We've been deluged in the past few weeks by economic data that is showing a very mixed picture about the economy. On the one hand, strong Empire and PPI data and the Fed's Beige Book are suggesting a slowly recovering US economy, while on the other hand the jobs, claims, and housing data point to a much poorer economy and little to no economic recovery.
So which picture should an investor believe? We think the best way to judge is to actually examine the earnings of the major companies that make up the economy - forget the surveys (remember many of these economic reports are surveys) and dig into the actual financial reports. We believe the economy is in much worse shape than many think as evidenced by weak company revenue growth and poor reports by companies such as Best Buy (BBY) (downright ugly report) and United Parcel Service (UPS) (cutting guidance).
But there are a number of key company reports in the upcoming week (1/21 to 1/24) that should give us a much better picture of the economy. We don't need to say that knowing the state of the economy is crucial for investors as they develop their medium to long-term portfolios thesis and allocate accordingly.
Delta Airlines - The Tuesday Delta Air Lines (DAL) report is an important one for investors to keep an eye on because Delta Airlines is the largest US carrier by enplaned passengers and thus will give investors a nice pulse on business and travel dollars spent. Even with the advent of technology that cuts down on business travel miles such as video and teleconferencing, a healthy economy will still need businesses to send their people to meetings, conferences, and simply to check out new investment opportunities. Additionally, private citizen air-travel is also a very important indicator of the health of the economy. The more affluent citizens are the more they choose air-travel over driving and vice versa.
Investors should keep an eye on top-line revenues and revenue passenger miles, with the latter being more important for economic analysis since we want to know if more miles are being flown rather than if the airline is increasing prices. The more miles being flown the better for the economy, while if less miles are being flown that may be a negative for the economy - especially during the fourth quarter when a large amount of US miles are being flown by people visiting families for the holidays which cannot be replaced by video and teleconferencing.
Norfolk Southern - The Wednesday Norfolk Southern Railway (NSC) report is important because this is one of the country's largest railway operators and a healthy economy needs "stuff" to be moved - and NSC is one of the largest movers of that "stuff." The transportation of coal is the primary revenue generator for Norfolk Southern; and since coal is the primary source of US energy generation, it is a very important economic indicator - the less coal being moved suggests less energy generation activity and thus lower economic activity. Though we do note that natural gas is growing as a source of electricity generation, but these major structural transitions take quite some time and so coal transportation is still very relevant.
Additionally, Norfolk Southern does transport large amounts of other things such as chemicals, metals, construction materials, and automotive, so these numbers should also be analyzed. Investors should focus more on the units transferred rather than the revenues generated by each segment, since it is more important for economic activity to see increases in units rather than revenues per unit.
eBay - The Wednesday eBay (EBAY) report should also be an important economic indicator since it is one of the largest online shopping sites and will give investors a good insight into holiday spending. We think this takes even more importance since Best Buy's report and the consumer traffic from other retailers suggests a weak holiday season at the brick and mortars stores, eBay may tell us a little more if this weakness is general or limited to physical stores.
eBay has a large amount of revenues generated from its payments division (primarily PayPal), but investors should be more interested in the "Marketplaces" segments since that represents the sales of actual products rather than financing and interest revenue. We expect electronic revenues to grow on a year-over-year basis as e-commerce continues to grow in the holiday season, so it's more a matter of if this growth offsets the declines in traditional retailers - if not watch out because that would signify a very weak holiday season and thus a weak economy.
Conclusion for Investors
While no company's report is a be-all-end-all for judging economic activity, we think the three reports we've detailed above should give investors some insight into the performance of the economy in three different economic sectors: travel, commodities, and retail - which we think offers much more value than some of these government issued surveys and reports.
Additionally, we believe that the economic recovery is much weaker than investors and company valuations suggests, so we want to confirm this belief in some of the upcoming earnings reports. If it is as weak as we think it is, then the Fed will be forced to increase its purchases via quantitative easing or take other extraordinary measures to support the economy. This we think will be negative for stocks as economic recovery is baked into the valuations, but will be positive to assets that do well in extraordinary economic situations such as gold, SPDR Gold Shares (GLD), and some of the gold and silver miners such Goldcorp (GG), Agnico-Eagle (AEM), First Majestic (AG), and others which we've profiled in an earlier article.
Investors should pay close attention to some key "economic cog" company earnings reports even if they don't own shares in those companies. Examining these reports will help keep investors in tune with the true economy - which is very difficult to see through some of these government economic reports that have quite a bit of creativity and estimation baked in.