- The Washington Times - Friday, March 20, 2009


A strong run in the S&P 500 despite some disturbing data points - get ready for a pause at best. The stock market continued the upward climb from last week with the S&P 500 moving up 4.9 percent as I write this and as such now stands down “only” 12 percent year to date and 39 percent over the last year.

While still negative, this is far better than the down 25 percent on March 9. As I mentioned a few weeks back, it has indeed been a roller coaster ride with the market down 7 percent the week of March 6 and then up 16 percent over the past two weeks. I continue to look for signs that this rebound is indeed the real thing. While there are some, my concern that we have come back too far too fast remains.

To be clear, I am not saying the stock market will retrench to levels reached on March 9, but rather a pullback from current levels is likely as more sobering data come to light.

One of the larger components to the rebound in the stock market is the strong move in financial related stocks like Citigroup, Bank of America, Goldman Sachs, AIG and the like. Some would say these stocks were punished over the weeks prior to their respective rallies over the past few weeks and that recent moves to shore up the financial markets, including the Fed’s bold announcement this past week, are responsible.

At the same time, we have to examine what else is happening out there in the economy and in other sectors. On the manufacturing side of the equation, and by that I mean companies that serve the industrial manufacturing economy, there has been little good news of late.

Industrial products company Illinois Tool Works reduced earnings expectations for the current quarter to 8 cents per share, down dramatically from its prior forecast of 26 cents -42 cents. The revised expectations reflect weaker than expected global demand “during the first two months of the year and expectations that the decline will continue in March.”

Similarly, Kennametal, a tooling, engineered components and advanced materials company, shared that its order demand weakened in February from already weak levels in December and January.

Aside from reduced outlooks, we are seeing a fresh round of head-count reductions. Case in point, industrial coatings company PPG Industries announced that it would miss Wall Street earnings per share expectations for the March quarter of 27 cents as it expects earnings of 10 cents-15 cents per share. At the same time, PPG said it would look to eliminate another 5.6 percent of its work force.

This was followed by another round of head-count reductions at construction and mining equipment manufacturer Caterpillar. The additional 2,454 in reductions follows the 22,000 layoffs announced at Caterpillar in February. As with issues at Illinois Tool Works, the culprit is plummeting demand and the need to right size.

This is but the latest and follows the 312,552 in layoffs announced year to date through March 17 at America’s 500 largest companies, which I would characterize as only a subset of what has actually occurred in the marketplace thus far.

Should unemployment continue to grow, there will likely be greater pressure on consumers and subsequently the risk of further increases in credit card write-offs and other consumer credit metrics. We have already seen increases in those levels in the past few months as evidenced by an American Express regulatory filing early this week. In that filing, American Express said its credit card write-off rate rose from 7.5 percent in December to 8.3 percent in January to 8.7 percent in February. Not to say this is the silver bullet of data points, but it does cause me to question the February retail sales data released last week that has been viewed by some as a modest positive.

With that in mind, we have to look at Nike news from earlier this week. Nike beat Wall Street expectations, but the area to focus on in my opinion is the company’s order outlook. As the company said, its global orders for shoe and apparel delivery between “now and July” fell 10 percent, with the majority of that drop in Europe. Hardly convincing let alone reassuring that the consumer is “back,” especially when married with those rising write-off levels.

In my mind, should we get a another round of layoff announcements over the next six to eight weeks as companies report their March quarter results, concerns about the consumer in terms of ability to buy and service debt and other obligations will reignite. Not a lot to get excited about in my opinion, particularly as the overall market approaches the classic bear market rally of up 20 percent. I suspect at a minimum we will see some profit- taking here over the next few days.

As any good investor does, so too should we look for areas of strength in order to identify potential opportunities. As evidenced by the move in financial stocks over the last two weeks, there are sectors in the market that have some positive shift in fundamentals. Given issues at industrial manufacturing companies near term and my concern for those tied to discretionary consumer spending, let’s turn our eye to an area not tied to either and still has a rising tide behind its back.

There are several areas poised to benefit from the presidential stimulus package and one I find interesting is the $8 billion targeted for rail and train projects from high speed rail to national passenger rail to new high-speed technology. In the coming weeks, a strategic plan that explains how the Department of Transportation will use the $8 billion and by June states should have a better understanding for how to apply for grants.

There are few pure play companies that have meaningful exposure to this market and are publicly traded. One such company, however, is Wabtec.

Wabtec is a component supplier primarily to the freight and transit markets. With more than 50 percent of its revenue derived from transit and less than 20 percent of its revenue from the freight car market, I think it is positioned to be a primary beneficiary of rail-related spending.

Clearly we will need to see how the rail-spending plan unfolds and how long the ramp up time is in that spending. In the mean time, that offers plenty of time to do some homework on Wabtec.

&#8226 Chris Versace is the founder and portfolio manager of SlipStream Capital Management LLC based in Reston. He can be reached at [email protected] .com. At the time of publication, Mr. Versace had no positions in the companies mentioned in his column, although positions may change at any time.

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