UNP, NSC, CSX: Rail Regulation Outlook, Former STB and ICC Chairman Linda J. Morgan

Takeaway: Please join us on Wednesday, January 8th for a discussion with former STB and ICC Chairman Linda Morgan.

UNP, NSC, CSX:  Rail Regulation Outlook, Former STB and ICC Chairman Linda J. Morgan - nbb1





The history of railroad profitability is dominated by regulation and government intervention.  Railroads have been regulated because, like utilities, they possess some characteristics of a natural monopoly.  With current railroad profitability generally higher than at the start of the Interstate Highway System, will regulators gradually step back in?  If hints emerge that the regulatory pendulum might swing back against railroads, it could prove negative for railroad share prices.  If not, the favorable industry structure of the railroad industry may allow the continued high levels of profitability investors now expect.



UNP, NSC, CSX:  Rail Regulation Outlook, Former STB and ICC Chairman Linda J. Morgan - nbb2






  • What is the current posture of the STB and how does it differ from the former ICC’s?
  • Can you discuss 'paper barriers' and other sources of anticompetitive concerns and whether they are viewed as relevant by regulators and lawmakers?
  • How do Congress, the Obama Administration and the STB view the railroad industry and its resurgent profitability? How profitable can railroads get without more scrutiny?
  • Are customers unhappy that cost reductions and efficiency improvements are not fully reflected in rates, similar to an actual utility?
  • What form might additional regulation take and when might it come, if at all? What proposed legislation should investors currently focus on? Is it a matter of time before legislation passes?
  • Will the expansion of the Panama Canal impact the industry and how do industry participants and regulators view the project?
  • Who are the key players in Congress and in regulatory bodies and what are their agendas?
  • Do recent railroad accidents increase scrutiny? Will increased oversight or additional costs emerge?
  • Is there hope for high speed passenger rail in the U.S. and what does the future hold for Amtrak?


Please feel free to send question for Linda in advance of the call.





Linda Morgan has 35 years of in-depth regulatory and legislative experience in the transportation industry, with a practice focusing on a variety of railroad and other regulatory and commercial transportation matters and associated legislative and policy issues.


Ms. Morgan's past experience includes acting as the Chairman, during President Clinton's Administration, of the former Interstate Commerce Commission (ICC), which became the Surface Transportation Board (STB) in 1996. During her 8 years as agency Chairman, she presided over numerous transportation regulatory proceedings, including rail rate and service matters and railroad merger cases of unprecedented national scope and complexity. In 1999, the Senate confirmed Ms. Morgan for a second term, and in 2001, President Bush asked for her continued service as Chairman until he designated a new Chairman in December 2002.


Prior to joining the ICC, Ms. Morgan served for 15 years as counsel with the Senate Committee on Commerce, Science, & Transportation, including seven years as General Counsel. During this period, Ms. Morgan was responsible for much of the legislation that established the framework for today's transportation system, including surface transportation policy that she later was in charge of implementing as Chairman of the ICC and the STB.


More background on Linda Morgan here:

Fade the Dead Cat

Takeaway: Gold is nowhere near confirming anything at all except a dead cat bounce.

After crashing throughout 2013, Gold, Yen, VIX (volatility) were all up yesterday.


Yes, I will be fading that counter TREND move (shorting Gold and buying US and European equity beta) on that.


Sorry, but Gold is nowhere near confirming anything at all except a dead cat bounce.


Fade the Dead Cat - Gold Dead Cat


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Bear Depression

“In 1893, the most serious depression the nation had yet experienced settled over the land.”

-Doris Kearns Goodwin (The Bully Pulpit)


Today is not 1893.


While they let some of the 2013 US stock market bears out of their caves yesterday (BREAKING NEWS: “SP500 Falls To Start Year Lower For 1st Time Since 2008” –Bloomberg), I suspect the blizzard will send them right back to where they came from.


This is not 2008 either.


Sure, there’s plenty to concern yourself with (like a market that got pinned up at an all-time high at year-end) in terms of this raging bull market being overbought and both sentiment and flows chasing it, but let’s get real here and get on with our risk managed day.


Back to the Global Macro Grind


Oh, and by the way, in 1893 we didn’t need a bunch of bureaucrats at the Fed to save us from themselves either. The bear depression of the late 19th century was one born out of this thing we call a cycle. Companies back then overbuilt rail capacity and over-extended themselves with bank loan leverage (sound familiar?). This is what happens at cycle tops (like 2007).


Globally (especially in Europe) we aren’t in the area code of a peaking 1893 or 2007 piggy cycle either. In the US we don’t think we’ll be seeing consecutive 4% handles on GDP, but that certainly doesn’t mean fear and panic is going to break-out across the land. With so many still whining about the last war, I say you get yourself a shovel and a smile this morning - move forward.


Back to the business cycle (where companies build inventories, shhh), lets dig through some fresh US economic data:


1. USA’s ISM Manufacturing PMI for DEC was reported yesterday at 57.0 vs 57.3 in NOV

2. The ISM’s New Orders component of the report accelerated to 64.2 DEC vs 63.6 NOV

3. The ISM’s Employment component of the report was steady at 56.9 DEC vs 56.5 NOV


For me, this was a surprisingly strong read-through on the US economy as the data was almost as good as it could get (sequentially) in Q3 of 2013. So to see follow-through in December was a good thing for growth (as an investment style) and bad for bonds.


Employment is a fun one to watch people complain about because:


1. The monthly BLS data is a lagging economic indicator (the one CNBC has dudes guessing on every month)

2. The only coincident to leading indicators (ISM’s, weekly Jobless Claims, etc) are poorly understood

3. NSA rolling 4-wk jobless claims (see Chart of The Day) fit the 10yr US Treasury Yield’s 12 month TREND like a glove


I’ll give you 5:1 odds that if you ask your run-of-the-mill TV pundit what the consequence is of using the NSA # to probability weight the direction of the bond market that they think you are talking about the National Security Agency.


*NSA = non-seasonally adjusted. And the reason why we use the NSA rolling-claims data series on a year-over-year basis is simply because that’s what Josh Steiner (Managing Director of our Financials team) found that Mr. Macro Market cares about.


Who seriously cares that, on very light volume (-14% vs @Hedgeye TREND), it was the 1st market down day “since 2008” when it has no back-test or relevance to the market we have in front of us in 2014? Here are 3 more things to think about:


1. US Initial Jobless Claims of 443,513 (NSA) were down -9.5% y/y yesterday (vs. down -8.2% in the wk prior)

2. US 10yr Treasury Yield held my most immediate-term TRADE line of 2.96% support yesterday; 3.07% = resistance

3. Gold is signaling immediate-term TRADE overbought this morning within a bearish @Hedgeye TREND


So, rather than try to get cute with some Hedgeye panic and depression propaganda yesterday, here’s what I did:


1. Took our Cash positions down from 50% to 40% in the Hedgeye Asset Allocation Model

2. Moved from 5 LONGS, 5 SHORTS on 12/31’s close to 8 LONGS, 4 SHORTS (bought and covered on red)

3. Shorted Gold (GLD) and bought some US Equity Beta (TSLA)


That doesn’t mean I am going to be right. It simply means there’s a process behind every sequence of macro market timing decisions my team and I make. There’s nothing depressing about that.


Our immediate-term Risk Ranges are now as follows (all 12 of my Big Macro Ranges are in our Daily Trading Range product):


UST 10yr Yield 2.97-3.07%


VIX 11.91-14.91

Gold 1185-1235


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bear Depression - Chart of the Day


Bear Depression - Virtual Portfolio

Day 2 of 2014

Client Talking Points


Whoever is long South Korea’s stock market is not a happy camper this morning. The KOSPI is down hard for the first two days of the year (-3.3%). It is now bearish on both Hedgeye TRADE and TREND durations. Global Inflation Expectations Rising hurt real-growth assumptions.


Across the pond, the #StrongPound and #StrongEuro continue to be the economic glue holding together rising purchasing power and confidence across the continent. Both the UK's FTSE and Germany's DAX held TRADE and TREND lines of support yesterday. Meanwhile, UK Construction PMI came in at 62.1 for December. As you may recall, #EuroBulls was a Q4 Macro Theme here at Hedgeye.


After crashing throughout 2013, Gold, Yen, VIX (volatility) were all up yesterday. Yes, I will be fading that counter TREND move (shorting Gold and buying US and European equity beta) on that. Sorry, but Gold is nowhere near confirming anything at all except a dead cat bounce. Incidentally, the upside in the 10-year Treasury yield is 3.07%.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL.  So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.


Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road


TREASURIES: 2.98% 10yr yield holds yet another higher-low; bullish #RatesRising, bearish Gold @KeithMcCullough


"Go confidently in the direction of your dreams. Live the life you have imagined." -Henry David Thoreau


Pimco had record redemptions last year in the $244 billion Total Return Fund, which trailed 64% of peers and fell 1.9% in 2013 for the biggest loss since 1994 as the S&P 500 surged 30%, prompting investors to flee traditional bond funds.(Bloomberg)

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