “kids” in that candy store.  There must be a hundred different types of chocolate in addition to other candies sold by Hershey.

After hearing numerous times during the day about the commitment to domestic manufacturing, I looked at the label on a package of Jolly Ranchers (a brand acquired by Hershey in 1996) and saw the words “Made in Canada”!  What in the name of Milton Hershey is going on here?
It all has to do with the economic “Law of Unintended Consequences” which states that actions by individuals and especially governments often result in unanticipated effects.  

In the 1980’s some congressman convinced his colleagues to enact high tariffs on imported sugar to preserve the jobs of domestic sugar beet farmers.  I believe he accomplished this very difficult feat for one of the following reasons:
A.     He was a very skilled congressman
B.     Many other congressmen owed him a big favor
C.     He had compromising photos of the Speaker of the          House and a farm animal.

Dr. Sheeply, what do think about this if it was in fact reason “C”?
“That’s baaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaad”
This sugar tariff which is still in effect has resulted in the following:
Higher Sugar Prices

Sugar prices are much higher than they should be.  It is in effect a tax on sugar that is estimated to have cost U.S. consumers around $2.5 billion in 2009.  A sugar tax?  Where have you heard that before?  Oh that’s right; the British enacted the Sugar Act on the American colonies in 1764.  It was one of the taxes that led to the Revolutionary War.  I guess back then we got upset, now we just blindly pay it.
Dr. Sheeply, what is your opinion of high sugar prices?

“They’re baaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaad”
Unintended Job Results
The high sugar tariff is preserving the jobs of sugar beet farmers; however the unintended consequences have been significant.  Products that use high amounts of sugar, Jolly Ranchers("hard candy") for example, cannot be competitively manufactured in the U.S. so every one of those jobs moved to Canada or Mexico.  It is difficult to measure the exact impact on jobs, but it very well could be a net job loss.
In addition, it puts every domestic manufacturer that uses sugar in its products (like Hershey chocolate) at a competitive disadvantage against imported products and limits export sales.  Sugar prices are very important to chocolate manufacturers.  Ironically two of Milton Hershey early business failures were caused when sugar prices spiked.  The Hershey Company survived because Milton solved the problem by growing his own sugar in Cuba.  Milton Hershey would despise the sugar tariff.
Dr. Sheeply, what do you think about losing jobs due to high sugar prices?

“That’s baaaaaaaaaaaaaaaaaaaaaaaaad”
A Questionable Substitute
Because sugar prices were so high, Coca-Cola and Pepsi started using a new sugar substitute called High Fructose Corn Syrup (HFCS).  This sweeter is derived from corn using a special manufacturing process.  There would be no market for this product if sugar was available at the free market price.
The problem here is that several credible medical studies have found there are possible health concerns in how HFCS is processed by the human body.  This impact is much more prominent in men than it is in women.

Of course the corn farmers and HFCS producers have run television and radio advertisements promoting the naturalness and wholesomeness of the product.  Remember these are the same people who think that burning corn as fuel in our cars is a great idea.
So who are you going to believe: medical scientists who are trying to keep us healthy and have no financial interest in the research findings or people who are making billions of dollars off the product?

I don’t know the answer, but it is a moot point with me.  You see this one is personal.  I have two health conditions that I am currently taking herbs and vitamins to control.  The medical studies say the main two health concerns with HFCS are the two conditions I have.  I am the canary in the coal mine on this one.  If the studies are accurate, HFCS will kill me before it kills you.  So I obviously try to limit my HFCS consumption as much as possible.  People always laugh at my McDonald’s meal of Quarter Pounder, large fries and Diet Coke.
Dr. Sheeply, what do you think about HFCS?

“It’s baaaaaaaaaaaaaaaaaaaaaaaaaaaaaaad”
Therefore policies by my own government may be “poisoning” me and my government is making me pay more to do this.  It’s enough to make someone a Ron Paul supporter.

Dr. Sheeply, what did you think of working with me on this blog post?
“It was baaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaad”

Monday, January 2, 2012

These Economic Predictions Will Bowl You Over

Hey my 2011 calendar just ran out of days and the Spud Bowl and Fight Boredom Bowl are over, so it must be the start of a brand new year.  Last year I made my “Economic Bowl Picks” versus the picks of my economic expert panel (the average of my seven favorite economists whose forecasts are presented by the Wall Street Journal).  Here is how I did against the panel (please note that the actual numbers are current estimates, but should not affect the final results):

CPI  (Inflation)
Housing Starts
Crude Oil  Price

Officially I won three to two, but there is no room for bragging when my GDP and Housing Starts forecasts were so bad.  The economy spurted after an early surge and took until the end of the year to get going again.  I erroneously thought the housing market would begin to recover after hitting bottom.  Instead it scraped along the ground for the entire year.

Here are the 2012 Economic Bowl Picks:

The GDP Bowl
Richmond Recovery vs. St. Louis Snails

Line: Snails by 2.3% (The line is the average of the expert panel forecasts)
The economy has some momentum going into 2012. However most economists are predicting slower growth in Q1 and Q2, but I haven’t read a good explanation why.  The Model T (which is based on commercial transportation factors) indicates growth of more than 3%; however the Model T Junior (based on total transportation factors) says that we are entering a recession.  The growth this year will be uneven, but I think we can do better than 2011.  My Pick: Recovery by 3.0%

The CPI Bowl (Consumer Price Index)
Boston Bouncers vs. Louisville Lows

Line: Lows by 1.8%
Most commodity prices have recently moderated, so inflation is expected to be lower than last year.  I agree with the experts.  My pick: Lows by 2.1%.

The Unemployment Bowl
Portland Paychecks vs. Kansas City Cutters

Line: Even at 8.6% (year-end)
This one is very tricky because the unemployment rate actually rises at the beginning of a recovery as thousands of people reenter the workforce.  I expect the unemployment rate to bounce all over the place this year.  However the employment market is better than most economists believe.  One of my colleagues was downsized in late 2008 and was unemployed for 13 months.  Recently he had to reenter the job market and it took him only four weeks to find a job.  Even though the unemployment rate may reach 9% again, there will be enough new jobs by the end of the year to drive the rate down.  My Pick: Paychecks by 8.2%

Housing Starts Bowl
San Diego Starters vs. Denver Dirt Piles

Line: Dirt Piles by 674,000 Starts

The housing market is showing good progress at the end of 2011.  However economists do not think this will continue.  Housing prices are still depressed and this is supposed to restrict housing starts.  Things are still so disjointed that I’m not sure how much prices of existing homes are impacting starts.  I believe the recovery in the housing market may have started in Q4, 2011 and will continue (although slowly) throughout 2012.  My Pick: Starters by 720,000.
Price of Crude Bowl
Fresno Frackers vs. Libya Liberators
Line: Liberators by $94.50 (year-end)

(I love the name Fresno Frackers because they wouldn’t frack in California if it was gold that could be extracted)
This is the most difficult “game” to predict.  World demand, the continuing Arab Spring, an expected stronger dollar, Iranian issues and increased Libya supply will move prices significantly.  I don’t think we can make it through 2012 without someone dropping a few bombs in Iran (Instead of sanctions we should threaten to send them Kim Kardashian). I think Iran will be the most volatile place in 2012.  They are overplaying their hand and I think the “Arab Spring” could reignite there this year.    The barrel price will fluctuate between $80 and $110 during the year.  My Pick: Frackers by $101.

Stock Market Prediction:
In my last post I told you that the Model T (last December) said the stock market would peak around 1400 and it peaked at 1370.  If I knew that I was going to be that close, I would have been more precise in the forecast!

The stock market should be volatile again this year as the European financial crisis get worked out, the Iranians get worked up and Obamacare either gets thrown out (maybe with Obama) or gets cemented.  In addition will the new supreme, fearless, bad haired, commander in Korea spend his time stirring things up or just playing video games? Should we call him the “Supreme Kidmander”?
My Pick:  The Model T says the S&P will reach 1435 in 2012.  This is consistent with several experts’ forecasts which use models way more sophisticated than mine.  The good news is the stock market should peak in Q4 and be able to better hold its gains, unlike 2011.

Buy Low and Sell High everybody.  Hope your 2012 is prosperous!