The first half of 2016 has seen its share of volatility. Globalization, central bank actions, the impact of the internet (speeding the flow of information and creating social networks), Presidential election politics, acts of global terror, and Brexit are all phenomena that have contributed. Historically, markets have not been as volatile.

Declining rail freight volumes continue to pressure North American Railroads[1]. July carloads declined 8.8%, led by coal at 17.5%[2] (U.S. coal production has dropped to its lowest level since 1981[3]). Crude by rail has declined 45% in 2016[4]. Class One railroads are storing more locomotives and railcars[5]. With less equipment on line increased train speeds have allowed the roads to more efficiently serve customers, further reducing equipment demand. Air travel is down due to terrorism and currency swings. Lower jet fuel pricing has improved margins and allowed air carriers to add capacity; the resulting competition has reduced revenue per available seat mile and increased pressure on air carrier yields.

Economic activity drives traffic, and demand for transportation influences equipment pricing at the margin. Transportation services cannot be ‘stored’. Unsold seats on a flight, unused air-cargo capacity, empty freight cars, and parked locomotives represent lost revenue. Are we at a bottom? The 34 nation Organization for Economic Cooperation and Development (‘OECD’) thinks so. The OECD expects U.S. growth, as measured by GDP, to slow to 1.8% in 2016, but to then accelerate in 2017 to 2.2%[6].

Political, policy, business, and investment leaders constantly grapple with the increasingly fickle cycles of consumer and business confidence. Is the world is in a ‘rut’ because of a chronic shortage of demand for goods and services and an extended period of low interest rates[7]? Short term thinking, uncertainty, over regulation, anxieties, and a lack of confidence in the future have impacted our economy’s structural growth rate and contributed to a deterioration in productivity. When economic freedom is suppressed, growth fades, and when growth fades it takes the American Dream with it. Our Presidential candidates? If elected, one has stated, “coal miners and coal companies will be put out of business[8]” as part of a clean energy agenda. In contrast, the other would reduce taxes and government regulation.

In this environment, agility, adaptability, and an open mind are essential tools. Asset allocation is critical and risk management is key. Volatility creates opportunities to buy equipment at discounted prices. Experience teaches staying the course proves its virtue in the long run. A long investment horizon diminishes the effects of volatility. Traffic may be down, but we expect it will stabilize through the rest of this year.

Choose wisely. Work with a firm that has a history of excellence, expertise and ethics. Call RESIDCO!

[1] Moody’s Investors Services, May 16, 2016.

[2] Association of American Railroads (‘AAR’) July, 2016 weekly U.S. rail traffic reports.

[3] Truewealth Publishing, July 21, 2016.

[4] August 3, 2016, U.S. Energy Information Administration, a division of the U.S. Department of Energy.

[5] Progressive Railroading, Rail News: Mechanical, Fleet Stats, July 2016.

[6] The Associated Press, June 17, 2016.

[7] Larry Summers, “Zero interest rates are a systemic inhibitor of economic activity.” Bloomberg Businessweek, May 12, 2016.

[8] May 2, 2016 Democratic presidential nominee, at a round table discussion with locals at the Williamson Health and Wellness Center in Williamson, W.V.

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