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Rail Carloads Drop to 20 Percent Below 2008 Levels
No comments · Posted by wildebeest in economy
Last week the Association of American Railroads [AAR] released data that showed that carload volumes were higher than the corresponding week in 2008. Several bulls seized on this data as an indication that things were getting better, whereas realists had a more measured interpretation of the data. You see last week the AAR release was for the week ending July 3. In 2008 the data was for the week ending July 5, i.e. it included the July 4 holiday. Naturally anyone who wasn’t searching for data to fit a narrative would have expected that data from a week that included a July 4 holiday would be lower than from the weeks either side of the release. It follows that it was a no brainer to predict that volumes this week would be significantly down on 2008, and that is what has eventuated. As the AAR said in their press release:
WASHINGTON, D.C. – July 15, 2010 – The Association of American Railroads (AAR) today reported a decline in rail traffic for the week ending July 10, 2010, with U.S. railroads originating 252,963 carloads, down 3.5 percent compared with the same week in 2009 and down 20.8 percent from 2008. The July 4 Independence Day holiday did not affect comparison weeks in 2008 or 2009. In order to offer a complete picture of the progress in rail traffic, AAR reports 2010 weekly rail traffic with comparison weeks in both 2009 and 2008.
The following charts show intermodal and carloads freight volumes since 2007. Growth in carload volumes has stalled now for several weeks and currently shows no signs of reaching pre-crash levels. (Click charts to enlarge)
Intermodal rail freight has been stronger than carloads this year, i.e. closer to pre-crash volumes than carloads.
Based on from what we know about intermodal freight there should be some sort of correlation between container activity at our ports and intermodal rail freight, i.e. containers coming and going from ports have to be transported. The chart below shows moving averages of intermodal rail freight and total container movement at the ports of Los Angeles and Long Beach and New York/New Jersey — a 52 point moving average of the weekly intermodal freight data and a 12 point moving average of the monthly port data.
The carload data is divided by the AAR into 18 specific categories (plus a 19th called “other”). Below are the charts for each of the 18 individual categories. The same color coding used in the first two charts above applies: black — 2007; orange — 2008; green — 2009; blue — 2010. Please click on the images below to enlarge them.
Outbound and inbound container movements from the ports of Los Angeles, Long Beach and New York/New Jersey are shown in the next two charts. Of note is that container movement is trending up at both the west coast and east coast. Inbound container volumes have increased quite a lot in the last couple of months in line with an apparent seasonal trend.
I’ve mentioned Sundance Resources a couple of times this year as a company readers may want to take a look at. Sundance Resources is currently undertaking a definitive feasibility study on its large Mbalam iron ore project in Cameroon. I did have a speculative stake in this company before the GFC and keep it on my watch-list to consider re-entering.
While I was away in June a plane carrying 6 of the Sundance Resources board, including the company chairman, the CEO, and the largest shareholder (Aussie mining magnate Ken Talbot) crashed near the Cameroon/Congo border. All people on the plane were killed. In the interim the company has appointed Gindalbie Metals founder George Jones, who was involved with the company a few years ago, as strategic advisor to help them through the transition period until a new board and CEO are appointed.
Hard to say how the stock will trade when it emerges from the trading halt. My feeling about the longer term prospects of this company is that, given the size of the project, it would be unlikely that they’d get the funding without Chinese involvement. The exact amount needed will be known when the feasibility study is completed but numbers of the order of $2.5 billion have been talked about, admittedly speculatively, in the past. It could well be that the upheaval resulting from this tragedy, and the death of a major shareholder, could provide an opportunity for Chinese participation in the project. It is worth noting that George Jones has strong Chinese connections through Gindalbie (which is 36% owned by Chinese steel producer Ansteel) and was previously involved in a proposal to merge Sundance Resources and Gindalbie Metals.
Due to the flat-lining of the global economy I have been in no rush to buy mining stocks this year — among other things I have said often that they look overpriced at the moment — but it might be time to (re)consider Sundance Resources, starting with a small stake, as a bet on a stronger price if and when a Chinese company becomes involved.
http://www.sundanceresources.com.au (note that the websote was down at the time of writing this)
1
Australian Government Announces Revised Version of Mining Tax
No comments · Posted by wildebeest in commodities, resources
The Australian Government has announces a revised version of the mining tax that, when announced a couple of months ago, resulted in a virtual capital strike by miners. The previous tax, known as the Resource Super Profits Tax [RSPT], would have seen an additional tax on miners of 40% on profits above a threshold which was set at the 10 year bond rate. The announcement of that tax resulted a vigorous media campaign by both miners and government as each lobbied, via advertising, for public support of their positions. The announcement of the tax appears to have been one of many blunders that ultimately saw the resignation of the Prime Minister due to perceptions within his party that the election due later in the year was unwinnable on the current course they were following. A change of party leader immediately brought a more conciliatory tone in negotiations with miners.
After meeting with three key miners, BHP Billiton, Rio Tinto, and Xstrata the Australian government has announced that the restructured tax will now be called the Mineral Resource Rent Tax [MRRT], that the tax rate will drop to 30%, and that the hurdle rate will be 7% above the 10 year bond rate. This appears to be a major win for the mining industry and should see a spike in prices, notwithstanding other global forces/sentiment that are moving to push prices down at the moment.
A breakdown of the changes can be found here:
http://www.abc.net.au/news/stories/2010/07/02/2943317.htm
A constant source of irritation to me is articles about base metals that fail to distinguish between physical demand and speculative demand and typically fail to mention the supply side at all. Are speculators adding liquidity to the market or are they the market? The way I see it rising prices in base metals don’t necessarily signal economic growth. You need to determine if the prices are rising because of demand from industries with an interest in the underlying commodity or from demand for futures contracts by speculators who have no intention of taking physical delivery of the commodity. My opinion of the rally in base metals since March 2009 is that physical demand has been weak, notwithstanding transient buying splurges by China in some — but not all — base metals.
Anyway I came across this interesting article by James Montier of GMO:
http://www.scribd.com/doc/32174243/JM-I-Want-to-Break-Free
The entire article is interesting but the commodities commentary begins on page 9. Note that GMO estimate that speculative money accounts for half of commodity trades.
hat tip to The Big Picture.
commodities · demand · speculators · supply
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Marc Faber: Mirror, Mirror on the Wall, When is the Next AIG to Fall?
No comments · Posted by wildebeest in commodities, economics, economy
I always find Marc Faber both entertaining and informative. …but would I enjoy listening to him as much if he didn’t have that accent? Not sure. All I know is that he always reminds me of Dr Strangelove. Here is a link to a one hour long speech he recently gave at the Mises Institute titled “Mirror, Mirror on the Wall, When is the Next AIG to Fall?”
Boom · Doom · Gloom · Marc Faber · Mr Bernanke · Mr Greenspan · Mr Krugman
April retail sales were released by the US Census Bureau on Friday. The next four tables summarize the numbers and put them into context by comparing with pre-recession data. A realistic analysis of the numbers requires real dollar comparisons to previous years. Real dollar numbers are in January 2005 dollars. Note that since the CPI for April has not yet been released the April real dollar data has not been corrected, i.e. April inflation of zero percent was used.
There has certainly been some improvement in sales numbers in March and April. We need a couple of months more data but it is possible that retail sales might resume the trajectory they had been on for many years prior to this recession — retail sales barely missed a beat during the 2001 recession. The chart below puts the current retail sales trajectory into context. A significant source of GDP growth has been lost in this recession, and this recovery, such as it is, shows no signs of being strong enough to recapture that lost GDP in the near future.
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Australian miners hit with 40% “Resource Super Profits Tax”
No comments · Posted by wildebeest in commodities, resources
The Australian government today announced a new tax on miners beginning in the second half of 2012. Known as the Resource Super Profits Tax [RSPT] it will be levied at 40% and will apply to profits after extraction costs are paid and capital investment is recouped. The announcement also said that companies will not be taxed until they provide shareholders with a normal return on capital investments but I cannot find who defines what a nominal return is.
When this was touted it was suggested that if the new tax was introduced it would replace royalties currently being paid to Australian states. Royalties are paid on the quantity of ore dug up, not on whether it is profitable. A very strange part of this announcement was that from 2013 states will refund royalties, which implies that they will still collect royalties and then hand them back to miners that are profitable enough for the RSPT to kick in. So no doubt more bureaucrats will be required to implement that.
One of the positives from the tax changes is that miners will get rebates on exploration costs. Under current tax rules small exploration companies do not currently receive a tax benefit from deductible exploration expenses until they become profitable.
In response to the announcement miner BHP said that the new tax will result in an increase in the total effective tax rate on its profits earned from its Australian operations to around 57 per cent from 2013 from the current rate of 43 per cent. BHP boss Marius Kloppers said that the proposal will hurt the sector’s competitiveness.
“If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardise future investments and will adversely impact the future wealth and standard of living of all Australians,”
I have to agree with BHP [see disclaimer], on the face of it this looks like a disaster, but one that won’t begin until late 2012. The Australian treasurer described the new tax as:
“We’re putting in place a tax that encourages investment.”
…which only confirms that politicians have no idea about business. The rent-a-quote from the investment community comes from UBS:
“I think it’s clearly negative for the big miners. I expect them to be down fairly materially,”
A material hit to profits beginning H2 2012 will have a hit on the current price. You don’t have to be a UBS analysts to reach that conclusion. To be fair, there probably isn’t enough fine detail about at the moment to quantify the effect on profits — notwithstanding the quote above from Marius Kloppers.
A Range of opinion from the News Ltd Australian press here:
www.theaustralian.com.au/business/in-dep…
www.theaustralian.com.au/business/in-dep…
www.theaustralian.com.au/business/in-dep…
www.theaustralian.com.au/business/in-dep…
www.theaustralian.com.au/news/opinion/mi…
Using only dividend data to calculate estimated returns. Right or Wrong?
I’ve been involved in a back and forth in the comments section of this article on Seeking Alpha.
It is my contention that in the real world you cannot estimate a return by adding dividend yield to dividend growth. In the comments to the article, in response to a comment in which a formula was produced, I explained that the formula doesn’t work in the real world. More details of the formula can be found here. Mathematically the infinite series can be re-written as:
r is the real rate of return, and g is the real dividend growth rate. The assumptions are that r > g , that r and g are both constant, and that g is less than economic growth. If you’re wondering about the second assumption it is there because if you have a perpetuity growth number that exceeds economic growth you are saying that the asset being valued will eventually become the entire economy. The value that the series converges to (right hand side of the arrow), can be used to derive this formula:
D is the dividend, P is the price, r is the real rate of return.
The thing is that this series converges very slowly for typical values of r and g. The smaller the difference between r and g, i.e. the smaller the dividend yield, the slower the convergence. What this means is that for typical investment horizons the formula that is derived by summing all terms to infinity is nothing like what you get in practice — and after all it is the real world that we live in — i.e. it doesn’t even constitute a good approximation.
Here is a plot to show you what I mean. A 3D plot of real rate of return vs number of years. The orange surface is what you get using the simplified textbook formula and the green surface shows the real world. We can see that in the real world the surfaces are not very close to each other (understatement) due to the infinite series converging very slowly. The calculations where made using a real dividend growth of 1.3% which is the number cited by one of the adherents to this model in the comment stream. This actually seems high for perpetual growth. I note that no error estimate accompanied this number.
Here is a video to get a better idea of the gap between real world and textbook:
www.screencast.com/t/MWZlM2U0YzQt
As a result of the textbook situation bearing no resemblance to the real world, I maintain that the use of the formula to calculate a rate of return is a crock, useless, a waste of time, and so on.
As a postscript, for those interested, for an expansion over a finite number of years ( y years) the formula is:
which means that the theoretical relationship between rate of return, dividend yield, and dividend growth, is actually:
discounted cash flows · dividend growth · dividend yield · Gordon model · perpetuity
In March blogger Matt Trivisonno wrote an article titled “Payroll Withholding Taxes Surge in March“, which was published at The Big Picture. Somewhat strangely the figure that accompanied the blog actually showed continued decline in tax revenues. Sure there was a rise in the line on the chart but the rise indicated that revenues were less negative, it didn’t indicate positive year-on-year (YOY) growth. Those sort of charts represent a continued source of irritation for me as described here:
So while there has been a YOY increase in withholding taxes in March (see below) the chart accompanying the article showed the opposite.
Zero Hedge ran an article on April 7 titles “Now, About This Alleged Increase In Tax Withholdings By The Government…” which began
“We are a little confused by all the recent hype in the media about a surge in individual tax withholdings by the US Treasury. Our confusion is predicated primarily by the fact that this is patently not true.” (their emphasis)
There was no indication in the Zero Hedge article that they were taking a shot at anyone in particular. And there have been several “taxes are rising” type stories recently.
Whether Zero Hedge had Trivisonno in its cross hairs who knows, but Trivisonno decided to rebut the Zero Hedge article, with a rebuttal titled “Zero Edge– Rebutting Faulty Tax Analysis“, which led Zero Hedge to respond with “Some Afternoon Confusion“. Both Zero Hedge and Matt Trivisonno claim to get their numbers from the daily US Treasury statements which are available here. So are taxes rising or falling YOY?
Trivisonno says in his rebuttal that
“The purpose of looking at the withholding data is to try and get an idea of how many paychecks are being cut, not to make an accounting of the federal government’s cash flow.”
So presumably a study of the daily receipts could be used as a proxy to forecast employment changes ahead of the monthly BLS official figures (or other releases such as ADP).
Since the debate seems to be about Q1 receipts in 2010 versus 2009 I’ve taken the monthly Treasury data, specifically data from Table 4 of the monthly Treasury statements (for anyone interested in reproducing this). The first chart shows federal income tax withheld — this is the first line item in Table 4 of the monthly release.
Clearly there is a rise in income tax receipts. The next chart shows total tax withheld, i.e. income taxes plus social security and Medicare taxes. Note that this next chart excludes the 3rd “Individual Income Taxes” line item called “other.” March 2010 receipts exceed March 2009.
When you add the “other” item the story is much the same:
A criticism Trivisonno had of the Zero Hedge analysis was that new tax changes took effect in April 2009:
“And since Zero Hedge did not take into consideration the tax-credit that began in April 2009, their unadjusted numbers understate withholdings for the first three months of this year by a substantial amount.”
On that basis Trivisonno believes that adjustments are necessary to the 2010 numbers. The problem I have with that is that the shortfall in the total Q1 receipts is due to a decline in social security and Medicare withholding, and the tax rates for these items has not changed. Since these taxes are a flat tax shouldn’t they provide a much better indication of how many pay checks are being cut than income taxes which vary depending on the distribution of tax rates among the population? What do readers think?
Social security and Medicare tax receipts are falling. This surely tells us much more about paychecks and employment than some of the other data being reported?
But back to the question: Are Federal Withholding Taxes Rising or Falling YOY? In March total tax withholdings were rising.
