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Jae Jun
Ravi Nagarajan
Articles (5983)  | Author's Website |

Warren Buffett’s “Desert Island” Economic Indicator

September 19, 2009 | About:

In a recent CNBC interview, Warren Buffett was asked to identify one economic indicator that he would consider most relevant for evaluating overall economic conditions if he was stranded on a desert island for a month and had no other access to information. He immediately mentioned rail car loadings as a top candidate for this “desert island indicator”, and has made similar comments in the past.

Let’s assume that Mr. Buffett received the Association of American Railroads September Rail Time Indicators report and had to draw some conclusions regarding the state of the overall economy. The report actually includes a significant amount of information that is not directly related to rail shipments, so let’s just focus on a few of the indicators published in the report that pertain to railroad indicators:

“U.S. freight railroads originated 1,116,182 carloads in August 2009, down 16.4% (218,593 carloads) from August 2008 and the 10th straight double-digit monthly carload decline. However, the percentage decline in August was the lowest since February 2009.”“Average weekly carloads on U.S. railroads in August 2009 (279,046) were more than 15,000 carloads higher than in July 2009 and higher than any previous month in 2009, though seasonal factors account for some of that increase…”
Looking at the report’s breakdown of rail traffic by commodity type, nearly every category still shows double digit declines from the prior year, although as the report indicates, traffic has improved significantly from the depths of the recession earlier this year. There are numerous charts in the report that show more granular details.

The rail indicators seem to show an economy that is improving but still significantly depressed compared to the period prior to the September 2008 meltdown in financial markets. Average weekly carloads still falls far short of the levels seen in 2006 and 2007. While year over year comparisons will improve starting in October, it does not appear that predictions of a “V” shaped recovery can be supported by this indicator.

Obviously rail traffic is just one indicator of economic activity but it deserves special consideration given Mr. Buffett’s recommendation and is something to keep in mind for those who are making investment decisions predicated on an assumption of rapid improvements in economic activity in the 4th quarter.

In general, making investment decisions based only on macroeconomic factors is not consistent with a value investing approach. However, the investment thesis for many companies can be influenced to some degree based on whether an investor is assuming a quick return to rapid growth or a longer period of relative stagnation in the economy. It is dangerous to look at average earnings of a company from 2005 to 2008 and assume a rapid return to those levels if the company is particularly exposed to macroeconomic factors.

Ravi Nagarajan

http://www.rationalwalk.com

About the author:

Ravi Nagarajan
Jae Jun is the author of Old School Value, a value investing blog dedicated to the Old School methodologies and teachings of the investment greats such as Graham, Buffett and Fisher. The blog deals with finding intrinsic value, fundamental stock analysis and special situations including spinoffs and merger arbitrage.

Visit Ravi Nagarajan's Website


Rating: 4.5/5 (47 votes)

Comments

guruek
Guruek - 9 years ago    Report SPAM
Talk to a trucking sale rep the other day. They were down 30-40% in volume and trucking companies are killing each other on pricing. Also an interesting comment he made is that retailers has been cutting back on inventory, so their impact is much more severe than the GDP decline: first on a low running rate, then on the reducing inventory.

Makes me wonder whether rail car loading factor a leading or lagging indicator.
lexloeb
Lexloeb - 9 years ago    Report SPAM
I live on the union pacific line and the last few days the traffic was constant and loud. It as dead not long ago. A few trains are long but none a mile long in terms of having 100 cars and multiple locomotives and none are double stacked cargo boxes like they were in the boom. The Burlington Northern line across the river was pretty quiet ...did not hear it doing much...maybe the tracks are under repair there? living on the rails you can gage the economic activity going to and from the Port and City / Inland. Also noticeable on the river the barges are loaded up .

Separately read the Aurthur Laffer Article from the wall street journal on 9-22-09 (I think it is that date). A little history there on the FDR instant devaluation of the dollar much like we see in Latin American peso fiasco's is a great cause for concern with the present fed and administration. Not all bad for stocks necessarily although historic data says stocks don't weather inflation that well and there is a piece by Warren Buffet that makes similar claims. I have the opportunity to be right at the heart of the Mexican capitol during one of their banking crises when they forced holders of us dollar accounts in the country to take pesos the same way FDR forced gold out of the hands of American owners. We know it must be constitutional if it happened once before. The danger is it might not just be gold this time but stocks, bonds , real estate, anything. It was fascinating listening to the president say "next time the banks fail he will just let them fail." Like hell that would happen not that it should have. The funny thing is that this same administration has sufficient control over some of the biggest banks yet that they would be at least partly responsible. Its not like to happen again until long after the president is out of office given all the instant liquidity floating around the markets still. The same president also essentially re-introduced a new improved sub prime loans for all program and collateral requirements are just 5 and 10 percent for instant home ownership. It is possible to see another real estate housing crash coming at some point particularly when you see the sales prices now , again, being unaffordible for most buyers. It would have been better for the economy as a whole for home prices to go to levels that were affordable instead of getting propped up as they were. Inflation is then the savior of those who are in too deep who can survive long enough for that to kick in but if interest rates rise as the fed chief promises volker style then inflation maybe up but home prices could be flat to down just because the mortgages are less affordable. Remember what happened when interest rates were 10, 12 and 14 percent? I get the sense some people want capitalism to fail in a big way. Michael Moore has a new anti-capitalist film out he expects to make 100 million dollars on for his own bank account. It is called something like Capitalism is love and it features Fox Television's Bill O'reiley saying that he thinks capitalism is a sin in the tv trailer.

Blaming the politically connected scumbags in Lower Manhattan and across the river for their actions is one thing but to blame capitalism and suggest an alternative is viable seems completely absurd to some one with my world experience seeing China before and After among other places. I saw Spain before and after and also Mexico before as it was before because it does not get the kind of political change that leads to economic change toward real capitalism they so desperately need. I saw Taiwan , Japan , Ireland, Korea develop with amazing speed with capitalism and the total nowhere of alternative to capitalist countries. Michael Moore probably thinks he is wall street's second 911 with this stupid new film of his. Success if he were to achieve it might mean that the financial capital of the world would just become Singapore...money flies across national boundaries faster than ever if you spook it with online transaction so easy. Moore probably believes that central planning that gave us our public schools fiasco in this country is the best way to re-create the financial system? How about a soviet five year plan? At least all the money from Moore's film is going to a good cause--The Moore daily menu fund.
anders
Anders - 9 years ago    Report SPAM
Hi,

Thank you Ravi for all your articles.. I read them whenever time allows..

Here - in Europe - I keep an eye on the Baltic Dry Index (a measure of what it costs to ship raw materials - like iron ore, steel, cement, coal and so on - around the world) to get an impression of overall economic conditions.

Regards,
figuemi1
Figuemi1 - 9 years ago    Report SPAM
Hi

I am new to the site but find this article and the comments left by others very intersting reading..

Thank you all for your postings.

Regards to all
berkshirefan
Berkshirefan - 9 years ago    Report SPAM
charlie, you should have removed the huge booger from your left nostral before the interview.

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