Without a doubt, transportation stocks were the most compelling yesterday. Led by a great report from JB Hunt (NASDAQ:JBHT), the action was counterintuitive because of the spike in diesel fuel (we actually sent alerts to take profits on the space last month). But, it highlights the other side of the equation. Maybe the economy has enough momentum to withstand the current spike in energy costs. Of course, that leads to more questions, including how long can consumers ignore the pain at the pump? It's early, but there haven't been any bombshells from businesses on the impact of higher commodity prices on demand. Considering businesses would rather err on the side of being too cautious, it is unlikely management is putting on brave faces.
With that in mind, it stands to reason corporate America thinks the spike in gas is transient (to borrow a phrase from the Federal Reserve) or that our economy is simply strong enough to withstand the hit. When truckers are rocking while crude is knocking on the door of $108.00 a barrel, it can only be that people can handle it...for now. One thing is for sure, transportation stocks have been something, leading the parade, which validates the rally while dismissing (for now) higher food and gas prices.
Our Auto/Transportation analyst David Silver is on fire with his institutional research. He is the only guy with a "sell" rating on General Motors (NYSE:GM) (from $37.00). Institutions interested in a sample of his work should email him at David.Silver@wstreet.com.
After the market closed Wednesday, Freight Car American (NASDAQ:RAIL) posted strong month over month load data, prompting higher earnings estimates from JP Morgan (NYSE:JPM) in the process. We have exposure to the rails and are not interested in airlines, but overall I'm impressed with the sector even if it defies simple logic. Old school investors will tell you when the transportation index is making new highs with broader market indices; it's the best validation of the rally. Some think the rally is an aberration doomed to fail.
On that note, there is a fair amount of head-scratching going on over the latest news out of the Port of Los Angeles. The notion that outbound (exports) containers should be improving is a given, but the 19.18% year over year spike in March was completely unexpected. Outbound containers leaving the port surged 28.26% from February. Perhaps it could be an aberration, but I think it's real. The news validates the economic miracle in Asia, particularly China, but also underscores the fact that America is no longer the straw that stirs the economic drink. Sure, the country enjoys the biggest economy by far, and all the other economic rankings, but the rate of change that is the basis for investments and valuations is disastrous.
I always say we want the rest of the world to prosper and grow so we can sell them our stuff and stop sending them our money. But, I never figured exports would be the savings grace of our economy so soon. It's spurring manufacturing jobs, but comes at the expense of a dirt cheap dollar. This is a critical time to spark accelerated domestic growth because it comes with better paying jobs and higher living standards. Then again, I read somewhere today we don't have to worry about China's low wages much longer...soon ours will be lower.
China's Inflation Better than Ours
This morning's inflation news for March from China and India sent gold prices higher. It would be an understatement to call the data hot...it's molten.
* China CPI +5.4%, the highest in 32 months (July 2008,) up from +4.9% in first two months of the year.
* India CPI +8.98% came in ahead of consensus +8.36%, climbing from the +8.31% in February. Fuel inflation surged 12.92% year over year and 11.49% in February. Goods inflation spiked to 6.21% from 4.94% in February.
So why is China's inflation better than our inflation? While China's economy grew at 9.7%, if ours grows above 3.0% this quarter it would be a shocker. Classic inflation is "a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money." So given my druthers I would rather have the former than the latter. You know too much money chasing too few goods. That's happening in China. There, service inflation is real, and wage inflation is becoming critical.
Is there anyone in the U.S. that doesn't think depressed wages is one of the toughest problems for households that have made the sacrifices, watched the value of their homes and other investments tumble, while real purchasing power has eroded? Our Fed has pumped trillions of dollars through the system through one elaborate scheme after another, and yet there isn't too much money chasing too few goods unless you're a bailed out Wall Street titan. But, the scary part is when the Fed has to fix its handiwork.
The People's Bank of China (PBOC) has hiked rates four times since last October and ordered banks to freeze 20% of deposits. Still, the economy is growing faster than targets, and inflation is almost at a three-year high. By the time Bernanke decides to flip the script he will find it's not as easy as flipping a light switch. Big Ben has totally dismissed food and gasoline inflation as transitory. In the meantime, a piece in the NY Times reported on theft of six tractor trailers loaded with $300,000 worth of tomatoes. There was also the disappearance of a truck loaded with $48,000 in frozen meat out of Miami.
When people start stealing truckloads of perishable items it's the ultimate sign of inflation.
This morning, the U.S. CPI report wasn't alarming, which makes it very alarming to me because it doesn't reflect real life for real people.
The first paragraph in the CPI just about sums it all up; inflation is real. Households are not only dealing with higher gas prices, but also energy at home and food bills. Grocers, after eating price increases last year, are now passing them along to consumers. The ex. food and energy measurement in the CPI supports the case of the doves inside of the Federal Reserve. It's sad but true; the Fed will be way behind the curve in fighting inflation, a notion backed up by dollar weakness and surprising euro resilience. -Brian Sozzi
Futures have bounced around all morning mostly in negative territory, trying to fend off disappointment from Google (NASDAQ:GOOG) and Bank of America (NYSE:BAC). I was very impressed with yesterday's session, and would love to see the same resolve today.
I join everyone in the investment/business media community in saying how shocked and saddened to hear Joe Battipaglia passed away. RIP and God Bless.