FedEx And The Folly Of Complacency

Includes: FDX
by: Grant Dossetto


FDX announced it would buy TNT Express and said the deal would prove accretive beginning in 2018, three years from now!

This confidence of performance years into the future represents complacency seen elsewhere in the media, financial media, and among investors.

The events of recent months are anything but ordinary. We will likely have an event jolt us from our current risk-free slumber.

FDX is one of the best corporations in the world. It should frighten people that they have fallen into such a tranquil view of the future.

Is there anyone left to convert to the market's siren song? If not, when does the ship capsize from everyone being on one side?

FedEx is up over 3% at the time of this writing on the news released this morning that they are going to acquire TNT Express, a Dutch shipping company, in a deal valued at $4.8 billion. TNT has been struggling for years and is widely considered to lag its peers in operational efficiency. Acknowledging this, Alan Graf, the CFO of FedEx, said that significant investment would be needed in 2016 and 2017. Beginning in 2018, CEO Fred Smith says he expects the deal to be very accretive in the long term. This level of certainty years out may be mistaken for typical C-Suite pillow talk, and for most companies that is what I'd chalk it up to, but FedEx is a well-run company that normally doesn't engage in such fluff. In fact, I'd argue that FedEx is up there with Exxon Mobil (NYSE:XOM) and 3M (NYSE:MMM) as an example of the best-run American corporations. When FedEx falls into the trap of believing with certainty that they know what the world will look like 3 years from now, something is wrong. As Warren Buffett famously warned, "Be fearful when others are greedy." If the best have fallen prey to the siren song of a tranquil economic future and riskless index returns, who is left to win over?

The truly startling thing about such complacency is that red flags are screaming from all asset classes in all corners of the world. China, the marginal driver of growth in the world, is experiencing a hard landing. Economic growth is now down to 7% annually, officially. That is the slowest in decades and the property market is crashing. The following chart has appeared on ZeroHedge and Reuters in the past month, criminally underlooked by the likes of political when they run articles headlined, "Everything Is Awesome."

The end of the Chinese economic miracle?

Housing assets account for nearly 75% of Chinese net worth. For comparison, that is roughly the exposure Americans have to the stock market. Imagine the strain on a highly levered system that a property market correction has on the Chinese economy. The Wall Street Journal is now openly discussing what I was writing about in December 2010, Communist political collapse due to the unwind of bad debts related to its stimulus efforts. If that sounds crazy, think of the political upheaval in South America, the Middle East, and Eastern Europe since 2011. We don't live in calm times. In so many ways, we live in an extraordinary one.

Imagine saying in 2012, oil would test $40 a barrel in three years, the Russian Ruble would collapse as well as Nigerian, Turkish and Brazilian currencies. You would have been laughed at. Imagine having said the process wouldn't be an implosion in slow motion but occur mostly in six months. Who in the oil and gas space predicted today's economic conditions for the industry correctly last June? Imagine the value of their predictions for 2017 at that time. There isn't any value in their predictions for 2017 made now. I'm not predicting a collapse but how accurate were the three-year forecasts of Monsanto or Potash, the shipbuilders, the homebuilders in 2006 for 2009? If the smartest person in the room is the one who admits there is a lot he just doesn't know, I can't imagine something worse than FedEx trying to play that game. I really do believe they are some of the smartest guys in the room and they have been suckered at a time of crisis level volatility into believing they have a sound grasp on the future.

Nice spread you have there. FedEx is sure about the future now?

The financial and economic world is in the middle of what I call the Newsman's paradox. The calm before the storm is rarely ever calm but it is perceived as such. The classic example is the summer of 2001. Al Qaeda had staged successful attacks for 8 years, including in America, against our citizens. The embassy bombings in Kenya and Tanzania proved that they could kill and injure on a mass scale. The bombing of the USS Cole proved that even crude methods were enough to prove dangerous to our military, its might generally assumed impervious to such retrograde capabilities. 2001 marked an official recession and the inauguration of a new president whose agenda and competence (no political comments please) were yet untested. The Nasdaq was enduring an 80% correction. There was a lot of danger and reasons to be worried. That summer would instead be known as the Summer of the Shark, subjecting Americans to the torture of sensationalist headlines about sharks in the ocean and their potential danger if you swam there (stunner, right?). The events of 9/11, two major coalition wars, a commodity supercycle began a month later and the world seemed to change overnight. What good were the forecasts from August 2001 about August 2004?

Today, we have the potential for disaster in the Eurozone, a fourth Japanese recession in 7 years combined with a demographic collapse whose societal effects are not fully comprehended, the BRICs acting anything but stable, a resurgence in the US dollar and the long dated US Treasury (everyone believed that was coming, right?), a potential profit recession, falling retail sales, a popping of the subprime auto bubble, Citi's surprise index is at negative levels not seen since the depths of the financial crisis, a nuclear Iran and a Mid-East arms race and we blindly cheer a stock market that has improved by 3% in seven months and the news is obsessed with llamas for an entire afternoon.

Where were the warnings about Yemen?

Something tells me FedEx's accretive predictions for 2018 will be as important, and accurate of its times, as llamas on the loose is to the spring of 2015. FedEx is usually the last, if ever, to get sucked into this trap. Now that they are, who is left to follow? There usually isn't a bell that is rung when no one is left to worry about the murkiness of the future. No, at times like these, it seems the music will play forever. History says that everyone will think they can time when it stops perfectly but too many are planning for it to be three years later, or more, rather than tomorrow or next month. That is as true for the stock market as geopolitical events. Jim Paulsen fretted this week about just that.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.