Even those who question whether his best days are behind him have to admit that he’s one of the most influential movers and shakers in the markets.
That’s why it’s worth keeping an eye on what Buffett is doing – and on what he’s watching.
So today we want to take a look at Buffett’s favourite economic indicator. It’s the one that tells him all he needs to know about the US economy.
And right now, it’s not looking good…
Warren Buffett’s ‘desert-island’ indicator
In a 2010 interview with CNBC, Warren Buffett was asked which single set of economic data he’d request access to if he were stranded on a desert island.
Buffett’s response? Freight car loadings. These show the volume of raw materials and industrial supplies being moved by rail around the US every week.
Why is Buffett so keen on such an old-fashioned sounding indicator?
Because all the stuff that’s being transported by America’s railways will at some stage get used. It will either be processed into finished goods for sale, or stored as inventory. In the latter case it should be pressed into service at a later date.
As inventory levels drop, more raw materials are likely to be ordered by manufacturers to plug the gaps in the stock warehouse shelves. That will be reflected in future freight car loading figures.
In other words, freight car loadings are a useful and very accurate early warning guide to the future direction of the US economy. They are, if you like, the American land-based equivalent of the Baltic Dry shipping rate index that
The other handy thing about freight car loadings is that you can easily find out what’s going on. Up-to-date information is published every week on the Association of American Railroads (AAR) website.
Buffett’s top indicator is warning of slower growth
So what’s the latest from the AAR? Last Thursday’s report didn’t make very encouraging reading at all.
For the week ending 25 February, the number of carloads moved by US railways dropped by 5% year-on-year. ‘Intermodal’ volumes – ie for trailers and containers where the form of transport is switched, say between road and rail – dropped by 2.8% on the year.
This slowdown seems to be gathering pace. For the first eight weeks of 2012, US railways reported that cumulative carload volumes were down 0.3% on last year.
These numbers in isolation, of course, don’t give us the full picture. For that we need to see how freight car loadings have performed compared with the overall US economy over a lengthy period of time.
When we look at the chart below, we can see why Warren Buffett is such a big fan of the AAR numbers.
Source: Bloomberg
The black line shows the AAR figure for overall North American carload units shifted. This includes Canadian and Mexican rail shipments, though the US accounts for around 75% of the total. Because the numbers jag around week by week, I’ve smoothed the stats using a ten-week moving average.
The blue line is the year-on-year change in US GDP. As you can see, this has been turning up recently. But as the latest drop in the black line shows, this improvement may well not last. If Buffett’s favourite indicator is anything to go by, America’s economy could soon be slowing down again.
The stock market is warning of a slowdown too
Importantly for investors, there’s confirmation of the above trend in America’s stock market.
The Dow Jones Transportation Average (TRAN) consists of shares in firms that shift people or products around, like truckers, airlines, railways, shippers and delivery service providers.
History shows that if the TRAN takes a tumble, the rest of the stock market is likely to follow. And right now, the TRAN is heading down.
But for now, these trends in both freight car loadings and the TRAN point to our long-standing advice to hold defensive stocks. These don’t require economic growth to make their money.
David Stevenson
#1. He doesn't follow it.
ReplyDelete#2. He said it was "classic" in the spring of 2014 and if you had cashed out you would have lost A LOT with the recent record market highs.
#3. Another blogspot.com page spouting crap.