Rollover Coming in Transports

Rail traffic is increasingly becoming a one trick pony involving autos, and metals. Total traffic versus last year over the four weeks is up only six% and shipments in some categories such as food, forest products and coal are in fact down. In the case of coal the perception of a strong economy and high energy prices has already built up inventories to high levels. China had been seeking scrap metal, but that has tailed off and is now running well below last year's pace.

Source: Railfax through April 9 (Click on the following charts to enlarge:)

The big story impacting U.S. economic activity that originally came after the Japanese earthquake seems to have been completely forgotten by the video console market players and risk-lovers. U.S. and global vehicle output is collapsing. Not 'is about to collapse' in the subjunctive tense, but is collapsing in the present tense.

As a refresher, IHS Automotiveswas quotedback on March 24:

If parts plants affected by the quake don't return to operation within six weeks, global auto output may drop as much as 100,000 vehicles a day. The industry produces 280,000 to 300,000 vehicles daily The third week of April could mark the start of more severe production slowdowns.

The industry may lose 1.2 million to 1.8 million vehicles by then and almost 3 million units within eight weeks, with about half of the losses coming from assembly plants outside of Japan.

Well, guess what video gamers, it is now mid-April and parts supply is so disrupted that production will be lost well into the third quarter. On Monday IHS updated their previous view and now forecasts that five million fewer vehicles could be produced globally this year. Per the WSJ, Toyota (TM) will idle American plants for five of the next seven work days starting April 15, and now says production will be halved through June 3. Honda (HMC) suggests they face similar disruptions and so far has been at half production.

Only a Kool Aid drinker would assume that the production problems will be limited to Japanese manufacturers. Yet so far U.S. carmakers are still using pre-earthquake forecasts. Ford (F) warns in an SEC filing made yesterday that "we now expect that beginning in the last week of April and continuing into May, certain of our operations in the Asia-Pacific region (including certain of our joint venture operations) will be affected by shortages of components and vehicle kits as a result of the events in Japan." Therefore I would expect auto shipments to hit the wall.

Although it appears CSX will report a decent first quarter, I would look for big falloff in the new quarter. There has been a short squeeze in CSX over the last few months that has reduced shorts from 22.69 million to 6.71 million. Priced for robust economic activity that is fading fast, I am short CSX and IYT.

Disclosure: I am short CSX, IYT.