Transport Sector Confirms Economic Weakness

Nothing has been more confounding during this equity rally than the weakness in the underlying fundamentals of the transports. Without fail, the data from the transports has been an excellent leading indicator in past recessions. Warren Buffett has even admitted that the rail data is his single favorite indicator to watch. But as equity market have ripped higher, the rails and other transports have lagged.

Of course, as time has passed we have witnessed the enormous influence of government stimulus on the economy and the incredible impact of money printing on asset prices. As we begin to see signs that government stimulus is failing to generate jobs and a sustainable recovery, the transports continue to forecast a very weak recovery. Have the transports been right this whole time or is the Fed’s liquidity induced rally a more accurate reflection of the economy?

Late last week, Union Pacific (UNP) CEO Jim Young said the economy had stabilized, but was not recovering just yet:

“So, it looks like the economy has bottomed out, but unfortunately we’re not seeing an upturn yet.

The weekly rails data we report has shown certain signs of stability and even a slight uptick of late, but whether this warrants the extreme recovery optimism we hear about on a daily basis is highly suspect:

Of course, the weakness in the transports isn’t just in the rails. The Air Transports reported a 13% year over year decline in cargo just last week and the latest truck tonnage data shows that the recovery in trucking is also very weak:

In terms of market implications, Richard Russell is now growing very concerned about the action in the Transports:

“From a Dow Theory standpoint, the Transports are now worth watching. They’re sort of sinking out of sight on higher volume. And look at MACD which has now turned bearish. Transports could be a problem. And note today’s plunge of over 100 points.”

From a trading perspective, we saw heavy put action in the Transports late last month as they were beginning to top out. Since then, traders have become very concerned about a potential double top leading to further weakness in the transports sector.

The fundamentals seems to rhyme with the technicals. Some traders couldn’t ask for a better set-up….

Comments

[robert.b.fe...:]

Looks like I pulled the trigger on Claymore (SEA) a tad early.

Oct 28 12:23 PM

[cyclingscholar:]

YAY DOW THEORY! Formulated in 1896 and the early 20th century by Dow and others....it is the grandaddy of all technical theories. Long after Prechter and latter day prattlers have been consigned to the trashbin of history, the Dow Theory lives on. Industrials show whats produced, Transports show whats shipped. Its that simple.

Oct 28 12:31 PM

[Snitzer:]

We (small trucking company) are up a hair, but nothing to get excited about. The big question is how hard we come out of the gate after the holidays, 2010 Q1 looking like "The Decider", as in do we keep the lights on and the doors open; or not.

Oct 28 12:51 PM

[Mistrofan:]

railfax.transmatch.com...

Oct 28 01:03 PM

[Mistrofan:]

Let's stop the bearish comments. Transportattion looks in rebounding phase to me. Oh, and those whatching the equities - don't be hang up on prices - that is called Anchoring and has nothing to do with Fundamentals

railfax.transmatch.com...

Oct 28 01:05 PM

[bottoms-up:]

Ya. Baltic Dry getting wiped-out, shipping is getting hammered and all indicators are the sham "recovery" that the governments have been pushing the past few months are just thin and hot air.

But wait!

Ben and Tim are there in the wings to pump equities, bonds, whatever at a moment's notice to keep the hype alive! Just look at those spikes today. They must have the government printing press linked to a program.

Oct 28 01:31 PM

[Mark in San...:]

My KSP (K-Sea Transportation) tanked today - donw 33% on lower earnings and dividend cut. Why? They are the "last mile" operator of barges that you see in NYC, Seattle, SF, etc. Taking oil, gas, etc. from tankers to power companies, refineries, etc. They see very little increase in business, and some deterioration. . .the economy is, in my opinion, going to have a second downturn as the Main Street economy is not really responding to the Wall Street runup. All those retail stores that were "hanging in" waiting for the recovery are now going belly-up, and many small restaurants here in San Diego have started to call it quits. I would say another full year to the bottom.

Oct 28 02:25 PM

[WS1835:]

I wouldn't say that transportation tonnage is an infallible indicator, but historically it has been a reliable way of predicting when an advanced economy is beginning to gather steam. Right now there is simply nothing positive to be seen in any of the tonnage indexes.

Please note two things. First, the YoY period is now starting to include the crash from last fall which will inherently reduce the potential for decline. Second, even with the slight positive trend that was cited in the article, the referenced graph still shows a >10% decline from last year. Last year was a disaster, we are more than 10% down from there, and this is a positive?

Sounding a lot like the 'less negative' talk we hear from the Fed and White House. Less negative is not a recovery by definition. Positive growth is a recovery. The AMA tonnage graph is a far better indicator of the economy's relative strength. The volume of goods is way down from previous years, and is at best staggering sidewise. I don't see a rebound anywhere in those numbers.

Oct 28 02:48 PM

[robert.b.fe...:]

Emerging markets will be moving first. Australia, Brazil, India and China will be doing a lot of shipping while the U.S. and Eurozone remain sluggish, possibly for a couple of years. However, it doesn't matter because the money will still be green and developed markets aren't the only place to find some.

Oct 28 04:01 PM

[No1:]

Do you mean, "it's called gambling"?


On Oct 28 01:05 PM Mistrofan wrote:

> Let's stop the bearish comments. Transportattion looks in rebounding
> phase to me. Oh, and those whatching the equities - don't be hang
> up on prices - that is called Anchoring and has nothing to do with
> Fundamentals
>
> railfax.transmatch.com...

Oct 28 08:44 PM

[rick12345:]

Where do some of you get this rubbish from. Anyone with half a brain knows that stock levels are up while production remains weak. Of course the transport sector is suffering.

Secondly, making absurd comments like "As we begin to see signs that government stimulus is failing to generate jobs and a sustainable recovery", is merely opportunistic given the past week. The unemployment rate while not pretty, has remained quite steady over the last 6 months. How can you possibly substantiate a claim of this nature based on available data? Do you somehow know what the unemployment rate would be if there was no stimulus? Nobody does, so I fail to see the point of such ridiculous arguments.

Oct 29 05:55 AM

[bricki:]

Investing 101. Economies don't respond to Wall Street runups. Not ever. Wall Street is a statistical predictor of future cash flow, discounted for risk.

Economies might respond to monetary and fiscal stimulus. Or they might not. The big puzzle here is how much of the GDP growth number we are getting is the result of these stims. There is a lot of skepticism that these GDP numbers are mostly the result of stimulation. Not so sure myself what the real story is. I'm not willing to give the Keynesians that much credit. In my opinion it's more a bounce due to things dropping below minimum economic activity levels.

In any case there are so many underlying issues going forward that I don't believe 3.5% real growth is going to be repeated on a consistent basis.

As far as retail, discretionary retail is dead for a good long while. People are learning that saving some and living within your means is a good thing. 2011-2020 is the decade of Wal-Mart and getting personal spending under control. And paying down debt. Time to get back to real values - like judging people for the quality of their character rather than whether their Bimmer is a 1,3,5 or 7 series.

On Oct 28 02:25 PM Mark in San Diego wrote:

> My KSP (K-Sea Transportation) tanked today - donw 33% on lower earnings
> and dividend cut. Why? They are the "last mile" operator of barges
> that you see in NYC, Seattle, SF, etc. Taking oil, gas, etc. from
> tankers to power companies, refineries, etc. They see very little
> increase in business, and some deterioration. . .the economy is,
> in my opinion, going to have a second downturn as the Main Street
> economy is not really responding to the Wall Street runup. All those
> retail stores that were "hanging in" waiting for the recovery are
> now going belly-up, and many small restaurants here in San Diego
> have started to call it quits. I would say another full year to
> the bottom.

Oct 29 10:16 AM