Trader Talk

FedEx or the Market — Who's Right?

You want to own FedEx if you think the global economy is improving and costs (fuel) are going to be lower.

That's what the company seems to be saying.

FedEx CEO Fred Smith said on the conference call:

"We believe that the near-term softness in the economy will be temporary as fuel prices have retreated from their April highs and the Japanese economy recovers. Going forward we see stronger economic growth. We believe the industrial sector will lead growth in the United States and overseas in the next two years supporting shipping demand."

The data seems to back this up. Their Express division — the global parcel and freight airline — grew 4 percent, while International Priority — a subdivision of Express that is often used as a proxy for global growth — grew a solid 6 percent. Even the Freight Division, which is one of the biggest less than truckload carriers in the U.S., posted solid numbers.

This is good news but is a bit of a curveball for traders. That's because the current thinking is that in the next few weeks corporate America will be resetting expectations for Q2 earnings and even 2H earnings lower due to the clear "soft patch" we appear to have hit.

The market is certainly saying that: the 6 percent correction in the S&P 500 since the May top is due to precisely this belief.

Finally, a note on "subsiding cost headwinds" that was mentioned in the earnings report. Alan Graf, Executive VP and CFO, noted that savings in pension expenses and maintenance costs on airplanes was the principal cost headwinds that were subsiding. On fuel prices, Graf said the reason guidance was in a wide 50 cent range was due to the volatility in fuel prices, and if fuel prices "stay where they are" and the economy performs well, that guidance should hold.

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