Thursday, September 20, 2012

$SPY, $IYT Decouple as FedEx Lowers Estimates

SPY decouples from IYT, 2y chart (source: FreeStockCharts.com) 9/18/2012

FedEx lowered its earnings and GDP estimates on Tuesday in its Q1 earnings release, which caused $FDX and $IYT, the Dow Jones Transportation Index ETF, to sell-off.

I thought that the earnings call was important so I quoted parts of the transcript courtesy of SeekingAlpha. They explained how customers shifted away from premium services because of the weak economy, and how the effects from China's "slower exports" on China's economy, via weak Eurozone economies (Italy, Spain) and the U.S., are being "underestimated."

The most interesting part about all of this is that $DIA and $SPY (the Dow and S&P 500 Index ETFs) have decoupled from $IYT by the most I have seen this year. See charts below.

FedEx's earnings and GDP estimates.

"On the economic front, we continue to see modest growth in the global economy. Our calendar year '12 U.S. GDP growth forecast is 2.2% and 1.9% for calendar year '13, which is 0.5 points lower than our fourth quarter earnings forecast. For industrial production, we expect a growth of 4.2% in calendar year '12, slightly below last quarter, and 3% in calendar year '13, 0.5 points lower than our fourth quarter forecast. Our global GDP forecast is 2.3% for calendar '12 and 2.7% for calendar '13, 0.3 points lower than our last call."

"Turning to the outlook and looking ahead, we're expecting earnings per share of $1.30 to $1.45 for the second quarter and have lowered our guidance for the year to $6.20 to $6.60 per diluted share. This guidance assume weaker economic growth in the economy than we had expected when we first gave you guidance for FY '13."

FedEx's thoughts on China's economic slowdown and the shift to "deferred services."

"I can tell you this on China. The locomotive that has driven China's growth is its export industries. And with the situation in Europe and, to a lesser degree, in North America, that is a significant issue for the Chinese economy. Now the consumer consumption in China is not increasing at a significant rate, contrary to everybody's hopes. While exports from, say, the United States into China have grown, they are dwarfed by the exports from China into the United States. And as the big economies in Europe and the U.S. have grown or contracted -- grown at a far lesser rate or, in the case of certain European countries, have contracted, that's reflected in the numbers in China. And you can't escape that. I've been somewhat amused watching some of the China observers, I think, completely underestimate the effects of the slower exports on the overall China economy." (Frederick W. Smith - Founder, Executive Chairman, Chief Executive Officer and President)

"Tom, I'd just add that when we see weakness in the economy, not unlike what happens in the United States, we see a shift from our Premium Services in the Priority network to deferred services to take advantage of lower transit times and lower rates. That's just one way that customers manage their supply chains in difficult economic conditions, so I think that's what we're seeing." (T. Michael Glenn - EVP of Market Development & Corporate Communications, CEO of FedEx Services)


In February of 2012 and then in August, $IYT, the Transporation ETF, started to decouple with SPY and DIA (S&P and the Dow ETFs). In February, IYT and SPY actually had a severe negative correlation. Now they are just decoupling; the correlation hasn't gone negative yet. Blame the weak Eurozone and Chinese economies this year, right? ECRI believes the U.S. is in a recession right now just as the Fed announced QE3.

The overall situation is tough to analyze since there are so many external forces at work. I'm just pointing out that transporation stocks are not joining the fun here, whether it's a warning sign for the overall market and U.S. economy or not. The first chart compares $FDX and $IYT to $SPY and $DIA along with $IYT and $SPY's correlation.


SPY and DIA vs. IYT and FDX with SPY, IYT correlation (Source: Stockcharts.com)


1.5 Year Chart of IYT vs. SPY (Source: Stockcharts.com) 9/19/2012

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