Weekly Railroad Data - Still Negative

As suggested in the chart above, weekly railroad carloads (a favorite metric of Buffett to gauge the health of the economy) continue to experience mid-teens year-over-year declines despite a growing consensus that the economy is on the mend. While certain categories are showing hints of a bottom, including grains and chemicals, many continue to experience 30+% year-over-year declines (i.e. metallic ores, crushed stone, forest products, and lumber).

While some would argue that carloads provide less of a snapshot of the economy relative to years past (primarily because services & technology represent such a greater chunk of our output), a mid-teens decline exiting a recession would be unprecedented. As such, I remain skeptical that the massive rally we have seen in the equity and credit markets (particularly the latter) can be justified based on what is going on in the real economy.

Interestingly, high quality stocks such as Walmart, P&G, etc, which have done nothing since the March bottom in the equity markets, have performed relatively well over the last week. While only a few days old, I suspect we are finally seeing a reversion to large cap value names vs. the “dash to trash” that has occurred over the last few months.

Portfolios positioned defensively should hold up much better as we exit 2009.