By Markos N. Kaminis
The Merriam-Webster Dictionary defines “railroad” as “to convict with undue haste and by means of false charges or insufficient evidence.” The definition seems to fit snuggly around what happened on Wall Street Friday, while also offering an interesting play on words. Based on popular press reports, investors convicted the market on the earnings data and forecast warnings of a couple key railroad companies. Friday’s downturn was placed squarely on the engine car of Burlington Northern Sante Fe (NYSE: BNI).
Railroad companies and other shippers of goods, including truckers like J.B. Hunt Transport Services (Nasdaq: JBHT) and shipping companies like DryShips Inc. (Nasdaq: DRYS), are considered barometers of the economic lifecycle. After all, if manufacturers and distributors are moving product, it is going to be visible in the results of the shippers.
So when Burlington Northern reported third quarter results that fell short of analysts’ consensus, a call to arms went up. Investors moved even more to the defensive when the popular press pointed out how well Burlington’s bad news complemented the dastardly economic diagnosis out of its railroad peer Union Pacific (NYSE: UNP) just one day earlier. The corporate leaders of both important firms both pointed to little improvement in their forecasts for the year ahead.
Burlington Northern’s shares tanked 6.5% Friday, and while aided by Union Pacific’s 5.5% decline, drove the DJ Transportation Average (^DJT) down 3.5% on the day. Lower moves for the Dow Jones Industrials and S&P 500 Index Friday erased a previously set gain on the week. The Dow slipped only fractionally through the period, while the higher-flying S&P 500 Index moved about 1% lower on the week.
Still, we are not so sure you can blame the railroads for the market’s re-evaluation. After all, even a stellar earnings season could not keep Wall Street on track Friday. Microsoft (Nasdaq: MSFT) and Amazon.com (Nasdaq: AMZN) both reported better than expected news last week, but the two technology giants simply joined 80% of the less than 50% of companies reporting so far for Q3 in doing so.
This suggests to us that stocks are fully valued currently, and will need further economic reasoning to move higher in the months ahead. The S&P 500 Index is up 60% since the closing low set on March 9 of this year. You would think the market might have found its economic reasoning in Friday’s Existing Home Sales data though. Sales of pre-owned homes ran at an annual pace of 5.57 million in September. That otherwise dismal rate compared favorably against the economists’ consensus for 5.35 million and against August’s 5.10 million pace. However, the market found a flaw in those numbers, since first-time homebuyers are about to lose their special incentive to purchase when their relative federal tax credit expires at the end of the year. The rush to buy now is attributed to the process time involved in buying a home and qualifying for the credit.
The best support for the market now seems about to be pulled away. Paper gains and tax consequences are perhaps keeping institutions and retail investors alike from selling off stocks and locking in tax-year 2009 profits. Thus, as the fiscal year for many a fund manager concludes, and a good number will before December, investors are likely to exchange winning holdings for new companies perhaps better positioned for this point in the economic cycle. Thus, a short-term selling spree seems pending.