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The Hobo Indicators

By Tom Dyson, publisher, The Palm Beach Letter
Monday, November 28, 2005

“We’re slammed. We are turning business away we are so busy.” - Norfolk Southern Duty Manager, Simpson Yard, Jacksonville

I was pretty sure there was someone behind the large tinted windows looking out over the railroad tracks, but my eyes couldn’t penetrate the dark glass.

He’s probably wondering what the hell I’m doing walking around his freight yard,” I thought to myself.

I approached the small white hut at the southern throat of Norfolk Southern’s Simpson yard - this was the yard’s nerve center - and I knocked on the door.

Some people look for investing ideas at the mall. Others hang around the cafes and bars of downtown Manhattan, hoping for an insider tipBut me, I spent Tuesday investigating the hobo hangouts of Jacksonville, Florida trying to get a handle on the country’s economic activity.

Steve “Doc Bo” Keeley and Victor Niederhoffer invented this kind of economic research in the ‘80s. Doc Bo would ride around the country on freight trains, sending bulletins back to Niederhoffer. Niederhoffer would then incorporate Doc Bo’s observations into his trading strategy.

Here’s an example of how it worked:

“[I] received a bulletin from Dr. Bo that freight cars were going through key locations in Jacksonville, Denver and Salt Lake City at twice their normal rate,” Niederhoffer writes in 1997. “The number of freight cars was also increasing. The employment situation was obviously good, so I stayed short the bond. Sure enough, the February employment statistics showed an 800,000 increase, one of the largest ever, and bonds dropped three points.”

Doc Bo is legendary in the trading community. He draws on a network of stockbrokers, traders, and investment bankers whenever he needs a couch to sleep on after a long day on the rails. He’s an old friend of best-selling author Doug Casey, and Victor Niederhoffer even included a chapter on Doc Bo and his ‘hobo indicators’ in his first book, Education of a Speculator.

I spent 6 weeks with Doc Bo this summer, crisscrossing North America on the freight trains, learning his research techniques. On Tuesday, I went to Jacksonville and put theory into action.

Jacksonville is the only major city in Florida that does not base its existence on tourists. It’s an industrial town and a major seaport. It’s also a major railroad center. In other words, Jacksonville would be the perfect guinea pig for our ‘hobo’ evaluation.

This is what I found:

The railroads are running at maximum capacity. The yard manager told me Norfolk Southern (NYSE: NSC) was turning away business.

They send out 14 trains a day from the Simpson yard, each one 10,000 feet long. “That’s about 200 railcars,” said the duty manager. “We don’t like to send ‘em out any longer than that.”

Doc Bo likes to pay particular attention to the kinds of freight cars traversing the rails.

“Everything’s up,” said my contact at the train yard. “There’s nothing in particular I can think of. It’s all booming... cars, coal, grain, intermodal [container boxes]... we’re hauling a ton of everything. It’s been like this for over two years now.”

Hmm... leading indicators from the freight yard suggest the economy is hot and getting hotter.

At the Salvation Army – or the ‘Sallie’ as hobos refer to it - there were lines around the block. Long lines at the soup kitchens indicate bad times, says Doc Bo.

But in this case, Doc Bo’s indicator was broken. On Tuesday, they were handing out Thanksgiving Dinners in large white boxes. Hundreds of people had come to pick one up.

“It’s not usually this busy,” the director told me. “Only at Thanksgiving and Christmas. We serve meals everyday though, and we offer 190 beds to the homeless each night. Sometimes we have to turn people away, but usually we have a few beds open.”

“Have you noticed any trends?” I asked.

“Not really. It’s pretty constant. There’s plenty of work around. Drugs will always be a problem, but generally, I’d say Jacksonville is doing fine.”

The message from the Sallie is unemployment will remain low. In fact, the message from all of our “Hobo Indicators” is one of a strong economy with plenty of goods being shipped across the nation.

In conditions like this, a trader like Niederhoffer might buy Norfolk Southern stock and bet on interest rates rising due to the strong economic activity... you may consider doing the same.

Good investing,

Tom Dyson





Market Notes


WHAT THE WORLD’S TOP ECONOMIST IS SAYING

Another unconventional economic gauge we follow is Dr. Copper.

Due to copper’s heavy use in everyday applications like plumbing and electrical wiring, the price of the red metal reflects construction activity and the demand for industrial products. This economic sensitivity has helped copper earn its Ph.D. in economics by its ability to send messages about the world’s economic health.

According to the two-year chart of copper below, the world economy is doing quite well:


 

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