Signs of Strength: Should Underpin Spring Selling Season

Posted by jeff

Sun Mar 14th, 2010 11:13 PM

Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of March 14th, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.

Just a brief post to note the many signs of strength now being exhibited by the economy and mirrored in the stock market. While I had been worried about the stock market and expecting a correction, which we got, I was also worried about the economy's ability to do better than just "Less Worse". While I still see significant overhead supply in the major stock indices moderating further gains, the economy is showing signs of sustainable strength. To wit:

FDIC figures for early non-performing loans appear to have peaked in Q4.

Railcar loadings have been running up high single to double digits year-to-year in a variety of categories including steel, automobiles/parts, commodities, and chemicals (away from coal car loadings which have been impacted by high surpluses at utilities related to the slowdown in energy demand and weak cooling demand last summer) for the last several weeks. “Rail traffic trends over the past few months, especially when you take out coal, are consistent with a slowly recovering economy,” said John Gray, AAR senior vice president of policy and economics, in a prepared statement.

U.S. air traffic has turned the corner, as domestic traffic rose by 1.6 percent, with strongest growth seen by Boston +13%, Baltimore +9.1%, Chicago Midway +15%, Los Angeles +9%, New York LGA +5% and San Francisco +8%, according to the ACI PaxFlash report.

Freight tonnage is improving. According to Logistics Management:

"The Cass Information Systems February 2010 Freight Index, which measures the number of shipments and expenditures that are processed through Cass's accounts payable systems, showed that February shipments at .930 was 3.4 percent better than January's .899, but it was down 0.9 percent year-over-year. And February shipment expenditures at 1.569 were 5.6 percent ahead of January's 1.462 and were up 2.7 percent year-over-year. Last week the ATA reported that its advance seasonally-adjusted (SA) For-Hire Truck Tonnage Index was up 3.1 percent in January from December 2009 and was up 5.7 percent compared to January 2009, which the ATA said is its best year-over-year reading since January 2005, as well as its second straight annual increase."

We are seeing flow through from the better retail sales that have been reported, as manufacturers begin to feel more confident in ordering new equipment. At the least, U.S. companies, which have tightenend their belts, cleaned up their balance sheets and begun to gush free cash flow have the wherewithal to spend some money to catch up on deferred maintenance and revitalize their aging equipment.

According to a recent article in Transport Topics Online, "truck trailer orders jumped 10% in January from year-ago levels. Yes, the new number is measured against the catastrophic low levels of early 2009. But truck makers at the show had good things to say as well, with one reporting that his company’s heavy-duty truck production was sold out through May and probably soon would be sold out through June. And the May and June sales were for trucks with the new, more expensive 2010 engines."

Kennametal, the cutting tool manufacturer, whose business is widely seen as a strong indicator of industrial production trends, reported February orders which included the first year-to-year increase in 16 months.

I do not mean to minimize the real risks I still see in the economy domestically. These include the removal of supports from the housing/mortgage market, and headwinds from continued bank failures and reluctance by banks to lend. Neither do I recommend ignoring the very real threats from macro factors including surging gasoline prices, (which recently broke out technically, and seem to be promising $3.00 + gasoline at the pump again), potential further sovereign debt issues, China stimulus/inflation/bubble concerns. In addition you can add to the list geopolitical risks including, but not limited to, Iraq withdrawal and Iran/Israel nuclear issues which could produce second half fireworks. It's a dangerous world out there, but it has been for a long time. There is no denying, however, that the data flow is to the positive as of late regarding the domestic and world economy. This is why despite the stock market correction earlier this year, the Nasdaq composite and Russel 2000 indices have now broken out to new 52-week highs and are awaiting confirmation of the continued bull trend by the Dow Jones and S&P 500 indices. My expectation is that you will get those confirmations shortly as investors continue to play what looks like a more sustainable economic advance. I still think stock market gains will be limited, but I see a favorable economic backdrop and stock market underpinning spring sales season for New York City residential real estate this year.