Sulaman Chaudhry and Andy Cole send: Last week was very interesting for a number of reasons, the main one being that many of our trendlines remain intact:

The S&P 500 has been forming a rising wedge over the past six months now, and is eventually going to be forced to breakout to the upside or the downside within the coming months. There are two things we need to take note of here: the first being the negative divergence we are seeing in the MACD, the second being the increase in selling volume over the past few days. Looking at this objectively, this is definitely bearish for the markets.

As we mentioned a few days ago, we have seen gold (ETF: GLD) consolidate a bit over the past few days. On a daily chart, the GLD formed a double top, and proceeded to break out of an uptrending channel that had been in place since two weeks ago. We would look for a bit more selling in the GLD from here.

Similarly, the UUP dollar ETF has experienced a double bottom over the past week or so and looks to be headed higher from here. Again, we mentioned the heavy increase in volume on the UUP in the last post, and it looks as though that did prove to be a short-term bottom. Keep an eye for clues such as this to help determine future trends.

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After Buffett’s investments in a handful of major railroads – Union Pacific (UNP), Norfolk Southern (NSC), and most notably Burlington Northern Santa Fe (BNI) – the industry garnered plenty of attention. The attractive industry dynamics and a myopic focus on the major players makes me interested in the small number of publicly traded regional railroads – among them Kansas City Southern (KSU) and Genesee & Wyoming (GWR).

Why railroads? Foremost, it’s an industry with significant tangible barriers to entry, and it provides a vital economic service. Although fixed asset investment is substantial, I also believe that the general consensus underestimates the variability of the typical railroad’s cost structure – yes, there’s operating leverage there, but there is also room to reduce headcount as unit volumes decline. Below is a graph of quarter-over-quarter revenue growth compared to QoQ operating expense growth for two major carriers (Norfolk Southern and CSX), one larger regional (Kansas City Southern) and the short-line amalgamation G&W.

A fixed asset business is going to have scale, but there’s still a fair degree of correlation for those companies. For the quarterly dataset going back to the beginning of 2006, the slopes vary from 0.51 (NSC) to 0.87 (GWR), so some flexibility exists in aligning expenses with revenues.

Next is a list of several metrics used to compare the four railroads, focusing primarily on their track infrastructure. Although other equipment is needed to operate a railroad, the real economic asset I’d be buying is the network.

A few explanations: there’s a strong correlation between revenue per track mile to market value per track mile. I chose to use enterprise value in addition to market cap, since these rails all have some level of debt attached and the end results cluster around 2.5x revenue per track mile. Also, the capital spending necessary to maintain the track network is important, and for the larger and more continuous players, spending is substantially higher than for a fragmented short-line company like G&W.

One red flag that makes me tread with caution is that railroad stocks have generally seen a robust recovery since the March lows, though I’m wary of mentally anchoring to those prices. On the whole, the rail industry has several positives about it – so even if a cross-section of some stocks don’t show any great bargains, it’s an understandable industry with competitive advantages, and that means good returns can be obtained at the right price.

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Sulaman Chaudhry and Andy Cole send: Hope you all had a great weekend. Let’s look at a few charts:

The S&P looks to be forming a rising wedge of sorts. A break to the downside would definitely be bearish, but until that happens, which it most likely will, the trend is up and continues to be for now.

After that high volume breakout on the Gold (ETF: GLD) chart a few weeks ago, we’ve seen a nice bit of consolidation around that 100$ level. For those traders banking on a move past 100$, this is definitely healthy in order to have a sustained move higher.

The head and shoulders that we have been on top of since February is still in play. A break above 100$ should lead us to a target price of 115$ on the GLD over the course of a few months.

There was a strong surge in volume on the U.S. dollar (ETF: UUP) last Friday. Whether this will form some sort of short term bottom remains to be seen, but it’s something to keep an eye on.

Finally, take a look at Hecla Mining (HL). This stock has seen a surge in buying volume over the past few weeks as it completed a cup and handle breakout, which was no doubt influenced by the pennant breakout in gold. We would look for a retest of $3.90 on the downside as nice entry position.

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In a note to file under the “Playing for Time” theme, the Curious Capitalist notes:

First American CoreLogic has taken a look at the effect of the government’s efforts to drive down mortgage interest rates, which, among other things, makes for easier refinancing. According to the loan analytics company, in the first half of 2009, refinancing homeowners set themselves up to save some $11.5 billion over the next five years. The typical person who refinanced was able to drop his monthly payment by $120 a month, a reduction of 10.5%… The value of mortgage originations hit $664 billion in the second quarter, and 69% of that was refinancing (by contrast, 37% of origination activity was made up of refis in the last quarter of 2o08). Fair or not, the government’s plan at least worked.

Reconcile this with one of the headlines on the site of Connecticut’s new candidate for U.S. Senate, Peter Schiff, which reads, “What America has succeeded in creating is not an economy impervious to shocks, but merely one which enables their consequences to be postponed to a later date.” I’ve spoken briefly with Peter before, and I’ve read his books, but I’m by no means in complete agreement with his views - yet in this instance, what he says is a perfect application to what the banking system is doing with the blessing of our government. Their strategy? Between the PPIP and mortgages, let’s sell as many options as we can now, book a benefit, and hope the adverse scenario that results in our option position(s) taking losses doesn’t occur.

I’ve wondered before whether or not we can carry trade the U.S. consumer back to health by attempting to force Treasury rates and other borrowing rates to converge; I’m not sure, but we’re certainly giving it the old college try.

If the typical person refinancing can save an extra $120/month, where does the money come from? It’s money that mortgage lenders aren’t making anymore in a lower interest rate environment. Now, the yield curve is steep, and short rates are near zero, so the relative change in rates is still helping banks. But at the same time, we’re more heavily leveraging banks to low rates; net interest margins might be getting fat at present, but they will compress and then some when rates inevitably rise. Zero, as James Grant has said, is the wrong rate for any economy, but more and more, I’m leaning toward believing that short rates stay extraordinarily low because of the idea that the economy depends on it - even when reality is that it aids speculators much more than the economy as a whole.

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Sulaman Chaudhry and Andy Cole send: Let’s watch this to see where it breaks out. We did make new monthly highs Thursday across the board. Keep in mind, however that it was on very light volume.

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