Trains, Planes, (Trucks), and Automobiles
In last week’s commentary we
referenced “following the tape” and how we use momentum indices as guidance to
underweighting/overweighting certain sectors in our portfolios….in this case,
Financials. Particularly timely given
the news about yet another bank seizure and purchase in the United States, First
Republic. As fluctuations in interest
rates, budget policy disputes in Washington, and Federal Reserve mandates raise
concerns about the future, we want to spotlight yet another sector that
manifests many of the same capricious considerations, Transportation.
Overall, the companies which comprise
this sector have also been volatile and underperformers relative to the
market. While the economy tries to find
its footing in a post-Covid world, cargo has largely caught up to pent-up
demand and in many instances resupply of inventories has fallen as a
result. This hasn’t just occurred….it
was a process that evolved over many months and continues to broaden as volume,
profit margins, employment of workers, and consumer debt are causing economic
uncertainties writ large.
Inventory development is a
constituent element of GDP, so it should come as no surprise that as capacity
recedes the supply chain issues we dealt with last year have also for the most
part receded. The most significant
factor to our underweighting of the Transports at this moment is an
unwillingness of many companies to resupply warehouses with product in
anticipation of a rebound in consumer spending….or perhaps an expectation of
none such occurring. Rather, we see a
decline in the volume of freight-being-moved as expenses are going up. Business is being forced to use assets more
efficiently as costs rise.
As with any sector analytics, there
are always exceptions to the rule. The
transport “winners” are companies that can absorb fuel price increases without
significant disruption in the short term.
Overall, however, a decline in commercial bookings and fees for such are
compounding the problems for this industry.
The other major obstacle in the
Transportation sector is how resources are allocated. Moving product from point A to point
B…whether it be by ship, ground, or air….requires investment in distribution
hubs, active staffing and workforce, and the ability quickly to unload vast
quantities of material, and then turn around systems to start to do it all over
again. Inland deliveries are more costly
than coastlines; the human and structural resources needed to fulfill the order
are more expensive. Last week, news
broke about the closure and consolidation of distribution hubs from a major
carrier. A slowdown in manufacturing
(alluded to earlier) foretells that freight deliveries will also be slowing
“Parallel Disconnect”
revisited
Bear in mind that the economy and the
stock market are not the same thing.
We’re discussing in this piece the allocation of monies into various
equity sectors, but allocation into any sector is a statement about aspects
not yet realized, as investors use their funds to try and “predict” what
trends might gain traction in the months/years ahead. Our particular methodology applies
probabilities of capital gains and earnings acceleration to the here and now,
not just what some expert predicts might happen. This careful balancing act between hypothesis
and fact is what makes our discipline both defensive and forward-looking at the same time….matching the micro with the
macro, cyclical to the secular.
How these data correlate is the essence
of the science behind quantitative architecture. We know that as consumers spend through their
Covid relief funds they will start to dip into savings and other sources for
discretionary (and/or necessary) purchases.
There is a lot of speculation about how or when a deep recession might
occur when the money spigot finally runs dry.
If it occurs, that, of course, would be the beginning of a massive
downwards earnings revision across all sectors in our database. For this reason, we have no problem remaining
defensive in the short term and optimistic in the long term, continuing to overweight
Technology, Basic Materials, Utilities, and Non Cyclicals.
Sometimes the best you can say is
that maintaining sideways (without capitulation downwards) is a uniquely
“beneficial” portfolio benchmark.
No comments:
Post a Comment