Momentum versus Economics

Momentum traders continue to drive stocks higher, regardless of what the economic data is.

The latest bit of Reality intruding into the party?  A warning from Lansdstar (LSTR), a $2.3B trucking company, which warned:

Landstar System CEO says lowers forecast for Q4 diluted EPS to between $0.44-$0.49/share, lowers Q4 revs to $620 mln and $635MLN – Reuters

Consensus is for Q4 EPS of $0.52 and revs of $697.5 mln.

That’s not exactly a horrific miss — its a range that might only be a few cents off from the prior expectations.

Here’s what it did to the Trannies:


Given the momentum into the market today — light volume notwithstanding — I wouldn’t be surprised if the market shakes it off and keeps going . . .

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  1. Jdamon commented on Dec 4

    I think folks here might be missing something. Who thinks that the amazing amount of M&A activity is related to lots and lots of great companies trading at very low valuation levels? I don’t remember a time when M&A deals were so prevelant.

    Now, when you say momentum investors, everyone thinks of the go-go late 90’s dot-com environment. I don’t see that at all. What I see are an enormous amount of companies making records profits, cash building up, P/E ratios falling and the economy (ex-housing) looking very strong. Yes, the budget deficit is high, but as we slowly extract ourselves from Iraq, those deficits will continue to shrink at a more rapid pace.

    What am I missing (or better yet what have the Bears been missing for the last 5 months)?

  2. Paul Jones commented on Dec 4

    I don’t believe that the broader economy is as tied to stock markets as it once was. I believe their are two economies, an “ownership” economy, and a worker economy. The markets reflect the status of the former, things like gas prices, falling wages the latter.

    I don’t see the demand for human labor rising over the long term.

  3. idontworry commented on Dec 4

    Jdamon we just have to remember for all this news that is noise, the stock market is not the economy and vice versa. they will catch up at some point but until then trade price.

  4. Macro Man commented on Dec 4

    It’s not so much that the demand for labour has fallen so much as the supply has risen because of globalization. Offshoring in all its incarnations has allowed US companies to decrease their cost base and boost profitability by transferring some manufacturing and service sector jobs to lower cost regions, e.g. China and India. This depresses low-end manufacturing and service sector wages and reduces the trend rate of employment growth.

    The winners of this transaction include the companies and their shareholders, the consumers of the goods and services provided at a cost that is lower than possible domestically, and of course the foreign workers who see a substantial increase in their standard of living.

    Unsurprisingly, however, the most vocal commentary on the arrangement is from those that have lost out from it.

  5. winjr commented on Dec 4

    I don’t understand much of Dow Theory, but I guess that purists maintain that Dow movements are not “confirmed” unless the Trannies perform in sync (which hasn’t been the case this year, or at least not recently).

    However, I heard at least one person posit that traditional Dow Theory is all washed up — that in this day and age, the Nasdaq really takes the place of the Trannies in the context of Dow Theory.

    Anybody agree? Disagree?

  6. winjr commented on Dec 4

    “I don’t see that at all. What I see are an enormous amount of companies making records profits, cash building up, P/E ratios falling and the economy (ex-housing) looking very strong.”

    That should be –


    No biggie.

  7. BDG123 commented on Dec 4

    “The winners of this transaction include the companies and their shareholders, the consumers of the goods and services provided at a cost that is lower than possible domestically, and of course the foreign workers who see a substantial increase in their standard of living.”

    Outsourcing is not a new phenomenon. The winners aren’t so easily picked. I expect the trend of outsourcing to Asia will not necessarily continue. Remember, this is a grand experiment for many companies. Many are moving off shoring to near sourcing or even back to the target countries. In other words, you can’t simply state that $1 an hour versus $12 an hour is saving money. In fact, most savvy companies who outsourced a decade ago for cost purposes have pulled their operations back in house. The ROI isn’t there in the long term. Nor is the business value. But, you have to experience the business process, customer service and time to market issues to draw conclusions on your own.

    This is a first generation move by many companies. And, as manufacturing technology and processes advance, the labor arbitrage issue becomes moot and production ends up closest to the end market. Even Honda recently said that manufacturing cars in China was more expensive than manufacturing them in Japan. The Japanese economy is highly regulated, highly taxed and has extremely high wages.

    Talk to Accenture, McKinsey, IBM or any other major outsourcer. The first thing they will tell you is never, ever outsource for cost savings. How do I know that? Because I’ve been on those teams.

    What does that mean? Many of these off shoring deals will not be renewed over time or will turn into full fledged Asian operations meant to service Asian markets as opposed to labor arbitrage deals. Labor arbitrage is generally a bandaid for piss poor management. That is opposed to contract manufacturing with a company like Flextronics which has a core competency in process and manufacturing innovation.

  8. BDG123 commented on Dec 4

    Dow Theory isn’t washed up, the people who are attempting to brainwash you are washed up.

    Industrials and Transportation companies. Think about it. It’s simple. How can industrials be doing well if the companies that ship the products industrials make aren’t confirming? Go back and tell those people who say the Naz takes the place of the Trannies that they need to watch the movie Dumb and Dumber because they’ll get to see their movie debut.

  9. Philippe RAFAT commented on Dec 5

    On existing 2006 profits

    Diversified Financial and Insurance results explains all of the increase for 2006. For 2007, difficult to see margins being driven up with “slower GDP” growth and mergers which will induce slashes in operating expenses and therefore add a precarious look on employment and consummer’s spending.
    “Current members of the Dow Jones 30 Industrials. They are: American Express (AXP), p/e 20, Coca Cola (KO), p/e 21, Disney (DIS), p/e 21, General Electric (GE), p/e 22, Gillette (now part of Proctor &Gamble-PG) p/e 24, International Business Machines (IBM), p/e 15, Johnson & Johnson (JNJ), p/e 17, 3M (MMM), p/e 17, McDonald’s (MCD), p/e 18, Merck (MRK), p/e 16, Phillip Morris/Altria (MO), p/e 14, Microsoft (MSFT), p/e 23, and Pfizer (PFE), p/e 19. “Beauty of the pe’s is in the eyes of the beholder”.
    On SP average pe 18.8, yield hoovering at 1.8% deposit interest rate 5.5% pa

  10. advsys commented on Dec 5

    For those who think that the basic fundamentals of the economy have changed I am reminded of a joke that has several hundred variations but end basically the same way. The five most costly words on wall street are “this time it is different”

    As to those profits you love so much. I would ask you to consider that the liquidity that everyone talks about might not be a one sided boon to the economy. If it comes from growth yes, if it comes from debt then – not so much.

    The Fed Govt has borrowed 3 trillion in the last 5 years. State govts., Wall street leverage and housing are up there in the trillions too. With the exception of Wall street, no one seems to be doing anything more than paying the minimum monthly payment. Not a great sign I would think.

  11. Emmanuel commented on Dec 5

    Point 1: Consumer dissavings have been going on for 19 straight months.

    Point 2: Some companies are reporting record profits, like financials and oil companies.

    Add points 1 and 2 and it makes sense. Somebody is bound to profit from all that mindless spending. But for how long can it continue? Housing prices on the wane are bound to affect HELOCs and $1 trillion in ARMs are going to reset early next year.

    Cheneynomics-style mindless spending will get its comeuppance, just you wait.

  12. winjr commented on Dec 5

    “That’s not exactly a horrific miss — its a range that might only be a few cents off from the prior expectations.”

    It’s earnings miss may only be a few cents, but it’s revenue miss will be at least 10%. That’s a pretty big miss.

  13. my1 commented on Dec 5

    Don’t forget these are the same Momentum investors, that will be selling (and shorting) when companies start LOSING profits, P/E ratios start excellerating higher, and the economy (even ex-housing) starts looking a bit feeble.

    The bears have been out of the market for months – making gains in other sectors like commodities and the like – Buying and holding instead of “momentum speculation.

    Just a thought –
    1999 – Dow 11,800 : House 150K : Oil 12 : Gold 300
    2003 – Dow 8000 : House 180K? : Oil 30 : Gold 400
    2006 – Dow 12,400 : House 225K : Oil 62: Gold 650
    All-time Highs – Dow (2006), House (2006), Oil (2006), Gold (1980)

    What so you think?

  14. S commented on Dec 5

    The “borderline stupid LBO deals” (a term recently used by a Goldman exec to describe them) getting done now are not driven by attractive valuations.

    There’s so much desire by investors to buy junk debt that the LBO guys force the issuer to do a “dividend recapitalization”. That’s where the issuer sells junk debt either at a holding company level or deeply subordinated to all other non-equity claims and uses the proceeds to fund a dividend back to the LBO guys. So, after receiving the dividend, the LBO shop is in the exceedingly happy position of getting most of its initial investment back AND it still owns the equity. Sweet. The asymmetrical return profile ensures they’ll do these stupid deals until the junk bond market quits financing them.

    The issuer ends up with a super leveraged balance sheet. If it chokes on too much debt in the next economic slowdown, fuck it, the LBO guy got his money back so he walks and lets the debt guys fight for a recovery in bankruptcy.

    You may be asking, “but why are the junk bond guys being retarded and financing stupid deals? Why are they willing to lend money knowing it won’t be used to fund operations or finance an acquisition but instead is being used to finance a dividend to someone more junior in the capital structure?” Good question.

    I’m sure when they model it up the cash flow generated by the issuer will support the increased leverage. But they also pay a premium to some else to lay off some of the default risk via a credit default swap. So, they THINK they’ve hedged their credit exposure and that belief emboldens them to lend against ever riskier deals.

    Unlike the LBO guy, who KNOWS he is whole (or nearly so) after he gets the dividend, the junk bond guy has to hope and pray the counterparty on the other side of the credit default swap will honor his promise when the shit hits the fan and the issuer defaults.

  15. jkw commented on Dec 5

    But that just pushes the question out one more step. Why is someone willing to take the other side of the credit swap? Is it being done by small LLC’s that will declare bankruptcy rather than pay up if there is a default? Or is someone actually taking the risk and not passing it on?

  16. S commented on Dec 6


    Many of the guys on the other side of creidt default swaps are operting under principles similar to that of insurance. Example: XYZ hedge fund agrees to insure the default risk of a small portion on 100 deals. If 1 defaults, the premiums from the other 99 will cover the default.

    The problem is that adverse events in insurance occur more or less RANDOMLY. During periods of widespread financial distress, the adverse event of default will not occur randomly. Ex: Ford sells fewer cars, so it orders less stuff from Lear, Goodyear, Johnson Controls, BorgWarner, etc. And each of them orders less from their suppliers. You get the idea.

    They’ve all got “value at risk” models to assure themselves they can handle the risk. So did Amaranth. So did LTCM.

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