Department of Empirical Observation:
To
provide relief from government indexes, we have our own collection
of economic indicators. The foundation was laid by our friend Hobo Keeley,
whose work in cigarette-butt length and business at brothels has been much
noted. We are pleased introduce some new ones exclusively to readers of
Daily Speculations. If you have an indicator you’d like to share, send it to
gbuch@bloomberg.net
Trains and the Market
A distinguished member of the Old Speculators’ Club writes:
I drive out to the spurs and
count the trains. Then I count the
trains moving on the rails up the Central Valley. It stands to reason
that the smaller the trains are,
then the less that is being shipped.
After doing this for many years, I have seen a definite correlation to
what the
economy is doing and the length
of trains.
It is similar to people who
forecast troubles at Kmart long before most others because they counted the
cars in the parking lot. Or Wal-Mart's
14/15 indicator that measures the
difference in sales between the two days of the month.
A lot can be discovered through observation.
The D.M. wrote again on Dec. 5. 2003:
I was in the San Joaquin Valley last week and
did another update to my train counting. Over the week I counted 6 trains moving
through the valley.
None of them was 100 cars long. The average length was 64 cars. This would tend
to be a bearish indication on the future economy as it shows a low level
of rail shipment. I am waiting to hear from others around the country to give me
their updates.
Will writes:
I'll postulate that the number of cars in a train is similar to the pressure in a pipe. The number of locomotives determines the maximum capacity of the system and the number of cars in the train, a measure of capacity utilization. Fuel consumption would provide a more accurate measure. Nonetheless, the higher the utilization, the higher the implied demand for the goods being moved. It’s a diversified measure though so its is difficult to distinguish between which goods shipped by train and if any experiencing abnormal demand.
Several factors influence the number of cars in a particular train, including large orders, the timing of required delivery, economic shipping volumes, etc., so I'm not sure that counting the number of trains with more than 100 cars will give you the right picture. A shift to smaller shipment sizes but an increase in frequency would deceive the indicator.
Trucks are moving a huge amount of goods as well. I imagine a truck counting system along key routes might reveal capacity utilization more closely as they represent smaller units of measurement. The key would be in finding which routes have the best predictive power. (12/6/3)
Henry Gifford writes:
There are a large number of factors influencing the number of trains, with
economic activity being only one of them.
Last month a new weekly 60 car refrigerated train started shipping produce from
California to The South Bronx (the part of New York City where Haagen
Dasz ice cream got started). If it passes you it would account for 1/6 of the
trains you see, and if it passes empty on the way back it could account for
2/6 of the trains you see.
Some fright flow patterns favor better "backhaul" ratios (filling empty trains
on the way back), while other patterns don't. For example there is a
severe shortage of grain hauling cars in the Midwest now, so the cars are
presumably rushed from coastal ports straight back to the Midwest. Secondary
markets that trade guarantees of on time train performance have skyrocketed,
making detours to improve backhaul ratios less feasible.
Then there is the Canadian National buyout of much trackage in the upper Midwest
US a few years ago. They instituted a policy of running trains on
schedules regardless of demand. This replaced the previous system of putting a
train together when there was demand. Customers love the predictability
enough to pay more (still a lot less than trucking), and other railroads in the
US are following suit. So you might count some short or empty trains.
Another result of the CN scheduling policy is that United Parcel Service is now
experimenting with shipping from coast to coast by rail. Railroads have
worked out a schedule that gets a train across the US in 63 hours, vs. 60 by
truck. The railroads' attitude is that they will move heaven and earth to
get UPS's business. If you count more trains as a result you are just seeing a
shift from trucks.
Coal imported from South America moves to power plants by rail, but strikes in
the mines or changes in the price of other fuels change coal shipments.
Ditto for weather's effects on fuel prices and electricity demand, or a
utility's using up their pollution credits.
Counting locomotives is an interesting idea, but different locomotives have
vastly different capacities, and are used for different purposes. In the
mountainous states you have to stand there for 1/2 hour to see if there are any
locomotives in the middle or at the end of the train that are necessary
to prevent pulling the train apart with too many locomotives all at the front.
Then there is the complication of locomotives towed back by a short
or lightly loaded train or going up the less steep side of a hill.
Fuel is an interesting idea too, perhaps averaging out some of the above
complications, with the advantage that railroads are stuck with no fuel
choices. How could the data be obtained? I fear that even with good data there
are too many factors to make fuel a good economic indicator over the
years.
Pressure in a pipe does not limit the flow, but is related to bursting limit.
Flow capacity for a given fluid velocity is proportional to about the
fourth power of the pipe diameter, with wall roughness playing a minor role. A
fascinating relationship between pipe length , diameter, other resistances,
and pump capacity determines flow. The math for calculating flows in networks
with parallel paths used to require repeated guessing to solve
simultaneous equations with a number of variables equal to the number of
possible fluid paths, but I invented a math formula that avoids the need for
simultaneous equations, or for even using a computer. Unfortunately, I don't see
any application to investing.
The analogy to railroads is that capacity is determined by a complicated
relationship between available locomotives, cars of the right type, track,
and labor. I think the time it would take to calculate this would exceed the
length of time between changes in cycles.
Just for New Yorkers
“The Hornet” offers an indicator that does not require
leaving Manhattan:
I call it "The Steakhouse
Indicator.” I live and work in the East 40s and as you may know, the area is
full of steakhouses - Palm, Palm Too,
Sparks, Bobby Vans, Del Friscos,
etc. I can recall a time, say 1999, when
it was not possible to find 3 square feet of space in any bar of
any steakhouse where one could
actually have some space to enjoy a drink.
Corporate credit cards were being thrown through air between
bartenders and customers stacked
10 rows deep off the bar rail. It was a
suffocating, miserable experience - bad service, spilled drinks, and
poor company. The dining room floors were overcrowded, the
steaks cold, the asparagus overcooked, and the wines expensive. A walk-in would be lucky to get a seat
before 11pm.
For the last 4 years I have made
it a routine to circulate to different steakhouses around midtown and ask the
bartenders, waiter staff, and
hosts how business has been, but
more importantly, I make observations as to the crowd, or lack of a crowd, in
the bars and dining rooms of
these establishments. I have noticed a steady decline. The most interesting finding is that
corporate card use is nearly dead. In the
old days, one could see the green, silver, and gold Amex cards lined up on the
bars, stacked 2-3 cards high. These
days, the majority of the plastic in use are personal cards - predominantly the
popular Visa ATM/Debit Check Card. Most
of these cards come with $1,000 purchase limits!