Propeller Skies

Another railroad performance measure I follow is average train speed. This measure, speed, is a pain in my fucking ass. Because financial disclosure regulations do not require it, railroads report speed whenever the fuck they feel like it or, in the case of Canadian National (CNI), almost never. However, reporting has improved recently and railroad performance measures are updated weekly except for CNI.

Despite the lack of reporting, average train speed is a very useful performance measure to track. Basically, faster trains allow railroads to haul more shit with less cars and fewer locomotives. Since freight cars and locomotives cost a fuckton of money, and hauling stuff is how railroads generate revenue, less capital equipment plus more stuff delivered equals higher profits.

The first conclusion that can be drawn from the above table is only half the major North American railroads provide average velocity on a regular basis. From the limited data available, all three railroads managed a year over year improvement in average train speed. However, only Canadian Pacific (CP) had an average speed above the five year average. CSX and Union Pacific (UNP) both had slower average train velocities in 2006 compared to their 2001 - 2005 average. Alert readers will recall that CSX and UNP also had the highest operating ratios during 2006.

Speaking of alert readers, if anyone out there on the internet could hook a cracka up with sources of historical speed data for the missing railroads, I would be most appreciative. Average dwell time would be nice, too.

Average train velocity is merely one performance measure. See the next post in this series: Free Cash Flow or previous posts in the series - Railroad Performance Measures: Yield and Railroad Performance Measures: Operating Ratio at the beginning.

notes:

Useful links regarding performance measures:

• Canadian Pacific AAR Reports
• Union Pacific AAR and STB Reports
• Railroad Performance Measures - does not include CNI.

Normally, Housing Panic bashes Lawrence Yun quite well. Unfortunately, the chief cheerleader* recently made this dumbass statement, “although there could be some minor slippage in the first quarter, existing-home sales should hold in a narrow range before trending up,” which is so blatantly retarded that I have to weigh in and call bullshit. Sorry, Mr. Yun, but housing is going down like a University of Georgia sorority girl.

This morning, KB Home (KBH) reported a loss of almost $10 a share. For the fourth quarter. The stock promptly fell 9.2 percent. For perspective, KBH earned $5.82 per share in 2006. There is essentially no difference between new and existing homes, so when new home sales go in the shitter, existing home sales do too.

It gets better - fourth quarter revenue at KBH fell almost one billion dollars**. New home deliveries dropped 22 percent. Continuing the gravity theme, average selling price fell from $280,000 to $247,800, or 11.5 percent. By the way, just in case anyone thought real estate was local, KBH saw a nationwide decline in orders.

Stable, my ass. This is a horrible time to buy and Mr. Yun damn well knows it.

In other news, I wish I had not sold my KBH Jan 30 puts back in November for what seemed like an absurd profit of 240 percent. Had I kept them, I would be watching big titted lesbians have relations in high definition on a sweet new 50″ plasma right now instead of typing this for 3 readers.

notes

* Lawrence Yun’s official title is economist, but my toilet knows more about economics than he does, so I can’t in good conscience call him one.
** All figures are year over year.

Yield, or revenue per car is another railroad performance measure I calculate. Because the capital and operating costs of rail are similar no matter if they are filled with raw sewage or gold, railroads with a higher yield are in a better position to put mad cash in their shareholders’ pockets. Keep in mind, since I am measuring revenue per car and not profit per car, management can fuck up and lose money while hauling gold. Conversely, a well managed railroad can make a nice profit hauling raw sewage.

So, if management will probably find ways to waste money anyway, why look for a high yield? Railroads with high yields and improving profitability may be turnaround plays. To calculate the yield, simply divide total revenue by the number of cars hauled. Cars hauled can generally be found under: volumes, volume and revenue, revenue table, revenues, or similar table headings. Searching for carloads or cars hauled also works nicely. Because I am lazy, I do not bother to subtract out non-freight revenue when calculating the yield. While this may be technically incorrect, revenues from operations other than moving shit around are generally a small percentage of the total and are therefore insignificant.

Now, for fun, I will draw a few conclusions from the above table. First, all of the railroads are clearly enjoying pricing power. This is obvious because yield has increased year over year for each of the railroads and current yields are all above the five year average. Second, Norfolk Southern (NSC) is far below the average industry yield for 2005, 2006, and the 2001 - 2005 average. However, alert readers will recall from railroad operating ratios that NSC has a better than average operating ratio that has improved dramatically over the 2001 - 2005 average.

To show how yield and operating ratio work together to determine profit, I subtracted the Operating Ratio from 100 and multiplied by the Yield for both NSC and CSX, its closest rival. Using this measure of profitability, NSC makes $324 in profit per car, or roughly 21 percent less than CSX, which makes $412 per car. If NSC were to increase its yield to the same level as CSX, say by reducing the amount of raw sewage hauled and replacing it with gold, they would make $502 per car in profit, or 18 percent more than CSX.

Yield is simply one performance measure. See also Railroad Performance Measures: Average Train Speed, the next article in the series, or Railroad Performance Measures: Operating Ratio at the beginning of this series.

I like railroads as an investment for the following reasons:

• Simple to understand - railroads move heavy shit from point to point;
• Macro-economic effects on railroads are easy to figure out - when the economy is good, people are shipping stuff, when it crashes, volume goes down;
• Efficiency, railroads use substantially less fuel to transport goods than trucks;
• Not affected by increasing traffic congestion; and
• There are only six Class I railroads in North America, making it simple to compare them.

Operating ratio is a key metric of railroad performance. It is basically a measure of profitability and shows the percentage of revenue used to operate the railroad. A lower operating ratio is better, as more revenue is falling to the bottom line or available to reinvest in the business. Over time, if the operating ratio is decreasing, the railroad is increasing profits. Railroads with lower operating ratios have more cash to reinvest in the business or return to shareholders in the form of dividends and buy backs. They also earn more for each additional dollar in revenue.

Despite being such an important measure, the operating ratio is easy to calculate. The operating ratio is simply operating expenses divided by revenue. Both items can be found in the annual report under the Consolidated Statement of Income, Consolidated Income Statements, or similar. This is generally at the back of the report to discourage investors from actually reading it.

A few conclusions can be drawn from the above table. First, Canadian National (CNI) has the lowest operating ratio, which is a sign of effective management. Second, Norfolk Southern (NSC) shows the most improvement over the five year average, a decrease of 11.9 points. This implies management has been successful at controlling costs and increasing efficiency. Additionally, NSC has the second best operating ratio of the railroads compared. Union Pacific (UNP) has the highest operating ratio, a sign of poor management. Their operating ratio, while improving on a year over year basis, is also above the five year average. This means management is getting worse over time. While CSX currently has the second worst operating ratio, they have the second highest decrease over the five year average at 10.1 points. For the industry as a whole, operating ratios declined from 2005 to 2006 and were well below the 2001 - 2005 average.

While important, the operating ratio is not the only measure of railroad performance. Several more will be posted in the future. Check out the next article in the series, Railroad Performance Measures: Yield.

Since this shit is boring, a little inspiration is in order:

notes:

Annual reports are available at the following web addresses:

• BNSF Annual Reports
• Canadian National Annual Reports
• Canadian Pacific Annual Reports
• CSX Annual Reports
• Norfolk Southern Annual Reports
• Union Pacific Annual Reports

Digging through annual reports and quarterly filings to analyze the fundamentals of a company is time consuming and rather boring. Because of this, retail investors often skip it, preferring to trade on tips from dubious sources such as their broker, neighbors in the next cubicle, or the internet. Analyzing fundamentals provides an edge to those who put in the effort.

A key to profiting in the market is knowing when to enter and, more importantly, exit positions. Buying low, when a company is trading at a discount to fair value, and selling high, when a company is trading at a premium to fair value, is much easier when fair value is known. Analyzing the fundamentals of a business is a way to determine the fair value of a company.

Financial reports only provide a picture of past trends and the current status of companies. However, based on those trends and macro economic assumptions, projections can be made that predict future company worth.

In the days of way back, I was a huge fan of The Motley Fool. Now that they are nothing more than an ad for newsletters, not so much. However, The Motley Fool did clue me in to Sharebuilder, an extremely useful wealth building tool. Sharebuilder is basically a dividend reinvestment plan* (DRIP) on steroids. The following advantages of DRIPs are offered by Sharebuilder:

• Dollar cost averaging - buy more stock when the price is low and less when it is high;
• Free reinvestment of dividends allows your money to compound and grow;
• Regular automatic investments are a powerful way to build wealth over time; and
• Requires a minimal amount of money to begin investing.

Although useful for beginning and income investors, a problem with DRIPs is a separate plan needs to be set up for each company. Additionally, companies that do not pay dividends obviously do not offer DRIPs. Sharebuilder allows DRIP style investing in almost any stock, including those that do not pay dividends, centralized in one account. Sharebuilder also offers real time trading when markets are open. More advanced features, such as margin** and options trading are also available.

Sharebuilder is not, however, a panacea. One key issue is the amount of record keeping required to keep track of multiple automatic purchases. Also, as far as I know, Sharebuilder does not offer real time quotes, which makes real time trading difficult and options trading nearly impossible. That said, Sharebuilder is recommended.

notes:

* For more on DRIPS, see What Are Dividend Reinvestment Plans?
** As far as I know (not having a margin account there), stocks can only be bought on margin and not sold short. So Sharebuilder’s margin feature is pretty worthless to me - to manage risk, I never borrow money to purchase stock. Leverage is a bitch on the way down, as a couple of Bear Stearns hedge funds learned back in the summer.

Prizzo Skeezy readers down with the Countrywide (CFC) debacle will recall Bank of America (BAC) provided them with a two billion dollar capital injection (like a meat injection, except with cash money and no messy clean up) a few months ago. As part of that operation, BAC gained the right to convert the shares at a strike price of $18.00. This seemed like a great deal for BAC, since CFC closed at $22.02 on the day the deal went down. CFC, much to my amusement*, closed at less than half the strike price yesterday.

So what’s a middle eastern retard with too much money and not enough brains to do? Why blow $7.5 billion on convertible Citibank (C) securities, of course - similar to the deal discussed above. Except these fucking morons didn’t even buy securities with an in the money strike price! Unfortunately for our Abu Dhabian friends, they will be paying between $31.83 and $37.24 for shares that closed at $30.32 today. The clue meter is reading ZERO up in this bitch. [UPDATE: As usual, Smoove did a slacktastic job of analysis. Market Ticker notes the actual strike is between $20 - $25 when the interest on the coupon is factored in. However, the basic premise of Smoove's argument, paying good money for a stake in a soon to be worthless company is dumb, holds - Ed.]

Now this might be a good investment, if C was not on the express train to insolvency. Currently, C is having problems maintaining their target capital ratio because of write downs on fucked mortgage investments. This is about to get worse, because C has a fuckton of off balance sheet SIVs (think Enron) that are losing value faster than the Falcons lose football games. When** C has to pull the SIVs back on their balance sheet, the liabilities will roach their Tier I capital ratio. The Feds require 6 percent, and C is at 7.3 percent right now, down from their target of 7.5 percent. Never mind all the Level 3 mark-to-myth dreck with (likely) highly overstated book values C has floating on their balance sheet right now. I highly recommend C change their ticker symbol to F - for fucked.

I wish I was still short C, but I closed my puts for an easy 60 percent profit in October. Had I waited, I would be rolling in the dough right now. However, as the ubiquitous they say, no one ever went broke taking profits.

notes:

* Of course I am shorting those fools.
** Don’t think it won’t happen - our friends at Holy Shit Buffalo is Cold gave up and did it today.

I had the misfortune of being at Lenox Square - a major regional mall in Atlanta - yesterday. While the Apple store seemed pretty happening, the rest of the mall was deader than a freshly grilled Bubba Burger (i.e. about the same size crowd as usual). In contrast, the mainstream media (MSM) keeps ejaculating about an alleged strong start to the holiday shopping season.

As usual, the MSM is full of shit. However, as Lenox Square is anecdotal at best, my experience does not prove a damn thing. What does call bullshit on the MSM, however, are the Port of Los Angeles and Port of Long Beach statistics. Calculated Risk has some interesting historical charts regarding port volumes buried in Roubini on Recoupling. Note the year over year decline at both ports in October, traditionally when volumes increase prior to the holiday shopping season. Somebody (i.e. retail buyers) does not seem to be expecting a cheery Christmas.

Trucking companies have been reporting crap results for a while now, so the easy money to be made shorting is gone. My guess is Union Pacific (UNP) and CSX Transportation (CSX) are going to be reporting some fucked fourth quarter numbers. During good times, both railroads are less profitable than their competitors based on operating ratio and return on assets - making them less likely to do well when volumes are down since fixed costs remain the same. My money is where my mouth is - I have puts on UNP and CSX.

People who give financial advice never shut the fuck up about emergency funds. I agree the concept is fantastic, but where the hell am I supposed to come up with three to six months salary to put in? Also, my traditional savings account currently yields less than the rate of inflation - making it a dog.

Ameriprise clued me in to high yield internet savings accounts. These can be easily identified, as direct is usually appended to the name of the bank. For example, I use HSBC Direct. Although their rate is not the highest, I am familiar with the bank from my days in the B-low and they offer an ATM card. Opening an HSBC Direct account was easy and accomplished on-line. So far, I am very satisfied with the account. As an aside, Bankrate is an excellent place to find others. On a monthly basis, seeing the interest I earned on the backs of the proletariat cheers me and encourages more saving.

Setting up the account is easy. Filling it with cash and sending it across the border is not. Prior to opening my HSBC Direct account, I had a two Starbucks a day habit. At four dollars for a cup of coffee, this worked out to 160 clams a month when multiplied by twenty work days. Cutting back to one overpriced coffee product a day hooked me up with eighty extra ducats a month. Although it will take some time, eventually the cheese and interest will pile up into a reasonable emergency fund.

As several banks (e.g. Citi, Countrywide, and Wachovia) are currently learning, liquidity is important. The point of an emergency fund is to avoid selling equities, options, or other positions at a loss when unexpected expenses or job losses fuck up your program.

“Life ain’t nothing but bitches and money”
– N.W.A.

While it has been fun living the $30,000 millionaire lifestyle and hanging out with Atlanta’s doucherati, the time has come to move on. Based on our new market driven business model, we will be right sizing and leveraging technology to concentrate on bitches and money, a.k.a. the meaning of life.

“In this country, you gotta make the money first … then you get the women.”
– Tony Montana

In my brief time as a client of Ameriprise*, one point that was made repeatedly is people with financial goals have more cash than those who lack direction. With that in mind, my goal is to make enough ducats to get this woman:

Yes, I know Ms. Theuriau is Freedom. I also realize that I despise the Freedom and have mentioned this repeatedly on the Prizzo Skeezy. Does this make me a hypocrite? Probably. However, Ms. Theuriau is the hottest newscaster ever and she makes Freedom sound good.

notes:

* Nothing against Ameriprise. My advisers both left, so I did too.