The stock market resembles a slow-motion train wreck: News flow is increasingly getting worse and bringing with it pain to portfolios. For the first time we are witnessing real confusion on what the real state of the global economy is. The U.S. consumer may be doing well based on accounts of some retailers, but the U.S. consumer could be doing poorly if one views the government data. Bank earnings have been suspect (want more loan growth here, people). On the other hand, railroad operator CSX (CSX) had a solid quarter and generally positive things to say about the global economy.
Until this sense of confusion lifts, it will be hard to put fresh capital to work in the market. Companies, in my view, are learning the hard way that fundamentals, and comments, are once again important to investors, seeing as the Fed has pulled back. It remains a "shoot first, ask questions later" environment. Here are several examples of those mixed signals.
CSX reported fourth-quarter revenue of $3.2 billion vs. a $3.18 billion consensus forecast, led by 8% increases in both revenue and volume in its housing and construction segment. Within the segment, CSX also moves pulp board that could be used in cheaply priced furniture and municipal waste, both of which experienced demand increases in the quarter. In total, about 6% of CSX's carloads are influenced by the movement of such items that are destined for residential construction job sites or the aisles of Home Depot (HD) and Lowe's (LOW).
I had the chance to chat with the chairman, president and CEO of CSX, Michael Ward, on Wednesday. It's always a pleasure to talk with him; he's incredibly knowledgeable about the industry and runs a company that gauges the real heartbeat of America.
"We are seeing some pretty good vibrancy, in lumber as well," said Ward regarding demand for homebuilder products.
Although I found the comments reassuring, they stood in contrast to KB Home (KBH) this week, telling us profit margins were under pressure. KB Home did announce a solid quarter and future backlog figure, but I am worried about the direction of each given the willingness by the company to price its homes more competitively.
Looking elsewhere, CSX's domestic intermodal business, which partners closely with trucking companies to move freight, has grown by a high-single digit percentage over the past several years. The fourth-quarter saw a 9% increase in domestic intermodal volume amid more business with existing customers.
"We can continue to do so (that rate of domestic volume growth) for a long-time," Ward said.
Still, the international component of the intermodal business, which represents 48% of the intermodal business for the company, logged a 1% volume increase in the quarter. That growth rate was a touch slower than the full-year future, which about tracked U.S. GDP growth.
Does that mean that, yes, we should listen to weak global PMI reads? Not sure, but it does feed the market's nervousness. The direction of sales and volume growth for companies in a market hovering at its existing valuation matters. Right now, the market continues to be valued for an acceleration in top-line growth rates and profit margins vs. previous quarters.
Of note, weekly railroad carloads, as reported by the Association of American Railroads, continues to be quite solid.
Target's (TGT) exit from Canada was a more self-inflicted wound than a reflection of a consumer that is on their deathbed. Don't get me wrong, consumers in Canada are not exactly spending robustly (we saw that in Best Buy's (BBY) international sales for the holiday quarter. On the other hand, Best Buy's sales disappointment, which was in stores and online, and a muted profit outlook for the new year was bothersome. It played right into the hands of market bears who feasted on the dreary U.S. retail sales report Thursday.
A couple of takeaways from a Best Buy report that will hover over retail names that have enjoyed strong runs of late based on spending optimistic:
- I don't follow the tablet market extremely closely, but persistent price deflation and sluggish sales could weigh on the outlooks of many chipmakers in 2015.
- Households are in a better shape financially, but not to an extent they could buy a large screen TV and a new couch. I think the market is valued for both purchases being made, and for it benefiting numerous companies.
You have to be a buyer of Target here; it could get a series of positive news on earnings day in late February related to capital allocation and new initiatives for 2015.