If FedEx is losing money, you know the economy is in bad shape

Last month I said that June was significant for two reasons.  First, we are going to get our first test of data that could disappoint, which would spell trouble for an overbought market. But, just as important, we need to watch the industrials because there is going to be no sustainable recovery unless these cyclical companies are leading the way.  If the recent awful earnings report from FedEx is any indication, this sector is still in a world of hurt.  The Globe & Mail has a good take on how this is shaping up.

FedEx’s forecast yesterday was certainly no green stalk. During the rally that began in March, its shares surged 80 per cent by early May as investors bet that a full financial meltdown and economic depression were not in the works. That’s about double the move of the broad S&P 500 over the same period, and it reinforced the belief that freight haulers are barometers for the global economy.

"They are a reflection of consumer conditions," said Morgan McGowan, assistant economist at Moody’s Economy.com. "The companies involved operate with a combination of air and ground, and even rail shipping as well. So they give a broad range of the different types of shipments that are going out.”

Now, though, the barometric reading has changed as investors lose patience over the lack of hard evidence of an economic recovery. FedEx shares have fallen 17.8 per cent over the past month – worse than the broader market – and have sent some strategists to the Dow Theory, a technical indicator that gets some respect from those who sneer at technical analysis.

According to the theory, an upward move by the 30-member Dow Jones industrial average means nothing unless the 20-member DJ transportation average also moves up. The reason? The industrials make the stuff that the transportation companies haul. If there’s no hauling, then there probably isn’t a lot of demand for the stuff being made.

Lo and behold, the transportation average – which includes Burlington Northern Santa Fe Corp., Union Pacific Corp. and FedEx – has hit hard times, tumbling 6.6 per cent since last Thursday.

The industrials are now playing catch-up: The index began its descent on Monday and has since fallen 3.4 per cent – and the Dow Theory hints at more trouble ahead unless the economic news starts pointing toward sunnier days.

"Until now, ‘less bad than expected’ has been enough for investors," John Hussman of Hussman Funds, said in his weekly letter to clients. "At this point, however, stocks are priced to require an economic recovery."

In short, this market has risen to seriously overbought levels that has priced in imminent recovery.  But, the FedEx news should give you pauseregarding an imminent recovery. Even a delay in recovery until the fourth or first quarter would be a huge disappointment in this market.  Continued recession beyond that time would be catastrophic.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.