Rerouting from the DVSMCI

There is good understanding of the tipping points developed through a bouquet of transportation KPIs.

One such, is the barometer for market inflection using DAT’s national rates first shown by Eric Williams of Target. Jason Miller of Michigan State has since adopted it and provided update of this measure in the Dry Van Spot Market Conditions Index or DVSMCI.

The math is below if you care. We’re going to build a case atop it. Another index that is potentially less forgiving as an indicator.

The tipping point is when the DVSMCI is over 10%, when the market becomes softer and more unnoteworthy. The inflections happen again when it dips below that threshold as shown below from the August update when it sat at 16.8%. A nothing burger. It rose to 18% in October.

Once the premium between the two collapses to zero, the all you know what has broken loose. You could stop here and be on your merry way waiting for the 10%, but when observing the above, how confident are you it will happen in a smooth succession? 18 to 10% does still look a long way’s off. Then again, none of the cycles above look gradual.

Independent of one another, the view is forming that 2025 will foresee the change we’ve all readied for, and waited for……and waited. Here's:

DAT’s Ken Adamo

Or

FreightWaves SONAR’s Craig Fuller

But how soon does that come and to what amplitude? No one can answer that exactly. Man, do we try. Instead, the focus should be on what do we do when the lights go on/off. What about between the switches?

Let’s first put all these %’s and acronyms aside to create a dollar value we all know and understand. We find it by taking a somewhat consistent market average of 600 daily miles as a constant to multiply the Contract and Spot rates with fuel. Therefore, when the DAT Contract Linehaul adds the fuel I’ve run with the DOE for an all-in rate of $2.25/mi, that equals $1,350. If all-in spot is $2.00, then the spot rate is $1,200. There should be $125 between the two given the market clearing averages or a 12% DVSMCI. If the spot rate falls by 5¢/mi the next month, and contract only 1¢/mi or $2.24 and $1.95, that expands to $174 or 14% DVSMCI.

As Jason suggests, the index tells you how much room there is from the spot and contract rate. The higher the premium, the uglier the market.

Hold on, you just said the more you can make between the two - the worse things are getting?

Yes.

That means, when it drops under the 10%, meaning making LESS money than before, the market is BEST?

Yes

Am I becoming The Joker?

No, but hopefully this helps.

Above is an example of all these concepts together. The top left holds the two equations first presented, arriving at the same destination for a premium or index value of 13.8%. Directly below them is a fake 3 year-ish cycle where our delta expands the softer the market gets. Except, the total savings or revenue erodes on account of a diminishing opportunity to spot. That trend is then shown in the top right of total savings through this pretend cycle. It’s reflection is that delta over time directly below it.

Over the longer stretch, these waves become more evident in the rusty columns in the back of this next graphic. Notice the teal spot rate expands unequally as this market conditions indicator moves further lower that red limbo threshold of 10%. I eyeballed in vs adding a trendline, before I get any nitpicking. The point holds with the limbo stick.

It is therefore, a key marker to watch. Another large part of the picture, however, resides with that more variable spot rate around the contract linehaul rate. It is uncommon, or at least ill advised to put all eggs in one basket or consistently chase the “golden” goose in the spot market. Both will leave you broke.

To mitigate this risk, there is the ebb and flow of modal and contractual/spot mix through the cycles. What this also means is you have two channels of revenue and margin. And they’re often at odds with one another. The culmination of mix and condition is what will then set one business’ financial straights to the left or right of the market average at any given time.

More important, is that contract holds the lions share of freight volume through any cycle. At worst, in 2021, rejections hit 25%. This means 75% of loads were still sent and accepted by a routing guide. Contract is king.

On the left below is a representation of part of the DVSMCI. I like to think of it as the good old rate of yesteryear against the current price. If contract used is older and higher, then the gap bigger the more the spot side falls. This is the DVSMCI expanding in a soft market.

The market doesn’t work in a manner where everyone has awards all at one time then race the year to see how they do against the tides of seasonal spot movements. Every month new opportunity comes in while others atrophy. That’s the way of the world in logistics. And why the concept of fully binding, in stone, contract is unworkable versus a mechanism that does a good enough job holding them together by way of fierce market competition.

On the right is the same deal, just using the contract linehaul versus the all-in number and will represent our new awards or concessions mixed in with the ones of yester year. These do not have the benefit of being rated and agreed so long ago as a market sours.

These two truths should help do away with any theory of golden rates. We’re all moving stuff today or tomorrow that we agreed upon using yesterday’s information. Did it even pick up yet?

It’s why I at least want to compliment, if not addend, the way we look at this barometer today. The math is all the same, only the variables change between serving two all-in numbers versus a mix of the two. Call it the DVCMCI. Better than Beau’s Tension Gauge. Here it is in comparison:

Although the formula is shared, there are some differences for practical application that I want to point out. The first being that the “flip” for this tension gauge happens at -5% vs the 10% of the DVSMCI. This is not huge, but for visibility and thresholding, I like it better as a monitor of > 0, 0 < -5%, -6% < -10%, etc.

The other subtle difference being we are no longer passing through fuel equally between spot and contract. This makes for much more sensitive swings in the gauge in times of high energy volatility like the ‘11’ rebound, ‘15 fuel glut, and ‘22 invasion spike that depressed linehauls with a tanking market.

The swings are more evident below in maroon for fuel YoY, vs the all-in spot rate YoY in orange. In teal and in columns are the DVSMCI again with the new tension gauge.

Looking to the left hand side, it may be wild to see this tension gauge so strong between the 2011-14 cycles, but you can thank the ZIRP era for that. The Great Financial Crisis knocked the supply base back significantly. Demand just barely outstripped supply for the slow ride up. It was more choppy and competitive than we see with the wilder swings as of late. As the number of carriers grow, routing guides are becoming more fluid with digital integrations.

It shakes out looking at all of this as if it were that average 600 mi run over time. Darker greens are spot and contract rates. The orange and light blue are implied yields using both methods of the all-in contract minus all-in spot in or linehaul-contract minus all-in spot.

The lows and highs of each cycle are evident here as well. Even if you don’t want to believe the least profitable time is when the market gets hot again. High revenues, volume, and handshakes mend all wounds on the way up.

Here it is in isolation, corroborating some of the softening that returned this Summer. I don’t think it lasts much longer. By January, the gauge returns below zero with the weather. That’s my bet at least. If not, I’ll be watching the progress. Let me know what you think.