H McKee Stewart Jr

Musings on Business, Finance, and Economcs.

Archive for August 2011

Regulatory State Run Amok; Edition # 927,687,125,987,213

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In a now all to commonplace fit of hubris, the Obama Administration mandates fuel efficiency standards for over the road commercial trucks. This is just nuts, for a number of reasons.

As a point of disclosure, I’m against the government’s CAF E standards for cars. It’s a hidden tax on automobiles; it pushes manufacturers to make less safe vehicles, leading to increased deaths and injuries on the highway; forces the manufacture of cars that nobody really wants, and that the car companies can’t make profitable, simply so that our betters in government can congratulate themselves on knowing what’s best for America’s great unwashed.

People buy cars for a number of factors: room to transport their family. Reliability. Safety. Prestige. Cool gadgets. Performance. “Chick Magnetism”. Fuel efficiency / low operational costs are just one item on the list, which is what serves as justification to get the government in the game of deciding what kinds of cars  you can buy, because car buyers are so “irrational”.

Truckers – either owner operators or corporate fleet owners – tend to be a more hard headed lot. Sure, they have certain performance requirements related to the need to haul thousands of pounds of freight. They also have a need to buy trucks with a high degree of reliability and ease of repair (breakdowns are money out of their pocket), and are equally focused on fuel efficiency (diesel is money out of their pocket).

As a group, they are faced with extremely tight profit margins. They are constantly looking for ways to reduce costs. Consequently, the truck and engine manufacturers are equally focused on improving both reliability and fuel efficiency.  Improving fuel efficiency puts money in the pockets of their customer – the trucker – and a significant gain is going to provide a hard to duplicate competitive advantage for the truck maker.

Given that the commercial truck market has a tremendous incentive to improve efficiency, what can the Obama administration add, beyond grandstanding? After all, is regulation needed to get business owners to do what’s clearly in their best financial interest? And one that they are already pursuing?

Regulations have an additional side effect: formulated by bureaucrats, they tend to drive a one size fits all approach that will likely stifle innovation and increase compliance & paperwork costs.  Plus, bureaucratic jobs are saved or created.

It’s pretty safe to expect that:

1. No new jobs or investment will actually be driven by these regulations.

2. Commercial truck prices will increase. The increased costs will probably more than offset the expected fuel “savings” that the regulations mandate.

3. Truck safety will probably be compromised to meet the new standards. Possibly reliability as well. (One suspects that the phrase “reduced rolling resistance” can be translated as “less traction” or “longer stopping distances”, but I’m not an engineer, so this is open to debate).

4. Some truck makers will be forced out of business as a result of compliance costs.

But press releases will be issued about how the environment is being saved.


Written by hmstewartjr

14 August 2011 at 8:27 PM

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Why You Might Not Want to Invest on the Motley Fool’s Advice

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There’s a lot to be said about the MF’s approach to investing. And then they wandered into my domain. LTL Freight with this bit of “reportage”. Nothing’s glaringly wrong with the piece – unless you have some understanding of the trucking marketplace, and the relatively trivial roles that FedEx Freight and UPS Freight play in the overall structure of their companies, or have some clue as to how freight rates actually work.

If you have that background, you might well wonder what MFs industry advice is actually worth, since at least in this case, it just sounds like some guy who’s skimmed a couple of 10-Qs, put up a post, and then went back to the X box in his basement. Which ought to lead one to be hesitant about placing real investment dollars on specific MF recommendations…  As you would on anyone’s recommendations, perform your  due diligence, but I’d ramp it up a bit for any of the MF’s recommendations where I wasn’t well versed on the industry.

FedEx freight  – as grouped on their 2010 annual report – represents about 12.4% of total FedEx revenue. UPS Freight (LTL only) is only about 4.4% of UPS’ revenues, based on the first half of 2011. So, freight is a much more significant part of FedEx than for UPS, but neither corporation is going under because of the performance of their LTL freight division.

Keep in mind that probably well less than 40% is moving on current rates with these carriers (the actual number may be in the 20-25% range; LTL carriers have been training their customers to get off of current tariff rates for years), and the fact that they will have to discount some portion of this increase away in order to keep freight on their trucks, the net effect on FedEx might not be much more than the money that Fred Smith could find simply by looking under the sofa cushions for change that’s fallen out of his pockets over the years.

Written by hmstewartjr

11 August 2011 at 4:15 PM

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About that Friday Jobs Report

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A quick look under the covers – especially at the labor force participation rate should be enough to disabuse anyone of optimism concerning the employment levels in the US economy:


That’s a pretty scary trend line from 2008 forward, strongly suggesting that the American economy is going to be struggling with employment for quite some some time.  Granted, there’s probably some influence based on general population aging, but without serious economic reforms, this isn’t likely to fix itself anytime soon.


Source data: Bureau of Labors Statistics:

Labor Force Statistics from the Current Population Survey
Series Id:           LNS11300000
Seasonally Adjusted
Series title:        (Seas) Labor Force Participation Rate
Labor force status:  Civilian labor force participation rate
Type of data:        Percent or rate
Age:                 16 years and over

Written by hmstewartjr

6 August 2011 at 1:51 PM

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The New August GRI Season

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*** Update 08 August 2011 *** Fedex Freight has just announced a general rate increase (GRI) of 6.8% effective 06 September 2011.

Is well underway. Most LTL (less than truckload) carriers took 6.95% increases effective 01 August 2011. Here’s just a sample list, idly culled from various press releases:

On 01 July, UPS Freight announces 6.9%, effective 01 August.

06 July, ABFS announces 6.9%, effective 25 July.

18 July, Con-Way announces 6.9%, effective 01 August.

20 July, YRC announces 6.9%, effective 01 August.

01 August, Estes announces 6.9%, effective 08 August.

FedEx Freight, on the other hand may just be content with ratcheting up their fuel surcharge formula

A nice, consistent, grouping. I’m surprised that none of these carriers even bothered to publish a 6.7% or 7.1%increase just to stand out a bit.

Keep in mind that in the LTL world, a 6.9% rate increase is not a 6.9% rate increase. Carriers can, and do, vary increases by lane, class of commodity, phase of the moon, and other factors. Only the overall weighted average of where they expect their business comes out to the 6.9% increase.

For the shipper, this means that your freight charges – depending on these factors – may not change much. Or they could increase 20%.

From a carrier perspective, the 6.9% isn’t a pure 6.9% price increase. It wouldn’t surprise me if 60% of each of these carrier’s business was moving on contract or “frozen”rates that are not going to be subject to the increase. Furthermore, shippers with enough business will likely be able to negotiate additional discounts to offset the proposed increases.  Assuming that these negotiations only discount away 25% of the increase, the carrier is only looking at a 2.6% retention rate (6.9%*.5*.75), and that’s on the generous side.

On the investor side, these increases mean much less to UPS Freight and FedEx Freight than they do to the rest of the group, since LTL represents a small segment to UPS / FedEx, but is the lifeblood to YRC, ABF, Con-Way, etc.

Written by hmstewartjr

4 August 2011 at 4:21 PM

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Dilbert on Preparing for Financial Meltdown

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Sure, he’s paranoid; but apparently not paranoid enough.

See the strip here.

Written by hmstewartjr

4 August 2011 at 10:46 AM

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