MONEY The Economy

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MONEY stocks

What Airline Stocks Tell Us About the Rest of the Market

airplane window view above the clouds
Getty Images

A century-old market timing strategy known as Dow Theory views the rally in airline stocks as a bullish sign, but investors need to approach the transportation sector with skepticism.

High oil prices. Fee-weary passengers. A global economy that’s still not firing on all cylinders. And geopolitical crises forcing carriers to re-route their flights.

Given these recent developments, you’d think that airlines stocks would be struggling of late.

But you’d be wrong. Airline stocks have been among the best performing groups in the U.S. stock market recently, with the Dow Jones U.S. airline index up nearly 75% over the past 12 months.

^DJUSAR Chart

^DJUSAR data by YCharts

In the short run, this trend is likely to continue, especially if airlines keep posting strong results. On Tuesday, Delta Airlines reported that revenue grew more than 9% in the recently ended quarter, versus the same period last year. The carrier also reported earnings per share of $1.04, versus consensus forecasts of around $1.02 a share.

But what of the long run?

One of the most enduring market-timing strategies on Wall Street would seem to point to blue skies ahead—and not just for airline and transportation stocks.

Dow Theory, the brainchild of Charles Dow, the founder of The Wall Street Journal, is one of the oldest technical indicators that’s still used by investors to gauge future stock market movements. Dow Theory has many technical layers, but in broad strokes the strategy seeks to verify trends in the Dow Jones Industrial Average by looking at the Dow Jones Transportation Average.

The idea is that stocks tend to rise when the economy is humming. And to tell if that’s the case, you need to see not only that factories are on the upswing (as measured by the Dow Industrials), but that transportation companies that are paid to move manufactured goods out of those factories are also on a roll. Hence the need to study the Dow Transports.

Recently, the airlines haven’t been the only transports rallying. Shares of railroads and trucking-related companies have also been on the rise:

^DJUSAR Chart

^DJUSAR data by YCharts

This explains why both the Dow Industrials and Dow Transports are at or really close to their all-time highs:

^DJT Chart

^DJT data by YCharts

Still, it’s important to understand that transport stocks have been soaring for more than five years now, as investors have been anticipating an improved economy ever since 2009.

The result is the bull market in transportation is getting long in the tooth. Meanwhile, valuations for many of these companies, including the airlines, are soaring.

As you can see below, while the broad market trades at a price/earnings ratio of around 17 or 18, many airline stocks — such as Southwest , United Continental , JetBlue , and Spirit — trade at significantly higher P/E ratios.

LUV PE Ratio (TTM) Chart

LUV PE Ratio (TTM) data by YCharts

The bottom line: This may be a time when it makes more sense to look at the fundamentals of each individual company, rather than at the technical trends for the airlines or transports as a whole.

MONEY The Economy

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MONEY The Economy

Think the Fed Should Raise Rates Quickly? Ask Sweden How That Worked Out

Raising interest rates brought the Swedish economy toward deflation Ewa Ahlin—Corbis

Some investors are impatient for the Fed to raise interest rates. They may want to be a little more patient after hearing what happened to Sweden.

If you’re a saver, or if bonds make up a sizable portion of your portfolio, chances are you’re not the biggest fan of the Federal Reserve these days.

That’s because ever since the financial crisis, the nation’s central bank has kept short-term interest rates at practically zero, meaning your savings accounts and bonds are yielding next to nothing. The Fed has also added trillions of dollars to its balance sheet by buying up longer-term bonds and other assets in an effort to lower long-term interest rates.

Thanks to some positive economic news — like the recent jobs report — lots of people (investors, not workers) think the Fed has done enough to get the economy on its feet and worry inflation could spike if monetary policy stays “loose,” as Dallas Fed President Richard Fisher recently put it.

If you want to know why the argument Fisher and other inflation hawks are pushing hasn’t carried the day, you may want to look to Sweden.

Like most developed nations, Sweden fell into a recession in the global financial crisis. But unlike its counterparts, it rebounded rather quickly. Or at least, that’s how it looked.

As Neil Irwin wrote in the Washington Post back in 2011, “unlike other countries, (Sweden) is bouncing back. Its 5.5 percent growth rate last year trounces the 2.8 percent expansion in the United States and was stronger than any other developed nation in Europe.”

Even though the Swedish economy showed few signs of inflation and still suffered from relatively high unemployment, central bankers in Stockholm worried that low interest rates over time would lead to a real estate bubble. So board members of the Riksbank, Sweden’s central bank, decided to raise interest rates (from 0.25% to eventually 2%) believing that the threat posed by asset bubbles (housing) inflated by easy money outweighed the negative side effects caused by tightening the spigot in a depressed economy.

What happened? Well…

Per Nobel Prize-winning economist Paul Krugman in the New York Times:

“Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.”

And deflation is a particularly nasty sort of business. When deflation hits, the real amount of money that you owe increases since the value of that debt is now larger than it was when you incurred it.

It also takes time to wring deflation out of the economy. Indeed, Swedish prices have floated around 0% for a while now, despite the Riksbank’s inflation goal of 2%. Plus, as former Riksbank board member Lars E. O. Svensson notes, “Lower inflation than anticipated in wage negotiations leads to higher real wages than anticipated. This in turns leads to many people without safe jobs losing their jobs and becoming unemployed.” Svensson, it should be noted, opposed the rate hike.

image (8)
Sweden

Moreover, economic growth has stagnated. After growing so strongly in 2010, Sweden’s gross domestic product began expanding more slowly in recent years and contracted in the first quarter of 2014 by 0.1% thanks in large part to falling exports.

As a result, Sweden reversed policy at the end of 2011 and started to pare its interest rate. The central bank recently cut the so-called “repo” rate by half a percentage point to 0.25%, more than analysts estimated. The hope is that out-and-out deflation will be avoided.

So the next time you’re inclined to ask the heavens why rates in America are still so low, remember Sweden and the scourge of deflation. Ask yourself if you want to take the risk that your debts (think mortgage) will become even more onerous.

MONEY The Economy

A Key Fed Official Says the Job Market is Just Fine. But is He Right?

Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas
Richard Fisher, president of the Federal Reserve Bank of Dallas. Jose Luis Magana—Reuters/Corbis

With a little help from Jonathan Swift, Shakespeare, and World War II, Dallas Fed President Richard Fisher makes the case for why interest rates need to rise soon.

In between references to Shakespeare, beer goggles and Wild Turkey, Dallas Federal Reserve Bank President Richard Fisher— a member of the Federal Open Market Committee that sets the nation’s interest-rate policy— expressed concern Wednesday about the risks caused by the Fed’s ongoing stimulative policies.

Thanks to a dramatically improving jobs picture, according to Fisher, the Fed should not only cut off its bond-purchasing program (known as “QE3″) by October, but the central bank should also shrink its portfolio of assets and begin raising interest rates early next year or sooner.

Whether or not the economy can withstand monetary tightening — fewer jobs means fewer people able to buy stuff — is open for debate. The real question, though, is if the jobs picture is really that strong?

First some context.

In his colorful speech, Fisher, one of the Fed’s leading “inflation hawks,” reiterated his belief that the Fed’s rapidly escalating balance sheet (now at approximately $4.4 trillion) in combination with a near-zero federal funds rate has led to investors having “beer goggles.” (As Fisher explains it, “this phenomenon occurs when alcohol renders alluring what might otherwise appear less clever or attractive.”) This is what he says is happening with stocks and bonds, which are both relatively expensive.

To make his point Fischer quoted Shakespeare’s Portia in Merchant of Venice: “O love be moderate, allay thy ecstasy. In measure rain thy joy. Scant this excess. I feel too much thy blessing. Make it less. For fear I surfeit.”

Portia’s adjectives (joy, ecstasy and excess) describe “the current status of the credit, equity and other trading markets that have felt the blessing of near-zero cost of funds and the abundant rain of money made possible by the Fed and other central banks that have followed in our footsteps,” Fisher said.

Of course, the Federal Reserve hasn’t bought trillions of dollars of debt, and cut the main interest rate to nothing, for no reason. There was something called, you know, the Great Recession — the once-in-a-lifetime cataclysmic economic event from which the country is still recovering.

But, said Fisher, things are improving, especially in the labor market. Not only did businesses add almost 300,000 employees last month, but there are more job openings, workers are quitting more often and wages are rising. Is he right?

Let’s check out some graphs:

Job openings:

ycharts_chart-1

Fisher is right that job openings “are trending sharply higher.” This time last year, there were a little less than 3.9 million job openings. Right now there are more than 4.6 million – an 18% increase.

“Quits”:

quits

The healthier an economy, the higher the number of employees who quit their job to either find another or start a new business. Therefore a higher so-called quits rate, means a healthier labor market.

Like job openings, the number of quits has been rising since bottoming out during the recession. The major difference though is that the number of job openings has almost reached pre-recession levels, while quits has not.

Wages:

wage growth
BLS

Fisher admits that wages aren’t growing “dramatically.” Nevertheless, he cites the Current Population Survey and the most recent National Federation of Independent Business survey to show that wages are on the rise.

However, wage data from the Bureau of Labor Statistics shows that Americans in the private sector are earning $24.45 an hour, only up 1.9% from last year.

But these three metrics aren’t the only metrics to gauge the health of the labor market.

Long-Term Unemployed:

l-t unemployment
BLS

Before the recession, about 1.3 million workers were without a job for longer than 27 weeks. Today, that number is slightly more than 3 million. While that’s significantly better than the post-recession high of 6.8 million in August 2010, there are still a lot of workers who’ve been without a job for a long time.

“Long-term unemployment is still a significant source of slack in the economy and is accounting for a historically large share of the total unemployment rate,” says Wells Fargo Securities economist Sarah House.

Broader unemployment:

l-t2
BLS

And while the unemployment rate may signify the economy is moving closer to full employment, the picture is less sanguine if you look at a broader unemployment rate that takes into account the underemployed (part-time workers who want to work full-time) and discouraged workers. Before the recession that number hovered a little over 8%. It’s now 12.1%. And while it’s trending down, it’s not coming down fast enough. At least according to recent testimony by Federal Reserve Chair Janet Yellen.

Conventional wisdom says inflation will come when wages really start to rise. Some, like Fisher, think we’re getting really close to that point. But if you take into account wage data from the BLS and look at the millions of Americans who aren’t working to their full capacity, it’s not hard to see how tightening monetary policy might make life harder on lots of workers.

MONEY The Economy

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MONEY The Economy

The Capitalist Argument for Renewing the Export-Import Bank

While this bank is a government agency, it levels the global playing field and promotes U.S. jobs.

Having excoriated big-government liberals and tax raisers, the Tea Party has now set its sights on the Export-Import Bank.

To the anti-government Tea Party movement, the bank is just one more government intrusion into things that private parties can do for themselves.

Created in 1934 by President Franklin D. Roosevelt, the Export-Import Bank is a U.S. government agency that lends money to foreign buyers to help them purchase our airplanes, computers, and other goods and services. Since 1945, its charter has been subject to periodic renewal by Congress. The latest renewal runs out in a couple of months.

In the vast majority of cases, the loans are paid back in full, with interest. Last year the default rate on loans the bank made was about 0.2%. The bank earned about $1.06 billion for the federal Treasury.

The bank is not supposed to compete with private lenders; therefore, it specializes in higher-risk loans that private institutions are unlikely to make. Over the years it has financed many large projects, including the Pan American Highway that runs from Alaska to Chile. It was involved in the Marshall Plan after World War II, and in the rebuilding of former Soviet countries after the fall of the Berlin Wall.

Who Benefits?

The purpose of the bank is not primarily to help the countries to whom money is lent. It’s to enable them to buy our goods and services, and therefore to create jobs in the U.S.

Between now and September, the reauthorization deadline, the Tea Party will be arguing that the main beneficiaries in the U.S. are big companies that don’t need help.

When you look at the organizations now lobbying for a renewal of the Export-Import Bank, it might appear that the Tea Party has a point there.

Among the organizations that have been speaking up on behalf of the bank are Boeing, General Electric, the U.S. Chamber of Commerce, and the National Association of Manufacturers.

At this moment, the battle is too close to call. In the Senate, sentiment appears to favor renewal of the bank’s charter. In the House, there is a good chance that the majority will vote for its abolition.

Competitive Landscape

My biggest disagreement with the Tea Party here is that it doesn’t make sense to be an ideological purist and think only in terms of the U.S.

Foreign companies such as Airbus receive a variety of subsidies to help them compete internationally. The Export-Import bank provides an indirect subsidy to U.S. manufacturers, helping their customers afford our goods and services.

Why should the Tea Party attack an institution that evens the playing field, helps to create jobs in the U.S., and makes money for the Treasury?

Harry Reid (D., Nev.), the Senate majority leader, is talking about a short-term reauthorization of the bank, tied to a bill that would fund the government past September 30 — again, for the short term.

A more statesmanlike solution, I’d say, would be to extend the bank’s charter for at least another three years, as Congress has done 16 times before. The most common extension period has been five years. That’s what the administration has asked for this time, and that’s what Congress should do.

John Dorfman is chairman of Thunderstorm Capital LLC, a Boston money-management firm. He can be reached at jdorfman@thunderstormcapital.com.

MONEY Autos

What Booming Luxury Car Sales Really Say About the Economy

Rolls-Royce sales are up 33%, and luxury brands like Audi and BMW are having a huge year thus far in 2014 too. Does this mean boom times for the economy are here at last?

+ READ ARTICLE

Not so fast. While Rolls-Royce sales have taken off—up 60% in Europe and 33% overall for the first half of 2014, according to the BBC—the total number of vehicles sold remains tiny: 1,968 worldwide from January through June, compared with 1,475 during the same period a year ago.

If anything, rising sales of its $263,000 (and up) models indicate high times for the ultra-elite, whose numbers are increasing. An Associated Press story on the subject pointed out that there are 219 more billionaires than there were a year ago on the planet. So the 1%, or more accurately the .01%, are doing pretty good lately, as opposed to the times when, you know, they “struggled.” Bentley sales have been exceptionally strong as well, but again, that’s probably only an indication that a small portion of the elite feel good enough to splurge a bit more than usual.

What about the rest of the luxury car market’s rise? Doesn’t the fact that luxury auto sales were up 11% overall through early 2014 show that consumer confidence among the reasonably well off is soaring? And isn’t that an indicator that the economy is revving up and kicking into a higher gear?

Again, not necessarily. A major reason luxury auto sales are up is that the luxury brands like Mercedes and Audi have been pushing the boundaries of “luxury” with low-priced models that start in the Honda-Toyota $30,000 vicinity, with the CLA line and the A3, respectively.

Audi sales in the U.S. leaped 23% in June, boosted in a big way by the brand’s ability to attract younger, less affluent buyers with the A3. The vehicle’s sticker price starts at just under $30,000, and Edmunds.com data shows that the average transaction price is around $35,000. Audi executives told Edmunds that the typical A3 buyer is a “move-up customer,” or a first-time Audi owner who used to drive a non-luxury brand like Toyota, Honda, or Ford.

Essentially, it’s the same demographic sought by Mercedes with its CLA, which also starts a smidge under $30,000, but is typically filled with extras and sells for around $39,000. A Bloomberg News article credited the Audi A3’s cheaper prices (averaging $32,530 in June), as well as a sportier look and feel, as reasons why it was gaining ground on Mercedes in the increasingly important affordable luxury category.

In any event, what this all means is that today’s luxury car buyers are different than the luxury car buyers of yore. They’re younger and less wealthy, and they’re spending less than their grandparents did to buy a Mercedes, BMW, or Audi. What’s more, they’re probably not even buying the luxury rides they’re driving outright. The Wall Street Journal reported that the percentage of cars being leased hit a new high earlier this year, representing 28% of all new car “purchases,” and a far higher portion (more than half) of all luxury car purchases are leases. So while aspirational consumers feel in a good enough financial situation to justify a new (affordable) luxury car, they’re not confident enough to actually buy such a car. These consumers are “still spooked about taking on large amounts of debt,” according to Bloomberg Industries analyst Kevin Tynan.

There is one anomaly in the luxury auto market that needs to be mentioned. Cadillac is the only only luxury brand with a decrease in sales thus far in 2014. The colossal failure of the $75,000 Cadillac ELR plug-in hybrid certainly didn’t help the brand’s prospects. More importantly, sales of the once hot Cadillac ATS, its sporty affordable luxury contender, have fallen 22% this year.

The ATS has struggled, Edmunds.com senior analyst Jessica Caldwell told Motley Fool, partly because luxury buyers “want the latest thing,” and the model, introduced in 2012, now seems old compared to newer models from Audi, BMW, and Mercedes. It’s also noteworthy that the ATS has a sticker price starting about $3,000 higher than the Mercedes CLA and Audi A3.

MONEY The Economy

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