Weekly Commentary and Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
July 2, 2012
Stocks were mixed last week as the news from Europe remains difficult, while here at home the Fed told us things were not going well but decided to do very little about it (maybe because they cannot).
As the charts above illustrate, the Dow Jones Industrial Average dropped by one percent last week even as the NASDAQ Composite showed a modest .68% gain. Commodities such as oil continued their recent decline. It is surprising that when oil falls the politicians say nothing,
but when oil prices rise the same politicians call for investigations.
The Markets & Economy
This stock market has really run out of momentum. The various catalysts that are seized upon daily to move markets seem to just vacillate between a positive interpretation and then a disappointing point of view.
Take all of these bizarre summits taking place around the globe - Last week’s G20 meeting in Mexico was simply a waste of time. This week there is another EU summit over in Europe. If you think anything substantial can come out of that meeting then you are reading too many news reports from the mainstream financial media.
Europe’s problems are beyond the ability to solve now. Germany will not acquiesce in allowing its money to bail out the other countries without obtaining control over their budget and fiscal policies. Can you blame them?
Italy, France, Spain and Greece etc… while they need the money, they are not interested in advancing a long-term plan to leave the Euro and bring back their own currencies. This is the hand that Germany is playing and it has all the leverage. Either you stay in the Euro on Germany’s terms or you get out, and that message is scaring the European countries and their markets.
Here at home the USA is clearly being impacted by these global factors, but at least we have a still growing economy, but one which is quickly approaching a double dip recession. Given the presidential elections in the fall, and hence our government’s inability to react this year, the markets are now on their own for the next few months.
The good news is that oil prices have fallen and inflation (which was never a problem to begin with) has been removed from the list of problems. This will help corporate America when it comes to profit margins, and it will help the consumer as well. Of course, job growth in this kind of economy is going to be very disappointing. Bad news for President Obama as well as job seekers everywhere, but again good news for corporate America as payroll expenses will slow.
What this means for the next few months is that earnings will not be stellar for many companies, but stock prices have discounted some of that already. It also means that the FED, while it passed last week on a new money printing exercise, will feel the heat to do something by its next meeting in early August. With the elections in November, the last chance to influence the economy through the markets will likely be in August, and I do expect them to move then. This too should bump up the stock market in general.
What to Expect This Week
The aforementioned EU summit is so completely discredited that perhaps they can surprise investors with some agreement, but I doubt it.
The other big news, which is due to hit this week, is the Supreme Court decision on Obamacare. The markets expect it will be overturned at least in terms of the mandate. Thus the decision has the ability to affect short-term psychology. Should investors get what they want, and it is interpreted to mean that government interference in the economy has peaked, and then a positive reaction just may be in the offing.
Finally, our weekly look at the Economic Cycle Research Institute leading economic index shows once again a deteriorating trend (see chart below).
There is no doubt economic growth is slowing and it is up to policy makers not to allow this thing to go negative, and with the elections looming I believe that they will do what is necessary to influence policy, that meaning the stock market. Sad to say it that way but it is true.
Our next update will be in two weeks as next week involves the July 4th holiday on Wednesday. By Friday of next week the June payroll report will be out so we will discuss that when we write again.
Shares of Ryder Systems fell sharply on Friday after the Company warned that they will not match consensus estimates for the second quarter or the full year. Ryder lowered its second quarter guidance to a range of $0.90 to $0.95 per share, down from its earlier guidance of $1.07 to $1.12. Also for 2012, the Company now expects to earn between $3.65 and $3.85 per share, which is also down from previous guidance of around $4.00 per share.
The main reason for the earnings warning is reduced demand for commercial truck rentals. Also, the main trade group for the trucking industry said last week that freight tonnage was down for the months of April and May, with little sign of a rebound in June. The management team also stated that higher medical benefits costs will hurt the bottom line as well.
Ryder’s management has always been a straight-shooter with investors since we became involved in the Company, and we believe that this management team will be able to reduce its fleet quickly. During the financial crisis in 2008, Ryder was able to bring down costs much quicker than its competitors so we expect they will act swiftly during this slowdown.
Earnings warnings are always troublesome, and the trucking industry is a leading indicator of domestic economic growth. With that said, we believe the selling was overdone, and the stock is simply too cheap at these levels. We look for the shares of Ryder to crawl back to $40 by the end of this year.
(c) McIntyre, Freedman & Flynn