Something's Gotta Give

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If the adage 'as goes transportation so goes the economy' is true, the U.S. financial markets are in a deeper pit than many had imagined. The Dow Jones Transportation Index has shed 1.2% year to date while its market counterparts, including the Dow Jones Industrial Average and the S&P 500,  have been showing off reaching multi-year highs and achieving year-to-date advances of 8.5% and 12.8%, respectively.

Transportation's woes are compounded with a weak future revenue picture painted by the likes of FedEx Corporation (NYSE: FDX) and railroad company Norfolk Southern (NYSE: NSC), among others.  One transportation analyst tells me that in the end, something's gotta give and either the industrials are going to crack or transportation companies are going to catch up. John Barnes, an analyst with RBC Capital Markets, is in the former camp.

To be clear, FedEx's stock is off about 5% since the company pre-announced its worldwide growth projections for 2012 and 2013. It lowered its revenue forecasts amid weak economic conditions in Europe and in the U.S.  There was a small pop in FedEx shares on Monday following the weekend's FedEx Cup Playoffs, but that near 1% jump did little to soothe investors.


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That the Dow Jones industrial and transportation averages are trading in opposite directions is cause for concern. For one, it suggests that if in fact transportation is a gauge of economic conditions the markets are moving higher not on the fundamentals of the economy but instead the artificial stimulus provided by monetary policymakers. And, if recent reports are accurate and money managers are in fact taking to the sidelines for the remainder of this year, then it is retail investors -- not institutions -- who are driving the markets higher, says Barnes. That means the individual investor is either going to be the hero or the fall guy. 

The antidote for FedEx's struggles is a material restructuring of its express unit, according to Barnes, which investors will be listening for at the FedEx Investors and Lenders Meeting next month. Domestic air freight volumes are just too low and international trade is far too slow to support the number of aircraft that FedEx has dedicated to this segment, he told me. 

Railroad company Norfolk Southern sounded a similar alarm when it disappointed investors and warned that third quarter profits would fall below estimates. Slower volumes in coal and merchandise transport in addition to exposure overseas are pressuring revenues. Weak economic conditions in Europe and Asia are weighing on the company. It almost seems to make sense to limit an investment portfolio to companies with a domestic focus given the impact that overseas' economies are having on corporate profits.

Shares of the railroad have declined some 10% since the preannouncement on September 19th.

And the hits just keep coming for the transportation sector. Trucking company Landstar System (NASDAQ: LSTR) pre-announced halfway through the third quarter in a mid-quarter conference call. The company lowered its profit and revenue estimates amid uneven volume and revenue that surprised company officials. Landstar reports its earnings results in about one month, which is when the company generally discloses its dividend. Last quarter, Landstar lifted its cash dividend by a penny to six-cents per share. Meanwhile, since late August when the company pre-announced, investors have trimmed 4% from the stock.

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No doubt the transportation sector has some tough weeks ahead. Companies are bracing for the worst while some are holding tight to their outlook on recovery. Whether the transportation sector proves to be a harbinger for the rest of the markets like much of the rest of the economic scenario remains unclear. There are some external anomalies influencing transportation profits but at some point these companies -- like FedEx -- are going to have to look at their own operations to turn the corner.  








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