One of the unexpected benefits of a $90-a-barrel drop in the price of crude oil is a transport sector that has far less to pay for keeping things moving. Now, of course, that savings is predicated on the assumption that there’s actually something out there to move – that manufacturers are still making things, and consumers are still buying. These days, none of that can be taken for granted. Consumer spending recently turned into a pumpkin
and went home (see chart, above). And as for shipping, the dye has also been cast. A look at the venerable Baltic Dry Index tells a tale of suction the likes of which would shock even Count Dracula. The shippers have simply been tied down and bled at full pump (see below).
It appears there’s nothing to be moved – nothing.
So how’s a good, old fashioned transport company supposed to avail itself of this windfall in fuel savings?
“Ahh,” say the intelligent men whom they call economists. “This is the point. The fuel savings will create…”
Yes? Please tell. What will the fuel savings create?
“The fuel savings will create – fuel savings!” And the audience gasps, and the band strikes up, and the dancing girls arrive, and we all move over to the bar for a drink.
At which point I embarrassedly ask my close friend and knower of all things economic, Andras, what it all means. He explains thus: the fuel savings will slash the costs of nearly everything, from gasoline to home heating to business energy expenses – everything will fall, he says. And margins – both household and business margins – will expand. There will be profits and spending and a return to the glory days and …
I look at the dancing girls and take a slug of bourbon. “But, come on, Andras… how much of a difference could it really make?” Andras refers me to the handout provided by the clever economist. “Look here,” he says. “It says that in just the past four months we’ve had $300 billion of indirect economic stimulus from lower gas prices.” “That’s 2% of GDP,” I say. Andras nods. He’s looking at the dancing girls.
Yep, that’s the way it goes in the world of economics, folks. Every 10-cent drop in gasoline prices, the economists tell us, can be equated to a $12 billion tax cut. And the greatest beneficiaries are businesses and the lower- and middle-classes, because they spend a greater percentage of their incomes on energy.
But when will the benefits be seen – and where?
Generally speaking, the transport stocks are the first harbingers of an uptick in business activity – which is why we’re watching both the Dow Industrials and Transports very closely for signs of a trend reversal under classic Dow Theory. If the stimulus is sufficient, we may very shortly see a reversal in market direction. (And if not, there’s always the dancing girls.)
As it happens, according to Dow Theory we’re at an investment crossroads literally today, as you read this report. The Industrials and Transports will either reconfirm the bearish signal given in the beginning of October, when the Transports declined to new lows. Or, only one of the averages will break to a new low, while the other begins to trend higher. Under classic Dow Theory this signals a non-confirmation reversal and would only become an outright bullish signal when both averages hit new reaction highs. The third possibility is that both averages reverse and trend higher without setting new lows. Again, if and when new reaction highs are hit by both, a bull market would be signaled.
Yet even without taking any of this into account, there are transport companies out there that are making money. They come from a sector that we never particularly liked (it’s perennially plagued with losses), but today it seems there’s something rather worthy in the group. They don’t move commodities – rather, human cargo. We’re referring to the airlines.
As a group, the air carriers have not impressed. But there are a number that have proven themselves standouts in nearly every respect. Here’s one.
Ice cold profits, Alaska Air Group
No, Alaska Air does not refer to the cranial contents of a particular, unsuccessful election candidate. On the contrary, this outfit has positively skated over the competition in nearly every aspect of its business, including all important stock price. Take a look below at a one year comparison of The Dow Jones Transport Average, the Dow Jones Airlines Average and Alaska Air Group (NYSE: ALK, Stock Forum); the outperformance is staggering.
At a time when the market was literally crashing – nose diving, even – when the wings were falling off the financial world – when high fliers of every variety were spiraling toward earth – Alaska Air was gaining altitude. One hundred and fifty percent in the last four months, friends. The technicals, too, are bullish:
- AKL has traced out a clear head and shoulders reversal pattern whose initial count should bring the stock to roughly $38.
- The shares have tested and bettered resistance at $20 and $24. Next resistance is shaping up at $28.
- The 50 and 200 day moving averages have made a bullish crossover and all trade in the stock is taking place above the MA’s.
Needless to say, it’s all very bullish.
Just who is Alaska Air? In brief, they’re the country’s 10th largest airline; they’ve got the youngest fleet of aircraft, and they’re the largest wholesaler of Disneyland vacation packages in the U.S. The company has over a billion dollars in cash and actually turned a profit last quarter (an exception in the airline industry); EPS was $1.10.
Alaska Air Group is primarily a West Coast operator. They have a loyal customer base and one of the top fuel hedge portfolios in the entire airline industry. Since July ’02, the company’s hedge program has garnered half a billion dollars in benefits.
It’s good to know someone got oil prices right.
Disclosure: none