Tuesday, September 15, 2009

Pay Attention to FedEx, not the Fed

The most important data of the month—perhaps of the year—will be released this week.

The data will provide not only the most realistic fundamental snapshot of the U.S. economy at the moment, but a view of trends around the world.

The data are not, however, courtesy of the Federal Reserve or the Treasury Department. The data are courtesy of Federal Express (now FedEx, officially speaking), and consists of that company’s first fiscal quarter earnings and its outlook for the back half of this calendar year.

As we have pointed out in these virtual pages (see “No Haircut to the CPI Here,” from December 2005), the correlation of U.S. GDP to the index of air cargo activity is 70%.

Last week FedEx kindly provided a preview of things to come when the company pre-announced a shockingly good quarter—almost double prevailing estimates—“thanks to better-than-expected international priority volume” and cost controls.

At least one other company worth watching, Lubrizol, maker of fuel-additives—another highly economically sensitive business—joined the fray last night, raising 2009 earnings guidance thanks to “improving volume trends in the current quarter” and the ubiquitous cost controls.

Not for nothing, Lubrizol's new earnings will be an all-time record high, and more than 50% above 2007's previous high.

Coming after better news even from lowly homebuilders, we think there’s a trend—and that the trend is up-and-to-the-right.

Now, San Francisco Fed President Janet Yellen is not convinced: just yesterday she said the economic recovery would be—as nearly every economist in America is also expecting—“tepid.”

You may disagree with Yellen, as we do. Or you may disagree with us, as many, many investors, and most economists, do.

But whoever you disagree with, be sure to listen to FedEx: they know a lot more about the real world than we here at NotMakingThisUp, and they probably know a bit more than Ms. Yellen.

After all, along with their counterparts in Atlanta, they basically help make the economy run, whether it’s on the downswing or the upswing.

To hear which way things are swinging, and how tepidly they may iu fact be swinging, dial in at 8:30 a.m., Eastern Standard Time, Thursday morning.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Mark said...

>>MEMPHIS, Tenn.--(BUSINESS WIRE)--FedEx Corporation (NYSE: FDX - News) today announced that it expects to report earnings of $0.58 per diluted share for the first quarter ended August 31, down 53% from $1.23 per diluted share a year ago... FedEx expects earnings to be $0.65 to $0.95 per diluted share in the second quarter... A substantial decline is expected from $1.58 per diluted share a year ago.<<

LOL... Yes, Jeff, a "SHOCKINGLY good" forecast indeed!

Jeff Matthews said...

Mark: Did the stock go up or down following the news? If down, it must have been worse than previously expected.

If up, it must have been better than previously expected.

Year/year comparisons are meaningless coming out of a recession...as they are going into a recession.

You can leave the "LOL" for the message boards.


Mark said...


The point is that clearly, all of these companies set (i.e., spoon-fed to analysts) expectations at ridiculously low levels, so what's the big deal if they exceed those "expectations?" The important thing is that earnings and revenue are still WORSENING on a year-over-over basis of comparison.

>>Mark: Did the stock go up or down following the news?<<


I have no idea because I haven't looked, nor will I, as the announcement was made all of three trading days ago. I expect more from you than to pose a question such as this.

eeeeeekonjohn said...

Yellen's remarks provide cover to justify keeping rates at 0% (for a limited time only!) while Bernanke declares "recession over".

Keep the lab bubbling, Ben! Hope you're having fun with it.

Tom said...

Earnings DOWN 50% vs the previous year! NO RECOVERY WHATSOEVER.

Jeff Matthews said...

Tom: Save the all-caps table-pounding for the message boards.

Next comment like that gets 86'd, from you or anyone else.

Still, I leave yours up as an example of how not to write a comment.


Anonymous said...

Since linguistically challenged readers came out in force today, I thought that a reference to Merriam-Webster is necessary:

1 : the act, process, or an instance of recovering; especially : an economic upturn (as after a depression)

Mark and Tom can try proving that there is no upturn from the previous quarter. Preferably without lolspeak.

Ape Man said...

Mr. Matthews,

I get your point.

In a recession earnings are always going to be down compared to the non-recessionary starting point until well after the starting point is underway. It is the trend that you have to watch, not absolute number.

But on the other hand, there are a lot of things that make me doubt that the things you are pointing to tell us much about the trends in the larger economy as a whole.

There is a flip side to your point that year over year is not as important as trends. Being up vs the last quarter proves as little as being down year over year in regards to prevailing trends.

Moreover, not all companies suffer equally in a down turn and eventually stronger companies befit from that effect.

For example, I have relatives who own a small trucking company. They have been absolutely killed in freight. In an effort to stay alive they are trying to muscle their way into hauling construction products for road work and they are giving up on hauling freight.

By giving up on freight they are making it easier for the people who are still in the game even if economic activity as a whole is not picking up.

To scale that example up, in 2008 FedEx had to compete in North America against DHL. In 2009 they did not. If you simply use FedEx as a proxy for total North American volumes with out taking that into account, your are going to get a misleading picture of the real level of recovery in North American parcel volumes.

Also take a look at the price increase (5.9%) that FedEx implemented in the beginning of this year. They patted themselves on the back by saying that the price increase were partly off set by reducing the fuel surcharges, but the end result was to lock in the price increases even as fuel prices fell.

These price increase were larger then inflation. So FedEx needs to ship far less parcels to make money then it did last year.

I could say a lot more, but I think I babbled on long enough.

The bottom line is that I hope you are right. As a blue collar male in the trades, I don't have the resources to short. My economic fortunes depend in large part on you being right.

But I just can't see it for myself.

Anonymous said...


They just don't get how the market works coming out of a recession. I learned in '90-91, when the market bottomed October 1990, and advanced 30%+ BEFORE the recession ended March of 1991.

That lesson it seems, is being taught again today.

OT: I was dissapointed by the Arctic Monkey's new record.

Anonymous said...

While I respect your post I disagree that Fed-ex alone can be the defacto trend in the economy. What about CAT- they make all the heavy equipment that new GDP growth will depend on. What about large Retailers like Best buy ( who missed today) and the the chip makers- where capital and consumer spending trends can be gauged - INTL and MRVL to name two.
Then of course we need to consider the commodities which are the raw inputs for any budding recovery. I like to look at Alcoa and some steel makers- which by the way are not doing so hot.
Finally if the U.S. is 70% based on the consumer- a service led economy then we need to look at the XLF and XLY ETFs and consider the latest reports from many of the retailers and the same store sales numbers they have been posting every month.
While we can go back and fourth on how this economic recovery may look my point is I dont think looking at Fed-Ex alone is a great predictor of anything - I could just as well ask you to consider how the Baltic Dry shipping index has been doing lately ( pretty bad by the way

Rod Roth said...


That we have a trend here-up and to the right-is one idea. Another one is that we have had a sharp bounce in both the market and in business which will turn out to be a reflex rally within a bear market in stocks and an economic depression that has only had its first leg. Given the excesses in both at the top, my view is that a lot more unwinding will take place before we have a good bottom.

Mark said...

The relevance of the worsening year-over-year comparisons is that the economy was already awful a year ago, when the FedEx numbers were considerably better than they are currently. As for a possible quarterly sequential blip up, it's my belief that this is mere "noise" in an economy that is-- if not still getting worse-- flatlining, and will continue to flatline for at least several years.

Jeff Matthews said...

Ape Man: Excellent thoughts, well said.

As far as looking at non-recurring items in the FedEx trends goes, they do a good job of looking through the non-recurring stuff to get to the underlying strength or weakness in their business--and they haven't exactly been holding back on the difficulties they've experienced thus far in 2008-2009.

As far as the price increases being a non-recurring margin benefit, they've also been good at calling that out.

The experience of your relatives in the freight-hauling business is, unfortunately, what makes a cycle: higher cost operators or those without deep enough pockets get driven out...when business comes back, it helps those who've been able to stay the course. Hence Lubrizol, for example, and the public homebuilders, for another, showing MUCH better order growth than the market as a whole.

And I share your hope that our point of view is correct. Readers who think we're cheerleaders haven't been reading long enough.

As for the 9/15 Anonymous' observation on the market moving in advance of the economy: yes, that's always the way--and it works in reverse, too. Recall how the market started falling apart when the private equity yahoos were still buying Hilton, Guitar Center and Equity Office at absurdly ridiculous prices, because business still looked good.

(Also, I share your view of the new Arctic Monkeys album, but I'm giving it time. They still ripped it up at the Paradise in Boston last month.)

Finally, the 9/16 Anonymous raises the logical notion that FedEx alone doesn't tell the nation's economic story...but it (along with UPS) comes closer than most: FedEx and UPS handle the supply chain for manufacturers, including Caterpillar; they handle online deliveries for Best Buy and every other retailer in America, and they even handle deliveries for semiconductor companies.

So they'll know when the consumer is buying, and they'll know when manufacturers are replacing inventories instead of draining them.

I apologize for letting the recent comments sit in queue, as the Brits would say...but being in an extremely isolated part of those Isles leaves our back office operations--i.e. me--less of a chance to get to these.

Much thanks,


Terence Chan said...


I commend you for stating your bullish points, I also so your interview with tech ticker. Please stand by your views. You will be correct when in hindsight the recession is really over and the market is sky high. the reason why the markets don't wanna go down is everybody is bearish. Only 13% of hedge fund managers are bullish in September. How can stocks go down if everybody is either short or out of the market?? there are no shares to liquidate in the first place. I also like your Brunswick example. only the brave make tons of money in the stock market, that's why 85% of people lose money. good job and keep it up!


Anonymous said...

I hate to make it into back and forth, but Mark is doing what a lot of pundits are doing, playing fast and loose with the time frame of the financial meltdown.

At the end of August 2008, FedEx had their best quarter in quite some time, yet the meltdown has not happened. By December of 2008, FedEx had a decrease in revenue to match with the overall economy going down and by March 2009, they lost more than 10% of their revenue quarter over quarter! So if anything, FedEx is a slightly LAGGING indicator of the economy.

I suspect that "lol"-ing was here to disguise the fact that the numbers brought up as proof do not actually match the statement itself.

Mark said...

Okay, anonymous, I'll bite:

>>...Mark is doing what a lot of pundits are doing, playing fast and loose with the time frame of the financial meltdown.<<

We're not talking about "the financial meltdown" here; we're talking about the deteriorating state of the economy, which CAUSED the meltdown of the (overleveraged) financials.

>>At the end of August 2008, FedEx had their best quarter in quite some time...<<


8/31/08 EPS: $1.23
8/31/07 EPS: $1.58
8/31/09 EPS: $0.58

Notice any sort of a pattern here?

>>I suspect that "lol"-ing was here to disguise the fact that the numbers brought up as proof do not actually match the statement itself.<<

No, I actually thought it was very funny-- in light of the ACTUAL numbers (http://www.sec.gov/Archives/edgar/data/1048911/000136231008005260/c75318e10vq.htm) to claim that business had improved to any level above "terrible".

Anonymous said...

it would be interesting if someday you share your view on some general aspects of economy, as opposed to specific companies. Most analysts I respect are fairly pessimistic (even though many I don't are optimistic); you are a notable exception.

So: housing. My contacts indicate that banks are still sitting on a huge pile of non-performing and deteriorating mortgages. They are no longer required to mark them to market, and they are trying to postpone a flow of foreclosed homes - but eventually these losses have to be booked and homes have to hit the market. Have you looked at this in depth? Checked the numbers - and decided it is not so bad after all? New demand should eat it all easily?

Next: GDP growth and out of recession stuff. Well, government is spending huge amounts of borrowed money. Of course there will be GDP growth. The question is, how sustainable it is. Is there really no price to pay for this borrowing? How do you figure that part of the equation?
My impression is that a robust, long lasting recovery is a dream and what we are seeing is just a moderate bounce from very low levels, assisted by government spending. If anything, I am surprised the effect is so moderate given the scale of infusion. Clunkers and new home buyer credits run out - will the bounce hold? Or you think they are just going to spend as much money as it takes, with new stimulus, all around the world?

To me, the current rally is less about real recovery and more about squeezing some too agressive shorts and betting on how stupid the average investor is. How many people take the bounce for real? It seems some are, so let us play it. That is a fair game - but it would be nice if you acknowledged if this is indeed your view.

Anonymous said...

And yet again, Mark picks and chooses the numbers to hide what was really going on. EPS comparison says nothing. At least quote the actual profits? Either way, revenue was considerably better in 2008 than 2007. I am sure that does not get mention precisely because it was better.

Beyond that, which industries outside of housing and automotive were suffering so horribly? My entire industry had a record or near-record quarter ending September 2008. That's semiconductor industry, the one that goes up and down with the change of winds. And my company had one darn good EPS that quarter too.

Mark said...

>>And yet again, Mark picks and chooses the numbers to hide what was really going on. EPS comparison says nothing. At least quote the actual profits?<<

Uh, sure... Does "operating income" match your definition of "actual profits"?

8/31/07: $814 million
8/31/08: $630 million
8/31/09: $315 million

Or would you prefer "net income"?

8/31/07: $494 million
8/31/08: $384 million
8/31/09: $181 million

>>Either way, revenue was considerably better in 2008 than 2007. I am sure that does not get mention precisely because it was better.<<

No, it doesn't get "mention" because in this particular case the reason behind it (fuel surcharges) makes it irrelevant as an indicator as to whether business is improving or worsening.

Anonymous said...

>>Does "operating income" match your definition of "actual profits"?

It really does not matter, operating income or net income will do just fine. I am glad you caught on to my hint as to what numbers better support your argument than the obfuscating EPS.

>>No, it doesn't get "mention" because in this particular case the reason behind it (fuel surcharges) makes it irrelevant as an indicator as to whether business is improving or worsening.

1. You mean, fuel surcharges that came as the result of increased fuel costs? And that's the same increased fuel costs that were not completely covered by these here surcharges, leading to *gasp* decreased operational/net income?!

2. If you think that revenue increase is not an indicator because of fuel surcharges, then profit decrease is not an indicator because of the sudden fuel cost increase that was not fully covered by the surcharges.

I am starting to like your position, it's fun to dismiss stuff.

Mark said...

>>If you think that revenue increase is not an indicator because of fuel surcharges, then profit decrease is not an indicator because of the sudden fuel cost increase that was not fully covered by the surcharges.<<

Well, do you think 'profit decrease" might be a good cause for a "lower stock price"? Because that's really all I care about here. But I tell you what: Let's see how volumes are doing this year vs. last year, based upon this morning's earnings release:

>>U.S. domestic package volume grew slightly.... while International Priority package volume fell 4%... FedEx Ground average daily package volume was down 1% compared to the prior year... Less-than-truckload (LTL) average daily shipments decreased 14% and yield decreased 13% year over year, reflecting the continued weak economy and resulting excess industry capacity, as well as an increasingly competitive pricing environment...<<

This will be my last reply to you on this, as we're clearly beating a dead horse here. I've placed my bets (starting to let into some significant short positions-- nothing in FDX-- late last week and will add to them if the market keeps rising and, undoubtedly, you've placed bets of your own.

bluewing said...

If the uptick in business and the economy is attributed to inventory replenishment, then it may not be sustainable in a deleveraging global environment...I suspect holiday sales will be dissapointing, and a double dip recession is headed our way.

Jim Grant went bullish as well as Jeff. Smart guys I respect, but contrarian in me is hearing the alarm bells.

Jeff Matthews said...


Yes, I do agree with Jim Grant--that is, I believe the economic recovery will be sharper than almost anybody, especially the average economist, expects.

And I have believed this since well before the Dow hit bottom, as readers may have been able to discern, even though we do not comment on the merits of individual stocks in these virtual pages.

That does not, however, mean I believe stocks as an asset class are still cheap, and worth buying, after this 55% up move.

In fact, it seems to me that caution in committing uninvested funds to the stock market makes sense at these levels.

So my question is this: was the contrarian in you buying stocks early this year?

If so, your caution at these levels seems rational.

And if not, throwing in the towel is not likely to prove a rational investment decision.


bluewing said...

Nibbled, but left myself with more cash than desired.
The contrarian move of most substance is selling an RIA practice in Summer 2008 and dedicating professional efforts to commercial real estate acquisition, focused on value recovery of distressed multifamily assets (Bank REO, etc).