Sunday, July 13, 2014

Is Warren Buffett Wrong About this Economic Indicator?

It's widely understood that Warren Buffett's favorite economic indicator is freight car loadings. While the reasoning is obvious -- more industrial activity equals more rail traffic -- all indicators are subject to changing circumstances, and rail traffic data is no different. The question is whether the data is still important, and what is it saying about the U.S.industrial economy? In addition, what does the make-up of the data say for the railroad companies like CSX Corp. , Union Pacific  and Norfolk Southern ?


All about coal
Buffett's acquisition of Burlington Northern in 2009 was a classic purchase of a highly cash generative business, that has a strong competitive moat, operating in an industry set for steady long-term growth. Throw in Buffett's predilection for freight car data, and it appears to be an obvious play on U.S. GDP growth. While, all of this is true, readers should note that the rail traffic data has been somewhat skewed in recent years by the tail-off in coal demand.

This chart demonstrates the issue:


US Coal Rail Traffic Chart


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