March 31, 2008
Despite reports of miles of idled railcars parked in the middle of nowhere, transportation traffic continues to grow, particularly in shipments of coal and agricultural products, which grew about 12% each from 2006. The decrease in intermodal traffic (simply put, containerized cargo shipment of imports) is off-set by the increase in export shipments. And, the increase in exports is due primarily to the weak dollar.
Speaking of the weak dollar, as an aside, it would appear that we're making the transition, by default rather than by design, from an importer to an exporter economy. The transition may be a long process, but the eventual outcome may not be all that inconceivable. And, if that were to happen, the Dollar would not only have to decline further, but it would also have to give up on its de facto reserve currency status. One of Japan's major mistakes was letting its currency appreciated too much too quickly. And, according to professor Paul Krugman's recount during one of his trips to Japan, Japan had once expressed its desire of wanting its currency to become the world's reserve currency. We'll pick up on this discussion later. For now, let's return to the transports.
The combined TSI (Transportation Service Index) that measures monthly changes in the output of both the freight and the passenger transportation service industries rose 1.5% in January from December. The combined TSI of 112.11 was also 2.36% higher than the same month a year ago (see Chart 1 below). Construction spending on transportation seems keeping up quite well with the performance of the TSI.
$33.14 billion Total Construction Spending on Transportation in January, while it had tapered off a little from November and December, was 15.27% higher than January 2007 (see Chart 2 below). This explains why the Transports (the Dow Jones Transportation Average) outperformed the DJIA (Dow Jones Industrial Average). In fact, amidst the gloom and doom and over $100 oil, the Transports had formed a Head-and-Shoulders bottom, or an inverted head-and-shoulders pattern.
The Transports chart has been flipped vertically for easier viewing of the formation (Chart 3 below). It appears that the Transports had already broken below the neckline (black circle), which completes the formation of the pattern. The subsequent retracement to the neckline is but a classic throwback before continuing its due course downward (upward when this chart's in its normal position). The distance between the Head and the neckline (see X mark) indicates a probable target of 5600, which would surpass the Transports' July 2007 high.
Since the movement of goods, people, and services, may be considered as a leading indicator of the economy, the positive divergence of the Transports versus the broader market could perhaps be considered as a positive indicator for the stock market.
There's little doubt that we're still mired in the credit crisis that had started with the rise of subprime mortgage defaults in 2006. However, every end-of-the-world scenario that's been repeated over and over again for the past two years should've all been discounted by the market already. There's also little doubt that we're in a bear market, and the economy's slowing down. However, the DJIA's 2,500-point selloff from October appears quite excessive. That's a rush of fear.
But nothing's more excessive than the housing market selloff. The median sales price in the East Bay of the San Francisco Bay Area had dropped more than 30% over just the last 8 months. That too was quite a rush of fear. Still, nothing goes straight down. The greed (the bargain hunters) is starting to return to the market as home prices pummeled rapidly. The number of units sold had finally begun to pick up, and the marketing time had started to shorten.
It's a probability in the statistical world as well as the real world that reversion to the mean usually follows after the pendulum's over-swung. That's why both the stock market and the housing market are looking to bounce back, at least until it starts making financial sense for those shareholders that are trapped holding shares at higher prices and those homeowners that are trapped holding upside-down mortgages to sell. Then, the market shall resume its downtrend as supply once again overwhelms demand.
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