Posts

The Big Comeback in Railroads

Want to know the best way to play the coming recovery in oil, commodities, precious metals, and emerging markets?

Buy the railroads. At least if you are early, you still have a functioning, cash flow positive business, unlike the rest of the above.

Since they peaked in early 2015, railroad stocks have been beaten like the proverbial red-headed stepchild, trading with the collapse in oil and coal tick for tick. Lead stock Union Pacific (UNP) has seen its share price crater by 36% since then before recently recovering half of that.

What follows a global synchronized slowdown, led by China and emerging markets? A global synchronized recovery, led by China and emerging markets.

I love railroads because they used to belch smoke and steam and have these incredibly loud, romantic, wailing whistles.

In fact, my first career goal in life (when I was 5) was to become a train engineer. By the time I was old enough to know better, American railroads almost no longer existed.

It turns out that the railroads today are a great proxy for the health of the entire global economy. They are, in effect, our canary in the coalmine.

If oil prices stay low enough for long enough, it will boost demand for everything else that Union Pacific ships, including houses, furniture, cars, and every other sweet spot for their franchise.

Union Pacific (UNP), in effect, has a great internal hedge for its many businesses. When one product line weakens, another strengthens. This has been going on since the 19th century.

The industry is carefully watching the construction of a second Panama Canal across Nicaragua (click here for ?Who the Grand Nicaragua Canal Has Worried?).

If completed by its Chinese promoters within the next decade, it could bring an incremental shift of traffic from the US West Coast to the Gulf Ports.

Even this is a mixed bag, as this will move some business away from strike-plagued ports that are currently causing so much trouble.

When I rode Amtrak?s California Zephyr from Chicago to San Francisco in 2014, I passed countless trains heading west hauling hoppers full of coal for shipment to China.

Last year? I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.

Take a look at the charts below, and you will see that the shares of virtually the entire railroad industry are breaking out to the upside.

In two short years, the big railroads have completely changed their spots, magically morphing from fading coal plays to emerging oil ones.

You?ve heard of ?fast fashion?? This is ?fast railroading?.

Today the big business is coming from the fracking boom, shipping oil from North Dakota?s Bakken field to destinations south. In fact, the first trainload of Texas tea arrived here in the San Francisco Bay area only a couple of years ago, displacing crude that formerly came from Alaska.

There are a wealth of interesting companies in the railroad sector now. You could almost pick any one.

These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), Kansas City Southern (KSU) and Canadian Pacific (CP).

Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service.

A friend of mine, taking a passenger train from New Mexico to Los Angeles, found his car abandoned on a siding for 24 hours where he froze and starved until he was discovered.

New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy.

The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government-owned Amtrak passenger service was created out of the ashes.

I know all of this because my late uncle was the treasurer of Penn Central.

Fast forward nearly half a century, and what you find is not your father?s railroad.

While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and lines were reorganized and consolidated.

The government provided a major assist with sweeping deregulation. It became tremendously concentrated, with just four companies dominating the country, down from hundreds a century ago, giving you a great oligopoly play.

The quality of management improved dramatically.

Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from West Coast Ports.

A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.

All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment.

The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.

Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa.

Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double stacked sea containers.

Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic.

Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.

I have some firsthand knowledge of this expansion. Every October 1st, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in.

There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.

During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad.

I can guide my guests through that tunnel today with flashlights because Union Pacific (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.

While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing and another energy renaissance) and Canada (natural resources) promise to boost rail traffic with the US.

The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, providing all great cargo for railroads.

And who knew?

Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four time
s more energy efficient than competing trucks.

In fact, many companies are now looking to railroads to reduce their overall carbon footprint. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad six years ago has probably doubled in value since then.

You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities.

My past letters have chronicled adventures riding the Orient Express from London to Venice and Amtrak from New York to San Francisco.

I even once considered buying my own steam railroad, the fabled ?Skunk? train in Mendocino, California, until I figured out it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.

It gets worse.

Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.

The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition, and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.

When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, click here and hit the ?PLAY? arrow in the lower left hand corner.

Please excuse the shaky picture. I shot this with one hand, while using my other hand to keep my over- excited kids from running onto the tracks to touch the laboring beast.

Railroads all look like ripe, ?buy on dips? low-hanging fruit to me.

unp
csx
ksu
cp

National Network

Percent Ton-Miles

Train-Cargo

A Chat With Berkshire Hathaway?s Warren Buffett

Sometime in the early 1970?s, a friend of mine said I should take a look at a stock named Berkshire Hathaway (BRKA) run by a young stud named Warren Buffett.

I thought, ?Why the hell should I invest in a company that makes sheets??

After all, the American textile industry was in the middle of a long trek toward extinction that began in the 1920?s, and was only briefly interrupted by the hyper prosperity of WWII. The industry?s travails were simply an outcome of ever rising US standards of living, which pushed wages, and therefore costs, up.

It turns out that Warren Buffett made a lot more than sheets. However, he is not a young stud anymore, just an old one, like me.

Since then, Warren?s annual letter to investors has been an absolute ?must read? for me when it is published every spring.

It has been edited for the past half century by my friend, Carol Loomis, who just retired after a 60-year career with Fortune magazine. (I never wrote for them because their freelance rates were lousy).

Witty, insightful, and downright funny, I view it as a cross between a Harvard Business School seminar and a Berkeley anti establishment demonstration. You will find me lifting from it my ?Quotes of the Day? for the daily newsletter over the next several issues. There are some real zingers.

And what a year it has been!

Berkshire?s gain in net worth was $18.3 billion, which increased the share value by 8.3%, and today, the market capitalization stands at an impressive $343.4 billion. (Sorry Warren, but I clocked 30% last year, eat your heart out).

The shares are not for small timers, as one now costs $214,801, and no, they don?t sell half shares. This compares to a 1965 per share market value of $23.80, and is why the media are always going gaga over Warren Buffett.

If you?re lazy and don?t want to do the math, that works out to a compound annualized return of an eye popping 21.6%. This is why guessing what Warren is going to do next has become a major cottage industry (Progressive Insurance anyone?).

Warren brought in these numbers despite the fact that its largest non-insurance subsidiary, the old Burlington Northern Santa Fe Railroad (BNSF) suffered an awful year.

Extensive upgrades under construction and terrible winter weather disrupted service, causing the railroad to lose market share to rival Union Pacific (UNP).

I was kind of pissed when Warren bought BNSF in 2009 for a blockbuster $44 billion, as it was long my favorite trading vehicles for the sector. Since then, its book value has doubled. Typical Warren.

Buffett plans to fix the railroad?s current problems with $6 billion in new capital investment this year, one of the largest single capital investments in American history. Warren isn?t doing anything small these days.

Buffett also got a hickey from his investment in UK supermarket chain Tesco, which ran up a $444 million loss for Berkshire in 2014. Warren admits he was too slow in getting out of the shares, a rare move for the Oracle of Omaha, who rarely sells anything (which avoids capital gains taxes).

Warren increased his investment in all of his ?Big Four? holdings, American Express (AXP), Coca-Cola (KO), IBM (IBM), and Wells Fargo (WFC).

In addition, Berkshire owns options on Bank of America (BAC) stock, which have a current exercise value of $12.5 billion (purchased the day after the Mad Hedge Fund Trader issued a Trade Alert on said stock for an instant 300% gain on the options).

The secret to understanding Buffett picks over the years is that cash flow is king.

This means that he has never participated in the many technology booms over the decades, or fads of any other description, for that matter.

He says this is because he will never buy a business he doesn?t intrinsically understand, and they didn?t offer computer programming as an elective in high school during the Great Depression.

No doubt this has lowered his potential returns, but with the benefit of much lower volatility.

That makes his position in (IBM) a bit of a mystery, the worst performing Dow stock of the past two years. I would much rather own Apple (AAPL) myself, which also boasts great cash flow, and even a dividend these days (with a 1.50% yield).

Warren will be the first to admit that even he makes mistakes, sometimes, disastrous ones. He cites his worst one ever as a perfect example, his purchase of Dexter Shoes for $433 million in 1993. This was right before China entered the shoe business as a major competitor.

Not only did the company quickly go under, he exponentially compounded the error through buying the firm with an exchange of Berkshire Hathaway stock, which is now worth a staggering $5.7 billion.

Ouch, and ouch again!

Warren has also been mostly missing in action on the international front, believing that the mother load of investment opportunities runs through the US, and that its best days lie ahead. I believe the same.

Still, he has dipped his toe in foreign waters from time to time, and I was sometimes quick to jump on his coattails. A favorite of mine was his purchase of 10% of Chinese electric car factory BYD (BYDDF) in 2009, where I have captured a few doubles over the years.

Buffett expounds at great length the attractions of the insurance industry, which today remains the core of his business. For payment of a premium up front, the buyers of insurance policies receive a mere promise to perform in the future, sometimes as much as a half century off.

In the meantime, Warren can invest the money any way he wants. The model has been a real printing press for Buffett since he took over his first insurer in 1951, GEICO.

Much of the letter promotes the upcoming shareholders annual meeting, known as the ?Woodstock of Capitalism?.

There, the conglomerate?s many products will be for sale, including, Justin Boots (I have a pair), the gecko from GEICO (which insures my Tesla S-1), and See?s Candies (a Christmas addiction, love the peanut brittle!).

There, visitors can try their hand at Ping-Pong against Ariel Hsing, a 2012 American Olympic Team member, after Bill Gates and Buffett wear her down first.

They can try their hand against a national bridge champion (don?t play for money). And then there is the newspaper-throwing contest (Buffett?s first gainful employment).

Some 40,000 descend on remote Omaha for the firm?s annual event. All flights to the city are booked well in advance, with fares up to triple normal rates.

Hotels sell out too, and many now charge three-day minimums (after Warren, what is there to do in Omaha for two more days other than to visit PayPal?s technical support?). Buffett recommends Airbnb as a low budget option (for the single shareholders?).

I was amazed to learn that Berkshire files a wrist breaking 24,100-page Federal tax return (and I thought mine was bad!). Add to this a mind numbing 3,400 separate state tax returns.

Overall, Berkshire holdings account for more than 3% of the total US gross domestic product, but a far lesser share of the government?s total tax revenues, thanks to careful planning.

Buffett ends his letter by advertising for new acquisitions and listing his criteria. They include:

(1) ?Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),

(2) ?Demonstrated consistent earning power (future projections are of no interest to us, nor are ?turnaround? situations),

(3) ?Businesses earning good returns on equity while employing little or no debt,

(4) Managemen
t in place (we can?t supply it),

(5) Simple businesses (if there?s lots of technology, we won?t understand it),

(6) An offering price (we don?t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

Let me know if you have any offers.

To read the entire history of Warren Buffett?s prescient letters, please click here: http://www.berkshirehathaway.com/letters/letters.htm.BRKA

BYDDF

IBM

 

Warren Buffett

Will the Oil Bust Kill the Railroads?

No, not really.

I was fascinated by the recent comments made by Union Pacific (UNP) CEO, Jack Koraleski, about the current robust health of his company.

Fourth quarter profits rocketed by an amazing 22% and those stellar numbers look set to continue.

I love railroads, not because they used to belch smoke and steam and have these incredibly loud, romantic, wailing whistles. In fact, my first career goal in life (when I was 5) was to become a train engineer.

It turns out that the railroads are also a great proxy for the health of the entire US economy. They are, in effect, our canary in the coalmine.

Jack sees moderate economic growth in the US continuing. Demand for the heavy products the company shifts is booming. Construction products like stone, gravel, cement and lumber, are up 10%.

The dramatic plunge in oil prices brings positives and negatives. The boom in oil shipments from North Dakota has been a windfall for the railroads that may now ebb.

But if prices stay low enough for long enough, it will boost demand for everything else that the Union Pacific ships, including houses, furniture, cars and every other sweet spot for their franchise. (UNP), in effect, has a great internal hedge for its many businesses. When one product line weakens, another strengthens. This has been going on forever.

The company is watching carefully the construction of a second Panama Canal across Nicaragua (the subject of a future article, when I get some time).

If completed by its Chinese promoters within the next decade, it could bring a tiny incremental shift of traffic from the US west coast to the Gulf ports. Even this is a mixed bag, as this will move some business away from strike plagued ports that are currently causing so much trouble.

When I rode Amtrak?s California Zephyr service from Chicago to San Francisco last year, I passed countless trains heading west, hauling hoppers full of coal for shipment to China.

This year I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here?. It turns out I was right.

Take a look at the charts below, and you will see that the shares of virtually the entire railroad industry are breaking out to the upside.

In two short years, the big railroads have completely changed their spots, magically morphing from coal plays to natural gas ones. You?ve heard of ?fast fashion?? This is ?fast railroading?.

Today the big business is coming from the fracking boom, shipping oil from North Dakota?s Bakken field to destinations south. In fact, the first trainload of Texas tea arrived here in the San Francisco Bay area only a year ago, displacing crude that formerly came from Alaska.

Look at the share prices of the major listed railroads, and it is clear they have been chugging right along to produce one of the best performances of 2013. These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), and Canadian Pacific (CP). In the meantime, competing coal shares, like Arch Coal (ACI) have been one of the worst performing this year.

Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service.

A friend of mine taking a passenger train from New Mexico to Los Angeles found his car abandoned on a siding for 24 hours, where he froze and starved until discovered.

New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy. The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government owned Amtrak passenger service was created out of the ashes. I know all of this because my late uncle was the treasurer of Penn Central.

Fast forward nearly half a century and what you find is not your father?s railroad. While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and roads were reorganized and consolidated.

The government provided a major assist with a sweeping deregulation. It became tremendously concentrated, with just four roads dominating the country, down from hundreds a century ago, giving you a great oligopoly play. The quality of management improved dramatically.

Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from west coast ports.

A huge trade also developed moving western coal out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.

All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment. The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.

Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa. Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double-stacked sea containers.

Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic. Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.

I have some firsthand knowledge of this expansion. Every October 1, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in.

There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.

During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad. I can guide my guests through that tunnel today with flashlights because (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.

While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing and another energy renaissance) and Canada (natural resources) promise to boost rail traffic with the US.

The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, all great cargo for railroads.

And who knew? Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four times more energy efficient than competing trucks.

In fact, many companies are now looking to railroads to reduce their overall carbon footprints. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad two years ago has probably
doubled in value since then.

You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities. My past letters have chronicled adventures riding the Orient Express from London to Venice, and Amtrak from New York to San Francisco.

I even once considered buying my own steam railroad; the fabled ?Skunk? train in Mendocino, California, until I figured out that it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.

It gets worse. Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.

The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.

When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, please click here and hit the ?PLAY? arrow in the lower left hand corner. Please excuse the shaky picture.

I shot this with one hand, while using my other hand to restrain my over excited kids from running on to the tracks to touch the laboring beast.

UNP 1-22-15

NSC 1-22-15

NSC 9-11-14

CSX 1-22-15

ACI 1-22-15

Train-Cargo

US Railroad Network

Percent ton-miles

Not Your Father?s Railroads

When I rode Amtrak?s California Zephyr service from Chicago to San Francisco last year, we passed countless trains heading west hauling hoppers full of coal for shipment to China.

This year I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.

Look at the share prices of the major listed railroads, and it is clear they have been chugging right along to produce one of the best performances of 2013. These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), and Canadian Pacific (CP). In the meantime, coal shares, like Arch Coal (ACI) have been one of the worst performing this year, down 35%.

Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service. A friend of mine taking a passenger train from New Mexico to Los Angeles found his car abandoned on a siding for 24 hours, where he froze and starved until discovered.

New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy. The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government owned Amtrak passenger service was created out of the ashes. I know all of this because my late uncle was the treasurer of Penn Central.

Fast forward nearly half a century, and what you find is not your father?s railroad. While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and roads were reorganized and consolidated.

The government provided a major assist with a sweeping deregulation. It became tremendously concentrated, with just four roads dominating the country, down from hundreds a century ago, giving you a great oligopoly play. The quality of management improved dramatically.

Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from west coast ports. A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.

All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment. The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.

Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa. Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double-stacked sea containers.

Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic. Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.

I have some firsthand knowledge of this expansion. Every October 1, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in. There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.

During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad. I can guide my guests through that tunnel today with flashlights because (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.

While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing) and Canada (natural resources) promise to boost rail traffic with the US.

The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, all great cargo for railroads.

And who knew? Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four times more energy efficient than competing trucks.

In fact, many companies are now looking to railroads to reduce their overall carbon footprints. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad two years ago has probably doubled in value since then.

You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities. My past letters have chronicled adventures riding the Orient Express from London to Venice, and Amtrak from New York to San Francisco. I even once considered buying my own steam railroad; the fabled ?Skunk? train in Mendocino, California, until I figured out that it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.

It gets worse. Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.

The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition, and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.

When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, please click here and hit the ?PLAY? arrow in the lower left hand corner. Please excuse the shaky picture. I shot this with one hand, while using my other hand to restrain my over excited kids from running on to the tracks to touch the laboring beast.

UNP 2-4-14

CSX 2-4-14

NSC 2-4-14

CP 2-4-14

ACI 2-4-14

Rail Cargo Volume

Train-Cargo

Amtrak Map

Not Your Father?s Railroads

When I rode Amtrak?s California Zephyr service from Chicago to San Francisco last year, I passed countless trains heading west hauling hoppers full of coal for shipment to China. This year I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.

Look at the share prices of the major listed railroads, and it is clear they have been chugging right along to produce one of the best performances of 2013. These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), and Canadian Pacific (CP). In the meantime, coal shares, like Arch Coal (ACI) have been one of the worst performing this year.

Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service. A friend of mine taking a passenger train from New Mexico to Los Angeles found his car abandoned on a siding for 24 hours, where he froze and starved until discovered.

New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy. The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government owned Amtrak passenger service was created out of the ashes. I know all of this because my late uncle was the treasurer of Penn Central.

Fast forward nearly half a century, and what you find is not your father?s railroad. While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and roads were reorganized and consolidated.

The government provided a major assist with a sweeping deregulation. It became tremendously concentrated, with just four roads dominating the country, down from hundreds a century ago, giving you a great oligopoly play. The quality of management improved dramatically.

Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from west coast ports. A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.

All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment. The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.

Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa. Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double-stacked sea containers.

Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic. Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.

I have some firsthand knowledge of this expansion. Every October 1, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in. There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.

During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad. I can guide my guests through that tunnel today with flashlights because (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.

While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing) and Canada (natural resources) promise to boost rail traffic with the US.

The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, all great cargo for railroads.

And who knew? Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four times more energy efficient than competing trucks.

In fact, many companies are now looking to railroads to reduce their overall carbon footprints. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad two years ago has probably doubled in value since then.

You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities. My past letters have chronicled adventures riding the Orient Express from London to Venice, and Amtrak from New York to San Francisco. I even once considered buying my own steam railroad; the fabled ?Skunk? train in Mendocino, California, until I figured out that it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.

It gets worse. Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour. The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition, and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.

When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, please click here and hit the ?PLAY? arrow in the lower left hand corner. Please excuse the shaky picture. I shot this with one hand, while using my other hand to restrain my over excited kids from running on to the tracks to touch the laboring beast.

UNP 6-24-13

CSX 6-24-13

NSC 6-24-13

ACI 6-24-13

Rail Cargo Volume

Train-Cargo

Amtrak Map

US Headed Towards Energy Independence

My inbox was clogged with responses to my ?Golden Age? for the 2020?s piece yesterday, particularly my forecast that the US was moving towards complete energy independence. This will be the most important change to the global economy for the next 20 years. So I shall go into more depth.

The energy research house, Raymond James, put out an estimate this morning that domestic American oil production (USO) would rise from 5.6 million barrels a day to 9.1 million by 2015. That means its share of total consumption will leap from 28% to 46% of our total 20 million barrels a day habit. These are game changing numbers.

Names like the Eagle Ford, Haynesville, and the Bakken Shale, once obscure references on geological maps, are now a major force in the country?s energy picture. Ten years ago North Dakota was suffering from depopulation. Now, itinerate oil workers must brave -40 degree winter temperatures in their recreational vehicles pursuing their $150,000 a year jobs.

The value of this extra 3.5 million barrels/day works out to $134 billion a year at current prices (3.5 million X 365 X $105). That will drop America?s trade deficit by nearly 25% over the next three years, and almost wipe out our current account surplus. Needless to say, this is a hugely dollar positive development.

This 3.5 million barrels will also offset much of the growth in China?s oil demand for the next three years. Fewer oil exports to the US also vastly expand the standby production capacity of Saudi Arabia.

If you want proof of the impact this will have on the economy, look no further that the coal (KOL) and rail stocks (UNP) which have been falling in a rising market. Power plant conversion from coal to natural gas (UNG) is accelerating at a dramatic pace. That leaves China as the remaining buyer, and their economy is slowing.

It all makes the current price of oil at $105 look a little rich. As with the last oil spike three years ago, this one is occurring in the face of a supply glut. Cushing, Oklahoma is awash in Texas tea, and the Strategic Petroleum Reserve stashed away in salt domes in Texas and Louisiana is at its maximum capacity of 727 barrels. It is concerns about war with Iran, fanned by elections in both countries that have taken prices up from $75 in the fall.

My oil industry friends tell me this fear premium has added $30-$40 to the price of crude. This is why I have been advising readers to sell short oil price spikes to $110. The current run up isn?t going to take us to the $150 high that we saw in the last cycle. It is also why I am keeping oil companies with major onshore domestic assets, like Exxon Mobile (XOM) and Occidental Petroleum (OXY), in my long term model portfolio.