One of our favorite hypocritical CEOs spoke this morning to try and explain why his rail freight transportation company's stock is plunging. 11 months ago Michael Ward was adamant on CNBC that he has "not seen any changes," suggesting everything's fine down to $30-35 oil and "expected no impact on crude shipments." Today, he exclaims, the volume drop can be seen as "freight recession," warning that "there is pressure on markets not seen outside of a recession." He is right, of course, as we noted previously, the weakness in rails is entirely recessionary and is no longer limited to industrials or coal.
Here is CSX CEO Michael Ward a year ago, completely unphased by the decline in crude oil prices and unable to see how that would affect his business...
Rail freight transportation company CSX's CEO Michael Ward stated 'unequivocally' that as far as the movement of crude by rail he has "not seen any changes," suggesting everything's fine down to $30-35 oil and "expected no impact on crude shipments."
CSX CEO giving the all-clear a year ago...
And his share price performance since...
And then today, from the disastrous earnings call...
Question - Bascome Majors, Susquehanna Financial Group: I understand you guys are railroaders. You're not economists here, but just looking at the volume declines you're seeing today, both the depth of them and the breadth, I mean, have you ever seen an environment like this in your business or careers outside of a recession?
Answer - Michael J. Ward, CEO CSX Corp: This is Michael, and I'll answer that although Clarence is here. So, if you take out the recession, no, we've not seen these kind of pressures in so many different markets because you have multiple aspects working against you, the low gas prices, low commodity prices, the strength of the dollar.
All three of those together are really pushing, and in some ways I think you can almost think of it as a spring recession.
Except for say markets like automotive and housing related, you're seeing pressure on most of the markets. So clearly outside of a recession, this is where we're seeing lots of pressure on lots of different markets.
He is correct of course, as we reported here, confirming a rather troubling finding from BofA: the manufacturing recession has spilled over from purely the industrial sector and into "other, more consumer-oriented segments." In other words, the service recession is imminent.
Weakness no longer limited to industrials or coal
For much of 2015, it was easy to dismiss weakness in carloads as being concentrated in industrial segments, and reflective of a secular shift away from coal. More recently, the softness has spread to other, more consumer-oriented segments. Intermodal carloads, which were up +1.0% and +3.6% in 1Q15 and 2Q15, respectively, posted a tepid +0.9% gain in 3Q15 and were down -1.7% in 4Q15. This follows the broader trend in 2015 of carloads accelerating to the downside through the year. Until recently, the difficult comparison year of 2014 was another reason to be dismissive of the decline percentages. Despite soft year-over-year results, absolute carloads remained above the 2010-2013 levels through the first 3 quarters of 2015. However, in 4Q15, volume is at its lowest level since 2010. BofAML Multi-Industrials analyst Andrew Obin recently noted that industrial weakness has not always been coupled with severe GDP declines, despite the high correlation between the two (86% correlation coefficient). However, as non-industrial segments post declining carload volumes, we are increasingly concerned with the breadth of the weakness.
All of the above is very bad news for the US economy of which railroad traffic is just one of the proxies.