Canadian Pacific Keith Creel. Source: Globe And MailCanadian Pacific Keith Creel. Source: Globe And Mail

Canadian Pacific (CP) reports earnings Oct. 28. Analysts expect revenue of $1.4 billion and EPS of $3.23. The revenue estimate implies a Y/Y revenue decline in the mid-single-digit percentage range. Investors should focus on the following key items.

Falling Rail Traffic

In 2019 railroads faced headwinds to their top lines. The pandemic has exacerbated the situation and business activity has free fallen. For the first 39 weeks of 2020, cumulative rail traffic for Canadian railroads was down 7.7%. Last quarter, Canadian Pacific’s rail traffic fell 14% Y/Y and its average selling price (“ASP”) rose over 5%. Over half of the company’s major product segments experienced revenue declines.

Canadian Pacific Q2 2020 revenue. Source: Shock ExchanangeOn a combined basis, Grain, Energy and Intermodal represented more than 65% of total revenue. Grain revenue was up 6% on a 5% rise in carloads and 1% rise in ASP. Lower Grain volumes in the U.S. partially offset record Grain volumes in Canada during the quarter. Revenue from the Energy, Chemicals, Plastics segment fell 1% on a 28% decline in carloads and 37% increase in ASP. COVID-19 triggered lower demand for crude and liquefied petroleum. Intermodal revenue was off 10% on a 5% decline in carloads and 5% decline in ASP. The segment should ebb and flow with the vagaries of the global economy.

Canadian Pacific’s carloads fell 14% Y/Y. Only three of its major product categories experienced increases in volume.

Canadian Pacific carloads. Source: Shock ExchangeCarloads for Grain rose in the low-single-digit percentage range on the strength of volume in Canada. Intermodal volume fell 5% Y/Y and I expect it to face long-term headwinds. Intermodal represented more than 40% of the company’s total carloads, so its performance will likely have an outsized impact on Canadian Pacific’s total volume.

The company hiked prices 5%, a sharp departure from competitors

Source: ForbesSource: Forbes

Union Pacific (UNP) reports earnings on October 22nd. Analysts expect revenue of $4.89 billion and EPS of $1.98. The revenue estimate implies a double-digit percentage decline in revenue. Investors should focus on the following key items.

Revenue Continues To Decline

The pandemic has practically shut down business activity. Falling business activity leads to falling revenue traffic and falling revenue for Union Pacific. For the first 38 weeks of 2020, combined U.S. rail traffic (carloads and intermodal units) fell 10.9% Y/Y. That portends a decline in revenue for Union Pacific.

Union Pacific Q2 revenue. Source: Shock Exchange

Last quarter, rail traffic and average selling price (“ASP”) fell 20% and 6%, respectively. Each of the company’s major product categories experienced revenue declines.

The Bulk segment included coal, grain, food, fertilizer, coal and renewables. Revenue from the segment declined 17% on a 15% decline in carloads and 2% decline in ASP. Coal was negatively impacted by lower natural gas prices and overall softness in the market. General Electric (GE) recently exited the coal power market due to unattractive economics, implying weakness in the market may not abate anytime soon. The pandemic negatively impacted shipments of food and refrigerated products.

The Industrial segment fell 23% on an 18% decline in volume and 6% decline in ASP. Low oil prices hurt energy revenue, while weak economic activity likely stymied industrial revenue. Meanwhile, the Premium segment fell as the pandemic hurt international intermodal revenue.

Total carloads fell 20% Y/Y, with each major product segment experiencing double-digit percentage declines.

Union Pacific Q2 2020 carloads. Source: Shock Exchange

The Premium segment, which included intermodal and automotive, experienced the largest decline in volume. Intermodal volume will likely track movements in global economic activity. Automotive could face more headwinds if consumers shun big ticket items amid the pandemic. Industrial could also face headwinds until the economy fully reopens.

The company’s blended ASP fell

There are some good reasons why the Euro is currently trading above its long-term moving averages. Divergent monetary policy between the European Central Bank (ECB) and the Federal Reserve (FED), widening 2-year and 10-year bonds yields spreads and relatively better debt situation in the EU (vs the U.S.) are usually cited as the main causes of the Euro relative strength. But how likely is EURUSD to strengthen further and move towards 1.20 as some analysts expect?

I do not think that the bullish case for EURUSD is strong enough. Range bound trading with a slight bearish bias is more likely to prevail. I see EURUSD trading in the 1.14-1.18 range over the next six months.

The Bearish Case

10-2 Yield Spread

One only needs to look at the chart below to ask an obvious question: is the Euro significantly overvalued?

Source: Bluegold Trader (website)

The chart above shows daily closing exchange rates for 1 Euro to U.S. dollars and the yield spread between the 10-year government bond and the 2-year government bond (10-2 yield spread). In this particular chart, the 10-2 yield spread is a simple difference between the yields on 10- and 2-year German government securities at constant maturity. German bonds were picked because Germany is the largest economy in the Eurozone accounting for 28% of GDP.

The yield spread is often included among the leading forex indicators because interest-rate spreads determine the shape of the yield curve and the shape of the yield curve embodies fixed-income traders’ expectations about the economy. When the 10-2 yield spread rises, the yield curve is steepening (becoming more upward-sloping). Upward-sloping yield curves have normally preceded economic expansions as bondholders demand a higher rate of return from the inflationary risks accompanying economic upturns. When the 10-2 yield spread falls, the yield curve is