Friday, November 16, 2007

Why Transports Matter and What Inflation?

One company and two, two TWO grand themes!!!!

From the

FedEx (FDX - Cramer's Take - Stockpickr - Rating) lowered its earnings projection for the current quarter and fiscal year, citing increased fuel costs and weak freight trends.

The parcel-shipping giant now sees earnings of $1.45 to $1.55 for the quarter ending Nov. 30, down from its previous forecast of $1.60 to $1.75. Analysts polled by Thomson Financial anticipated earnings of $1.70 a share.

For the full fiscal year, FedEx projects earnings of $6.40 to $6.70 a share. Its prior view called for a profit of $6.70 to $7.10 a share; analysts had an average forecast for earnings of $6.85 a share.

FedEx had already offered weaker-than-expected projections for the periods in its first-quarter report in September. But the company said Friday that its fuel costs have increased 8%, or $85 million, since that time.

This is not the first time Fed Ex has recently warned about earnings. From September 20:

FedEx (FDX - Cramer's Take - Stockpickr - Rating) said earnings rose for the just-completed quarter, but the package carrier reduced its forecasts for the current quarter and the full year because of economic uncertainty.

The company encountered "a U.S. economy slowed by a sharp correction in the housing market, financial volatility and high energy costs," said CEO Fred Smith, on a conference call.

The impact was particularly severe at FedEx Freight, owing to the housing market's effect on the less-than-truckload transportation market,
he said. Still, strong international results led to profit growth.

Federal Express is the second largest company in the air services and freight sector. UPS is about twice as large. In other words, what Fed Ex say is very important for the overall economy. And what they are saying isn't very good.

Dow theory says the transports have to confirm the broader markets. The underlying logic is simple. If the economy is expanding, we'll have to ship more and more stuff. Conversely, if the economy is contracting, we'll be shipping less and less stuff. The logic is pretty much irrefutable.

The transports say we're in trouble.

1.) The index is below the 200 day SMA, and has been there since early August.

2.) The shorter SMAs are below the longer SMAs.

3.) All of the shorter SMAs (10, 20 and 50) are moving lower.

4.) prices are below the SMAs.

Also note Fed Ex's statement about fuel costs. Fuel costs have increase 8% . That's a huge increase for a company that depends on oil costs.