This morning, UPS (UPS) reported its 2Q earnings. Earnings missed by $.02, coming in at $1.15, and revenue came in at $13.34 billion compared to estimates for $13.7 billion.
I don't pay a lot of attention to slight misses like these; they don't tell us much. What was worrisome, was the elaboration and forward guidance.
The midpoint of full year guidance now calls for $4.60 in EPS, compared to estimates of $4.83.
From CEO Scott Davis:
"Export volume increased 0.8% over the same quarter last year. European growth was mostly offset by double-digit declines in exports from Asia to the U.S. and Europe. Non-U.S. Domestic volume, down 3.2%, reflected weaker economic conditions and continued yield improvement initiatives."
The "double-digit declines" in exports from Asia to the U.S. and Europe is what stands out here. Just how much slower is China growing? How weak has demand gotten in the US? For both questions, it appears the answers are worse than we previously thought.
Furthermore, let's take a look at the big picture. Three years removed from an official recession, we're still hearing the same muddle-through story. Though US corporates have enjoyed record earnings and profit margins, the cycle appears to be coming to a close as the effects of QE and trillions in liquidity from global central banks is wiped out by the deflationary effects of huge amounts of (quiet) deleveraging in the private sector.
Both China and Japan (the two elephants in Asia, and cause for export declines) have implemented far easier monetary policy this year in response to lower inflation in China and a rising Yen in Japan. The effects, as is the case with any stimuli, have clearly been diminished, and we are now set to return to a classic post credit-crisis environment of essentially stall-speed growth.
This doesn't mean a full-blown recession, or that there is no opportunity in stocks. Rather, what's becoming clear is that most cyclicals like UPS may be closer to the top of the earnings cycle than the market has been pricing in.
Dow Transports (IYT) Pointing To Broader Equity Declines
I'm not a Dow theorist, but the 4% underperformance relative to the S&P (SPY) in the IYT over the past month tells us that the investors watching the business performance and prospects of companies in the transports sector are far less sanguine than investors elsewhere.
Today's UPS earnings spooked many investors, since it corroborated what they've been worrying about: a moderate, but accelerated weakening in the transports sector.
(click to enlarge)
Conclusions
Weakness in the transports has been a theme all year; FedEx (FDX) has been warning and guiding down since the beginning of the year. Art Cashin notes particularly sharp drops in trucking statistics as of late, also adding to investor fears.
There is a bull side here, however. Most of the railroads, particularly Union Pacific (UNP), have done reasonably well, thanks mainly to strong autos shipments. Management has been careful to temper full-year expectations, pointing to uncertain global demand and weak coal volumes.
Overall, the bearish divergence of the transports from the broader market has been confirmed with UPS' weak report. UPS' earnings and guidance, in conjunction with other macro indicators, appear to be consistent with weaker quarterly GDP than we had in Q1. My forecast for Q1 GDP is closer to 1%.
With this in mind, broader equities haven't yet been sold down to align with economic reality. Furthermore, as my recent articles have argued, there is a lot of risk repricing to do.
On a side note, the Richmond Fed report was just released, and its massive miss (came in at -17, compared to -1 estimates) foretells of GDP growth of essentially zero, according to PIMCO.
Disclosure: I am short SPY.
Additional disclosure: Short via puts
