FedEx, Royal Bank of Scotland, Tell the Real Economic Story

As we always say the news flow is really not that much different week to week, or month to month - it's just what the market wishes to ignore and what the market wishes to recognize. We've seen some high profile earnings blowups this week in smaller stocks, and the creep of inflation is starting to hit some other names, ala Fedex (FDX) a name we've always used as an economic tell.

• FedEx Corp. reported a fourth-quarter loss Wednesday and offered a gloomy outlook as it wrestles with a slumping U.S. economy beset by soaring fuel costs and falling prices for homes.
• FedEx, considered a bellwether for the broader U.S. economy, predicted 2009 earnings of $4.75 to $5.25 per share, well below Wall Street expectations of $5.92 a share.
• "Looking ahead to '09, we do expect conditions to remain extremely challenging and we anticipate in both the first quarter guidance and the yearly target the current economic weakness will continue and the current level of fuel costs will not mitigate," chief financial officer Alan Graf said in a conference call with market analysts.
• FedEx customers pay fuel surcharges, but that does not cover all of the increases. The company's fuel costs for the quarter were 54 percent higher than for the same period last year, Ortwerth said, while the surcharges were up less than 30 percent. The fuel surcharges, which are added to the company's basic shipping rates, were 28 percent for June and will increase to 32.5 percent in July, Hatfield said. (no inflation there)

But frankly Fedex has warned (multiple times) in the past few quarters, and other than a 1 day blip, the market didn't care most of the time - after all it was "backward looking" and "the 2nd half recovery is imminent". As I said almost every day of the "1st half", the "2nd half recovery" is a bowl of Kool Aid wrapped in an enigma of nonsense ... or something like that. I simply await the calls for "1st half 2009 recovery" that are sure to be the Kool Aid of choice soon, offered to you by the same people who last fall were offering the "1st half 2008 recovery".

Of COURSE you should be buying NOW to take advantage of the recovery in early 2009 since the market is forward looking. Oh yes, those comments are only from the people who acknowledge there is any slowdown at all - many still cling to the government reports which show "no technical recession".

I'll keep repeating this until I'm blue in the (?) fingertips - inflation is a tax on all things - producers and consumers. Someone needs to eat it. Uncle Ben won't be killing inflation by "words" (which CNBC will get in a froth about next week when "strong language" that shows "the Federal Reserve is serious about fighting inflation" comes in the statement - that is so laughable but it will be told to you).

And unless producers can pass it all along to consumers - they will be eating a lot of it and their profit margins will be hampered. This was plainly obvious to anyone who does not use government inflation reports... but since almost all of Wall Street clings to those as "truth", as these earnings reports begin to trickle out this quarter and next showcasing inflation is actually a real thing, and earnings are being crunched, stocks will react like wise. And it will make the typical mine field of earnings season that much worse since expectations are so unrealistic.

Again folks, I cannot stress what a crime "2nd half" earnings estimates are - as a whole analysts say fourth quarter 2008 is going to grow 60% year over year, over fourth quarter 2007. Second half recovery and all. Did I mention the whole housing debacle? And credit market debacle? I know, I know - that's all in the past - look forward young man, it will all be fixed in the grandeur of the 2nd half recovery.... Royal Bank of Scotland seems to disagree....

• The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
• A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets. Such a slide on world bourses would amount to one of the worst bear markets over the last century.
• "Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.
• "Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.
• US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit. The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. (oh yes they can, in fact they HAVE in the United States of Subprime - so please don't put the Fed in the same sentence with the ECB who have approached this issue from completely different angles)
• "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said. (that's what I've been saying for a long while now)
• "The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.
• Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.
• Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year. (I have to agree with that one as well)

What does Morgan Stanley think? Not such great things either. Would someone please pass long some of this data to the pundits clapping like seals to "buy stocks, they're cheap and everything is fine!"

• The clash between the European Central Bank and the US Federal Reserve over monetary strategy is causing serious strains in the global financial system and could lead to a replay of Europe's exchange rate crisis in the 1990s, a team of bankers has warned.
• "We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts.
• Just as then, Washington has slashed rates to bail out the banks and prevent an economic hard-landing, (that's how we solve everything, print more worthless US pesos and make sure the fat cats get bailed out from their stupidity - then we wonder why the fat cats do the same stupidity every 6-8 years) while Frankfurt has stuck to its hawkish line - ignoring angry protests from politicians and squeals of pain from Europe's export industry.
• The point of maximum stress could occur in coming months if the ECB carries out the threat this month by Jean-Claude Trichet to raise rates. It will be worse yet - for Europe - if the Fed backs away from expected tightening. "This could trigger another 'catastrophic' event," warned Morgan Stanley.

The news is really not very different than it has been for months... most of the past year really. But the market is ever hopeful - always trying to pounce on every sliver of data to reassure themselves that it is time to buy. Instead of taking 10 steps back and looking at a quite dark big picture. Because that would require actual thinking and analytical ability. Instead of just being hand fed data from the government about how everything is just fine, thank you, the Plunge Protection Team could be in store for a very busy summer and fall....

Conclusion: This is all priced in and setting up beautifully for that 2nd half recovery to start in 2 weeks. Drink Kool Aid, and buy stocks. Everything will be fine soon.

Comments

[mavericks:]

Wow...well you guys will never be accused of being a Pollyanna!! Though I share your mostly negative views, I will say that much of the problems are linked into oil and energy costs. Frankly, if oil prices dropped to $100 or below, I think alot of these market pressures will subside. The only way that happens is if (when?) demand drops significantly. THAT is what I am waiting for.

2008 Jun 19 09:06 AM

[John Lounsbury:]

Good summary of "let's keep it real here". The probability of a trading range market (Dow 11,000 to 14,000) is very high (at least 50%) for the next 6 months or so. I feel there is at least a 25% chance of the RBS projection and less than a 25% chance of a new high in 2008. I have been following a long/short trading strategy for the past six months and will not return to longer term investing until my outlook is changed by facts.

2008 Jun 19 09:30 AM

[notsosmart:]

facts??? what facts??? who to believe??? buy cans of tuna.at least you will eat.

2008 Jun 19 09:56 AM

[John Lounsbury:]

Facts that will change my strategy back to mostly long term investing include any one of the following:
1. Dow below 10,000.
2. Dow above 14,800.
3. S&P 500 moving averages (50 day and 200 day both positive, ie moving upward).
What kind of facts would you look at notsosmart? I certainly understand your reaction if you are referring to the opinions of others, including me.

2008 Jun 19 01:35 PM

[elwind45:]

And then rates rise in rest of world. The dollar continues its fall ( being held up to allow large overseas bond holders to cash out) to new lows. The trade doesn't benefit from falling dollar because trade is down.(higher world rates) forces our bond market to sell off because lack of confidence with dollar. Level 3 assets are the rot in the system, and will force a re-pricing of risk! Central bank is full of junk bonds ( how could it not be)??

2008 Jun 20 06:42 AM

[moe444:]

The author's words sound ominous because the situation is ominous--at least in his view :-(. In spite of the government (Bush folk) telling us the economy is OK, and the efforts of some other people/agencies to bolster "consumer confidence," the author uses the example of Fedex and the analysis from the Bank of Scotland to tell the reader that all the sugar in KoolAid is not making the current situation any sweeter and that it is not likely to get better for sometime to come.

There is a concept called "stagflation." The concept refers to a time when the economy is stagnant, but inflation is occurring anyway.

By stagnant, I mean the economy is "not growing and/or is even receding"--e.g., lower profits and even significant losses occur, such as those experienced by Fedex, because companies can't pass along ALL of their current and emerging costs to consumers, but they pass along as much as they can get by with. Higher costs eventually result in consumers backing away from certain services and/or products. Thus, a "stagnant" economy is the result. Moreover, wages typically do not go up in a stagnant economy.

However, when prices continue to go up as they have, even in the face of a stagnant economy, on numerous products/services considered essential by the majority of the public (such as food and oil), you have INFLATION, which further impacts the economy negatively. The Feds have tried to control inflation by reducing interest rates, which has resulted in a weakening of the US$. A double whammy--higher prices and a weaker dollar to use to purchase goods and services--contributes to the negative outlook of the author of the article you referenced. His view appears to be that things are going to stay this way (or get worse), at least for the forseeable future.

2008 Jun 30 11:29 AM