So we brought in the Senior Market Strategist from Federated Investors in Pittsburgh, PA., Linda Duessel. All in all, she delivered a nice presentation to the two groups. No one should have left the meeting unable to sleep, but each was made aware of some longer-term challenges the economy and markets face.
Overall, her view on stocks was pretty sanguine, at least for the next 190 points in the S & P 500, a cool 13.2% move*. Beyond that she expressed some concerns that the longer-term might present some hurdles–and she wasn’t afraid to couch the future in the context of Japan’s lost decades, that markets could go sideways for a while, echoing our own thinking (click here for it).
* That’s a move that should encounter a couple of stiff resistance zones, but that’s what happens when one multiplies earnings estimates by a P/E — BAM! — 1,250. To be fair she said 1,250 was the confluence of several estimation methodologies, something that gave her comfort.
As for why the economy’s going to start looking better? What else? inventory rebuilding, the salvation of all dismal scientists. In brief, and ad nauseum, businesses have worked–and continue to work–inventories down so low, relative to sales and history, that at the first whiff of strength in sales–or fear of missing sales–they’re going to reload the warehouses so as to not miss out.
So far, however, inventories have only continued to contract–call that destocking. Ned Davis Research pointed out, however, that even a lower rate of destocking–less negative, that is–can contribute to GDP even if sales are unchanged. That’s hardly what one can call restocking, however. The FOMC, in its August 2009 meeting minutes, said that its staff’s GDP forecast for the second half of 2009 was positive and was “expected to be the result of a slowing in the pace of inventory liquidation.” Inventory rebuilding is almost always the initial flicker of hope at the bottom of the GDP cycle.
If there is going to be a serious rebuilding of inventories it should begin to show up in various transportation statistics. Here is a look at inbound container traffic at the Port of Long Beach. It does show an increase in container traffic since March, although still below year-ago levels. Score one for inventory building. That’s about all we can learn from maritime shipping, so we turn our attention to railroad traffic.
Railfax produces statistics on railcar loadings and charts showing that data are pasted in below. First, here’s a look at the year-over-year change. These charts are showing the typical green shoots, where the recent readings are less negative than earlier readings.
Here’re some quick definitions of the three basic categories–not counting Total Traffic which should be fairly obvious. Intermodal Traffic largely represents container traffic; it’s essentially the containers being offloaded at the Port of Long Beach and other ports. Baseline traffic is the stuff that’s always being shipped, like coal and grains. Cyclical Traffic represents the building blocks of the economy, chemicals, steel, and other basic materials.
Now here is a look at four week moving averages. We all know that any current information is going to look terrible against year-ago data. The charts below give a more contemporary look at railcar loadings. The green line is 2007/08 data; blue line is 2008/09 data. The pickup in total rail traffic at the beginning of the third quarter is very distinct, and it appears to be broad based, across all three categories. I think we’ve got to give another point to the inventory rebuilding case.
So now we can make the case that inventory restocking is under waybased on the Port of Long Beach data and on the 4-week change in railcar loadings. The year-over-year change in railcar loadings doesn’t present as clear a case, but we have to recognize that as reflective of the unprecedented drop in retail sales.
Happily ever after, right? No. There is still a significant risk that the inventory rebuilding thesis has been too widely accepted, that too many are banking on it as the savior of the economy. Even if it materializes but is more tepid than expected it could send markets reeling.
Here’s an aside from Railfax. They track two categories of carloads, Crushed Stone and Lumber & Wood Products, as leading indicators of the economy. They show the bounce after the first quarter as do so many other data–and it’s not germane to our discussion of inventory building–but it doesn’t suggest the economy–certainly not the housing/construction sector–is going to rebound sharply. Instead of a “V” or a “W,” the only letter it appears to resemble is an “L.”