Supply chain bottlenecks favor Industrials - Railroads
What is a bottleneck in the supply chain?
A bottleneck is a congestion at a point within the production cycle. The congestion can occur anywhere within the production cycle, including at an assembly line within a large manufacturing plant, automobile factory, computer network, etc. The bottleneck occurs when workloads arrive at a much earlier timeframe for the production process to handle or process. Inefficiencies created can lead to delays within the overall production chain, resulting in higher production costs.
What causes the congestion in the supply chain?
Historically, the primary reason for the congestion lies within equipment capacity and performance, not labor shortage. Today, the sharp global recovery from the Covid-19 pandemic lock-down has created various supply chain bottlenecks, ranging from lack of shipping containers, warehouse capacity issues, congestion at ports, lack of truck drivers, and transport workers to move the products domestically and internationally.
Bottlenecks and rising inflation
Bottlenecks in global supply chains can impact the supply of a wide range of goods, including semiconductors, food, raw materials, consumer products, and even toys for the holidays. If the constraints sustain, then it can lead to higher consumer prices, contributing to higher inflation. So, the question the Fed and the U.S. government are struggling to address is whether the bottleneck is indeed transitory or sustainable longer-term.
How to fix the supply chain bottlenecks?
Resolving transportation can increase productivity, decrease the waste of materials and improve time. By transporting products on time and to the correct location, the supply chain returns to normal. The Biden administration is opening the Los Angeles and Long Beach ports 24/7 to unclog the backed-up cargo ships. It may provide some relief. However, the critical congestion continues to be the shortage of truckers and trucks needed to transport the goods and products. Some warn that removing the bottleneck within the ports is only a temporary fix and not a permanent solution to the supply chain crisis.
The supply-side bottlenecks favor Industrials - Railroad industry
The five common forms of transport remain rails, roads, air, water, and pipelines. It is reasonable to expect that this area will hold the keys to the supply-side issue.
It appears two industries within the Industrials are benefiting the most from the supply side bottlenecks – the Railroads ($DJUSRR) and the Industrial Suppliers ($DJUSDS).
The recent relative rotation graph (RRG) study shows the tails of the two Industrials moving higher within the Leading Quadrant. A third Industrials, Trucking, is trending sideways within the Leading Quadrant.
A brief review of the technical charts and an assessment of the risk/reward potentials confirm that Railroads recently broke out above their prior highs, suggesting this group will likely outperform peers. CSX and UNP are the relative strength leaders, while KSU and NSC are the laggards within the Railroads.
Within the Industrial Suppliers group, FAST is leading its counterpart, GWW. Both stocks are trading at moderately overbought levels and will need to consolidate before rallying higher.
ODFL is the only name within the Trucking group. ODFL is also trading at overbought levels and needs consolidation before trending higher.