Fed’s Pain Is FedEx’s Gain

06/23/2011 9:17 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The good vibe from the shipper’s windfall faded once the Fed chairman spoke his mind, writes MoneyShow.com senior editor Igor Greenwald.

Sometimes the journey is more enlightening than the destination, and the second-longest day of the year proved to be one of those.

The stock market closed Wednesday about where pre-market futures had predicted it would open. The Dow dropped 80—not that big a deal, after a four-day relief rally unwound nearly half of June’s 673-point swoon.

But how it got from point A to point B says much—nay, almost everything—about the opposite forces tugging on share prices.

The morning was salvaged by a timely FedEx (FDX) delivery, as the shipper trumped earnings estimates and issued a confidently sunny forecast.

“FedEx is well positioned for strong earnings in 2012, given the positive momentum, moderate economic growth, and diminishing cost headwinds,” said CEO Frederick Smith. He spoke in the past tense about “a brief soft patch” and predicted stronger growth “going forward.”

How high is FedEx flying? Annual earnings were up 23% year-over-year, and quarterly earnings rose 33%. From that sharply higher base, the company forecast an additional jump of 39% to 50% in the new fiscal year.

The formula is simple: strong international growth, stagnant US volumes, higher shipping rates and fuel surcharges everywhere, and lower tax rates—partly because of the aggressive reinvestment of overseas earnings.

In his brief opening remarks on the conference call, Smith stressed the focus on “high-value global customers” and “our global strategy,” and talked up acquisitions in India and Mexico as well as expansion into Colombia.

As for the US, “productivity enhancements” is the name of the game. And executive incentive compensation tied to the soaring earnings will increase, of course, by enough to be mentioned as a headwind.

After six weeks of lousy economic news, great earnings—even if primarily driven by overseas gains—provided welcome relief, boosting the stock almost 4% as 2 p.m. approached.

But of course, as the afternoon dragged on, we heard in detail from the other Fed—and as much as Express impressed, the Reserve concerned.

The central bank’s policy remained exactly the same, and though it sounded nowhere near as cheerful as FedEx, the Federal Reserve continued to forecast that the current slowdown will prove temporary.

Unless it doesn’t, because for the first time Fed Chairman Ben Bernanke acknowledged that the “soft patch” could, in part, reflect secular trends.

To wit, the Fed’s collective forecast for GDP growth dipped from the neighborhood of 3.2% in April (and 3.6% in January) to the current 2.8%. The 2012 projection went from around 4% in January to 3.8% in April, and 3.5% as of now.

Which doesn’t sound so bad, except that even in 2013, the Fed now collectively expects an unemployment rate above 7%. More than the numbers, it was the way Bernanke answered a question about the decline that must have spooked the few bulls in captivity.

“We don’t have a precise read on why this, uh, slower pace of growth is persisting,” Bernanke said. “…Maybe some of the headwinds that have been concerning us, like weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, some of these headwinds may be stronger and more persistent than we thought.”

So, to sum up, things aren’t going as well as the Fed once hoped, and it’s not entirely sure why, or how long this unfortunate state of affairs might persist. “Economic Trouble Puzzles Fed Chief, Too,” ran the AP headline.

And so Fedex giveth and the Fed taketh away. One’s never been better, the other remains frustrated and disappointed.

But these aren’t entirely unrelated phenomena. The FedEx strategy to invest overseas and seek “productivity enhancements” at home, easily understandable on the profit-seeking merits and replicated in boardroom after boardroom, just might have something to do with the 9% unemployment rate.

Think about it: jobs cut in Memphis in 2009 are being resurrected in Mexico City and Mumbai.

No wonder Washington is once again buzzing with talk of tax cuts, both on payrolls and the overseas earnings of companies like FedEx.

The last time the latter stratagem was tried, the cash that came pouring in from overseas went mostly into dividends and share buybacks. It must also have encouraged the further diversion of profits overseas, in hopes that the experiment would be repeated. And now it looks like that time might be at hand.

The moral of the story is that FedEx doesn’t need the Fed to be happy to do well. In fact, if the Fed is unhappy, FedEx might get a tax break. This no doubt seems excruciatingly fair to FedEx shareholders.

A pained nation feels their gain.

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