Can the transports bruise the bull? I am a huge believer that you need the stocks of the transports to go higher to verify the bona fides of any rally. One of my long-held principles is that rallies that are led by the financials and backed by the transports -- as opposed to the healthcare stocks or the techs -- are rallies that have genuine staying power.
The financials stopped going up after they reported their quarters but they have somewhat held in.
But the transports, as represented by the Dow Jones Transportation Index, have been a disaster, peaking at the beginning of earnings season, July 14, at 9740 and then plunging to 9212 today.
The group can be fairly emotional, meaning that its components, the truckers, the airlines, the rails, the freight forwarders and a barge company, can really jump around.
Right now they are jumping into an abyss. This weekend I read the conference calls of every single transport in the index that reported and all I can say is that while there are reasons for the declines, they don't necessarily signal a dire forecast, something like a recession or even a slowdown.
Let's break it down.
First, the rails. CSX (CSX) , Kansas City Southern (KSU) , Norfolk Southern (NSC) and Union Pacific (UNP) all had pretty good earnings, with KSU being the standout. CSX had run huge, because of the potential prowess of Hunter Harrison, the new CEO and a noted railroad turnaround artist. I don't think there was much he could do to keep the stock going higher. In fact, while the quarter was fine service issues caused him to lose some business to Norfolk Southern, which reported an excellent quarter, as did Union Pacific. Export coal starred because of U.S. competitive advantage.
So why has the group been pummeled so badly? Simple: autos were weak and they are a very big and important cargo. Given the downbeat nature of both General Motors' (GM) and Ford's (F) quarters, no one could be surprised by this. I regard the rails as a push.
The freight forwarders, notably FedEx (FDX) and United Parcel Service (UPS) , also appeared to be victims of bullish circumstances. They ran as ancillary plays to e-commerce but there simply wasn't enough upside to keep the stocks in the air. Again, a push.
The truckers were all over the map, but the market perceived weakness in the group. I found myself thinking if only XPO Logistics (XPO) was in the group, which makes sense give its size after the run it has, then it would have ameliorated the declines.
We've got some flotsam in there, like Kirby (KEX) , the barge company. Wow, management called the period the worst in 30 years. Avis Budget Group (CAR) , the rental company, has started to come back up, but perhaps something else is at work because I didn't think much of the quarter.
And then there are the airlines. They've been truly horrendous because the market, collectively, has decided the halcyon days are over. We've seen pretty strong domestic numbers this year tempered by price competition from no frills international carriers. This quarter, though, there was a ton of domestic competition affecting the group, including the always reliable Southwest Airlines (LUV) , which cascaded, in part because of some bad jet-fuel hedges that came back to bite them. As Spirit (SAVE) , not in the index, but a real bruiser with a terrible stock, said on its call "it is surprising to see our competition resort to the unusual level of discounting we currently see."
Still these are totally self-inflicted wounds. It sure wasn't for lack of filled seats, just a lack of discipline. They are generating a lot of cash but they've been a huge bust.
Taken in total, while many of the stocks have been awful I believe expectations simply got too high going into the reporting period. My conclusion, still, is a positive one: they all have their reasons for being weak. But the only real concern is the decline in autos, so important to the U.S. economy.
You have to watch that group. If they do layoffs, which seems right from this analysis, there will be another wave of pain to come. In the interim, while we can't be thrilled at the performances of this key group, it's hard to claim that it's finished or that it can't come back hard from these now less-than-lofty levels.