Dr. Anthony Fauci has predicted, “it will be open season for vaccinations in the U.S. by April”.  Supply boosts are expected to allow most people to get shots to protect against COVID-19 by then.  Herd immunity could be achieved by late summer.  With continuing low-interest rates and Fiscal stimulus provided by the CARES act (passed March 2020, authorizing $2.2 trillion), the 2020 COVID Economic Relief bill (signed December 2020, which authorized an additional $900 billion in spending), a possible third stimulus of $1.9 trillion, and a yet to be defined bipartisan ‘infrastructure’ spending package the economy is set for a comeback. As the vaccines roll out significant pent-up demand, caused by the pandemic lockdowns, will lead to a recovery in the second half of 2021.  

Rail traffic is often used as a measure of broad economic activity. This January ten out of twenty carload categories had higher volumes than in January 2020. Intermodal volume and carloads of chemicals (on a weekly average basis) were higher than ever before. Chemical carloads were up 4.4% year over year in January, their biggest percentage gain in 10 months.  Intermodal containers and trailers set new all-time records, up 12.1% over January 2020 (the fourth straight double-digit monthly percentage gain). Volumes are up at West Coast ports (Long Beach, Los Angeles, Oakland, and Seattle/Tacoma) and East Coast ports (Savannah, Virginia, and Charleston). Carloads of grain were higher than any month since October 2007 (the January year over year carload gain was 40%, the largest year over year monthly percentage gain for grain for U.S. railroads on record). And carloads of primary metal products, lumber, paper, and iron and steel scrap were higher than they’ve been since the pandemic began. The traffic category which most closely correlates with GDP is “industrial products” which is an aggregate of seven different carload categories representing a cross-section of U.S. industry1. Iron and steel scrap were up 5%, the most for any month since January 2015. U.S. plus Canadian carloads of lumber were up 8.9%, the most for any month since May 2019, and the fifth straight year-over-year monthly increase.  

Over 90% of U.S. coal consumption is for electricity generation, and coal’s share of electricity generation (at 19%) remains behind natural gas (41%) and nuclear (20%). Equipment oversupply continues in both the Rail (24% of the fleet in storage, 396,867 railcars) and Aviation markets (a significant fleet surplus is expected through late 2022). International passenger aviation will wait for travel restrictions to be lifted. Airfreight demand is so strong experts predict the market will be back to pre-pandemic levels by the end of March.  

With the highest probability scenarios priced in, knowledgeable investors anticipate unforeseen circumstances. As the economy recovers, fleet plans will change and aircraft that have been written down will again generate cash. Opportunities lie in those out of favor assets that offer strategic returns. A focused asset manager can identify secondary market transactions that combine current revenue generation with remarketing/resale opportunities. 

Invest productivelyCall RESIDCO.                   

Glenn P. Davis, 312-635-3161 

davis@residco.com

1  “Industrial Products” include chemicals, paper, metal products, autos & parts, crushed stone, sand & gravel, metallic ores and stone and glass products.

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