U.S. flat, Canada hammered

U.S. flat, Canada hammered
David Berman
RTGAM






When the chief executive of FedEx Corp. gives an earnings forecast, people sit up and take notice. It's not because Frederick W. Smith is particularly prescient. Instead, it's because FedEx is on the bleeding edge of the economy.

On Wednesday, the package-shipping company said its earnings for the current quarter would be just 30 cents to 45 cents (U.S.) a share, or about half what analysts had been expecting.

Rising fuel costs took some of the blame - but the dismal outlook is mostly due to the fact that shipping volumes are heading down. And when shipping volumes are down, the economy is in the dumps, providing more angst over whether the stock market's remarkable gains since early March can be sustained without signs of an improving economy.

On Wednesday, the Dow Jones industrial average closed at 8497.18, down 7.49 points, or 0.1 per cent. The broader S&P 500 closed at 910.71, down 1.26 points, or 0.1 per cent. The day marked the third down day in a row for both indexes.

Commodity producers were weak, with Alcoa Inc. down 3.8 per cent. Financials were also down on concerns about the U.S. administration's plan to overhaul the regulatory system, with Bank of America Corp. falling 3.4 per cent and JPMorgan Chase & Co. falling 2.3 per cent.

In Canada, the S&P/TSX composite index closed at 10,066.11, down 241.29 points, or 2.3 per cent.

Materials stocks led the way down, with Potash Corp. of Saskatchewan Inc. tumbling 10.5 per cent after a profit warning from a German fertilizer company. Teck Resources Ltd. fell 5.2 per cent.

Energy stocks were also hammered, despite the fact that the price of crude oil rose slightly, to above $71 (U.S.) a barrel. Suncor Energy Inc. fell 5.2 per cent and Canadian Natural Resources Ltd. fell 3.8 per cent.

Financials also fell, with Royal Bank of Canada down 1.4 per cent and Toronto-Dominion Bank down 0.7 per cent.

Until recently, the stock market was moving on the green shoots theory, which goes: Signs of economic stability, or even a slower rate or deterioration, are enough to send stocks soaring. But now, with major indexes up about 40 per cent from their March lows, investors want more, which helps explain the recent bout of stock market volatility.

"The selloff over the past couple of days in the stock market suggests that we need to see green stalks, not just green shoots," Ed Yardeni, president and chief investment strategist at Yardeni Research, said in a note released Wednesday morning.

The FedEx forecast was certainly no green stalk. During the rally that began in March, the shares surged 80 per cent by early May as investors bet that financial Armageddon and economic depression were not in the works. That's about double the move of the broad S&P 500 over the same period, and it reinforced the belief that freight haulers are barometers for the global economy.

"They are a reflection of consumer conditions," said Morgan McGowan, assistant economist at Moody's Economy.com. "The companies involved operate with a combination of air and ground, and even rail shipping as well. So they give a broad range of the different types of shipments that are going out."

Now, though, the barometric reading has changed as investors lose patience over the lack of hard evidence of an economic recovery. FedEx shares have fallen 17.8 per cent over the past month, which is worse than the broader market.

Copyright 2001 The Globe and Mail