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Will Wall Street Woes Affect The RR Industry?
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<p>Like every business railroads depend on credit to help finance their operations. It may be for working capital or bridge loans or long term debt to construct facilities or lease equipment. Leasing is a form of credit. As the availability of credit (short and long term) tightens, which is one of the fallouts of the housing problems, the railroads will have to pay higher interest rates to obtain financing. This will result in lower profits, unless they can increase their margins to offset the increased cost of the financing. The inability to obtain money at favorable rates can put a lot of capital projects on hold.</p><p>The credit crunch is driven by numerous economic variables that have, amongst other things, manifested themselves on Wall Street. As a result people are finding it more difficult to get credit, which in turn is forcing them to reduce their spends, as indicated by the weakest housing market in 17 years and slumping consumer (auto) sales. </p><p>The slowing economy is having an impact on the railroad industry. Fewer home building items and vehicles are being shipped by rail or trucks for that matter. The effect is already being felt. I talked to a UP conductor in Alpine, TX two weeks ago. He told me that the UP has laid off more than 60 conductors and engineers in El Paso. Alpine is a crew change point on the UP and a great train watching spot.</p><p>Derivatives (futures contracts, fuel hedges, foreign exchange hedges, etc.) can be an prudent risk management tools if they are structured and managed properly. A key is whether the issuer and counterparty understand them. And whether the counterparty has the wherewithal to honor the contract! If the derivative is written as a risk management tool, the risks are manageable. My company used derivatives to hedge the volatility in the electric futures market. But if it is purely speculative, the risks can spiral out of control quickly. </p>
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