Wednesday, April 8, 2009

Bookkeeping: Starting Con-Way (CNW) Short on Ryder (R) Warning

The most important sector in my eyes right now is not banks, but transports ... when the market crumbled transports were being obliterated day after day - I think I was counting a streak where the transport index was down 14 of 16 days at one point. Now as the market has rallied, so have they. While people focus on nonsense like as Research in Motion (RIMM) as a good indicator of economic health, the level of commerce is much more important.

As the Baltic Dry Index has fallen some 20+ days in a row (you don't seem to be hearing much about that in the financial entertainment TV do you?) the US transports have rocketed higher on "hope". I've been looking at shorting a few names, but they - much like consumer discretionary stocks - have been rocketing up on "thesis". Remember, in the near term reality means nothing in the stock market - only perception of reality. For example Ryder (R) has almost doubled in a month - must mean "great things ahead" because the "all knowing market" knows better than anyone. Frankly the chart turned into a thing of beauty - sort of the exact same chart as Whirlpool (WHR), Whole Foods Market (WFMI) and a whole host of "thesis" stocks. Remember, in this day and age the market is more important than individual companies - student body left (or right) trading; everything is good, or everything is bad.

Then a little thing called reality hit this morning - I just hate it when facts get in the way of a good thesis.
  • Logistics and truck leasing company Ryder System Inc. slashed its first-quarter forecast Wednesday, as the recession has hurt freight volumes. The company also said its planned restructuring expenses were greater than it initially expected.
  • Including restructuring costs of $8 million, or 12 cents per share, Ryder now expects a profit of 10 cents to 12 cents per share in the first quarter. Excluding those items, it forecast a profit of 22 cents to 24 cents per share. Last month, Ryder forecast a profit of 40 cents to 50 cents per share for the period.
That's quite a drop in forecast in just 30 days... considering all the "green shoots" emerging in the economy... yep.
  • "The protracted length and increased severity of this freight recession has resulted in reduced customer demand for new leases and an increased number of customers downsizing their fleets," Ryder said in a press release. The company added that customers are cutting back on driving, which reduces its revenue and fuel sales.
  • The company previously forecast adjusted profit of $2.70 to $3.40 per share for the year. It did not give a revised forecast, but said it expects weaker fleet management results, with lower miles driven, fleet count, and fuel volumes, and said it expects further deterioration in commercial rental demand and used vehicle pricing.
But other than that - green shoots of recovery were evident everywhere.

This is why this stock market is so darn tricky - so much hope permeates and people would have you believe the "stock prices" know better.... I had been looking at JB Hunt (JBHT) as a short but it's chart is exactly like Ryder (R) before the warning... the risk is hope continues, so I don't like shorting that sort of chart and Kool Aid was so wrong of late it was tough even to short it near $26 (which in retrospect was a great spot) since the ethos of green shoots dominates. I'd rather see JBHT below $23 or so.

Instead I am going to use a proxy play Con-Way (CNWY) who is both similar to Ryder and has a stock that is still below its 50 day moving average despite a monster run of late.

I am beginning today with a short of about 1.3% allocation, around $18.20. I'd like to see it get closer to $19.50 to layer in a larger short position so I'm starting with a smaller foothold; if CNW starts breaking out over $20.50 we'd have to "respect the wisdom of the market" and cover. Con-Way reports in a few weeks so maybe if we are lucky we get a pre warning before hand. Hopefully this is one sector I can avoid the federal government from trying to destroy my short position with another bailout.

Some recent "green shoots" (mustard seeds) from Con-Way
  • Con-Way said late Monday that it swung to a fourth-quarter loss of $43 million, or 94 cents a share, after the payment of preferred dividends, compared with a profit of $34.5 million, or 77 cents a share, in the year-ago period. The company said it was suspending guidance about future earnings because of the uncertain global economy. Revenue fell 6.2 percent, to $1.13 billion, falling short of analysts' forecast of $1.17 billion.
  • Chief Executive Douglas W. Stotlar said the economic slide in the fourth quarter "foreshadowed an extraordinary decline in demand for freight services."
  • The company has cut jobs, frozen management pay for 2009, and reduced capital spending to cope with the downturn. Con-way Inc. said late Monday that it will cut base wages and salaries of executives and employees of Con-way Freight and Con-way Inc. by 5% and suspend certain 401(k) contributions in an effort to further reduce costs.
  • Fitch Ratings on Friday downgraded several ratings of hauler Con-way Inc. because of tough conditions in the trucking industry. Fitch said it was shifting Con-way's issuer default rating, senior unsecured rating, and senior unsecured bank facility rating to its lowest investment-grade rating, "BBB-" from "BBB." Fitch said the senior unsecured rating applies to $925 million in notes and debentures as well as a $400 million line of credit. It put its rating outlook at "Negative," implying a possibility of further downgrades sometime in the next year.
Short Con-Way in fund; no personal position

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