Connecting the Dots: Choppy Seas For Transportation Stocks by Tony Sagami
“Red sky at night, sailor’s delight. Red sky in morning, sailor’s warning.”
—Old sailor’s adage
In the old times of sailing ships, sailors paid careful attention to the weather to see if it was safe to set sail. Investors should be watching the economic climate with the same intensity to see if it is safe to invest in transportation stocks.
Equities did well last month as most market watchers have noted that Value outperformed growth. In his March Factor Performance report, Alex Botte of Venn by Two Sigma noted that March was a strong month for the global Equity factor, especially in developed markets. Q1 2021 hedge fund letters, conferences and more He said Europe Read More
And let me tell you, the economic climate for transportation stocks is quite ugly.
Red Sky Morning #1: The Bureau of Transportation Statistics (BTS) reported that the total amount of freight volumes fell on a year-over-year basis. The total volume of freight moved by all types of transport—road, rail, pipeline, inland waterways, and as air cargo—dropped by 1.1% in the month of November (most recent statistics available), compared to the same year-ago period.
Red Sky Morning #2: The Association of American Railroads reported that freight volume on US railroads fell by 2.5% in 2015.
Example: When Union Pacific reported its quarterly results last week, they fell well short of Wall Street expectations. The pinstripe-suit crowd was expecting Union Pacific to deliver $1.42 of profits on $5.54 billion of revenue (a big drop from the $1.61 of profits on $6.15 billion of revenue it made last year), but the company couldn’t even deliver on those lowered expectations.
Union Pacific reported earnings of $1.31 per share—11 cents below expectations—on $5.21 billion of revenue.
The problem? Freight volumes fell 9% as shipments declined in five of the six major freight categories. The one positive category, automotive, was up by a measly 1%… nothing to write home about. This, by the way, is Union Pacific’s fourth quarter in a row of declining freight volume.
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Red Sky Warning #3: Sales of Class 8 trucks— those with a gross weight over 33,000 pounds, commonly called semi-trucks—have fallen like a rock.
In the month of November (most recent period available), a total of 16,600 Class 8 trucks were sold, well below the 22,000–25,000 expectation, a 59% year-over-year decline and a 36% drop from October.
Red Sky Warning #4: Boeing slashes production of 747-8 by 50%! Boeing was producing one of these jumbo jets every month but announced it will reduce that to just one every two months… a 50% decline!
According to Boeing, the decision to slash production was to “match near-term market demand” for the plane. “Global air passenger traffic growth and airplane demand remain strong, but the air cargo market recovery that began in late 2013 has stalled in recent months and slowed demand for the 747-8 Freighter,” said Ray Conner of Boeing.
Red Sky Warning #5: The transportation woes have spread far beyond US borders. The Baltic Dry Index, which measures the price of moving raw materials by sea, hit a new all-time low.
The Baltic Dry Index dropped to 373 points last week, the first time it has ever been below 400 and a staggering 22% drop in just the first 15 days of 2016.
Conclusion: It doesn’t matter which part of the transportation food chain— ships, air, trucks, or rail—you’re looking at… they are all in trouble as evidenced by the Dow Jones Transportation Average.
The Dow Jones Transportation Average closed below its August 24 close of 7,595 on December 11 and is already down more than 11% so far in 2016. Worse yet, it is down by almost 30% from its all-time high of 9,310 set on November 28, 2014.
If those old-time sailors are right, all the transportation “red” you see when the stock market opens in the morning is a clear warning of very dangerous investing conditions.
30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.