FedEx, Tariffs, and Deflation (My Manifesto)
Nerd alert! I read transcripts of quarterly earnings calls. Not all of them — I have a list of companies that are particularly significant.
Elon Musk will usually say something goofy on a Tesla call. I got bored with the arrogance you get from Apple calls, so I scratched them off the list. Cisco was better when John Chambers was still CEO, but Robbins is still pretty good.
Amazon, of course. Microsoft. Smaller techs like Twilio...
The key is companies that do a lot of business with other companies, what we once called "B2B" in a more innocent age...
Companies that sell to other companies can give you great insight into business conditions around the world and what the important trends are (i.e., what they're spending money on).
It may not be obvious, but FedEx is one of these very significant companies. 75% of its business is B2B, and it's all over the world.
So with a cratering stock market, imploding global growth, and a Fed chairman and U.S. president who seem utterly clueless about their contributions to this slow-motion train wreck... yeah, I couldn't wait to dig into the FedEx call.
I don't know if you saw it, but FedEx got hammered after earnings last week. Down 13%, over $30 a share. Worst day in a decade or more.
The company lowered earnings estimates for all of next year from a range of $17.20–$17.80 to $15.50–$16.60. That is a huge revision. And it's worse because FedEx just raised estimates in September. So what in the world happened?
Try this on for size (I've parsed comments from CEO Fred Smith and a couple other officers):
However, our international business, especially in Europe, weakened significantly since we last talked with you during our earnings call in September. In addition, China's economy has weakened due in part to trade disputes. As a result, we have lowered our fiscal 2019 earnings guidance and are accelerating actions to reduce costs given the uncertainty of global macroeconomic trends...
Some of the largest economies in Europe are experiencing weakness. That is impacting our international business. Germany, for example, saw their GDP contract quarter-over-quarter in the third calendar quarter. Italy remains a drag on overall Eurozone growth. The unrest in France, and I was just there two weeks ago, continues to escalate and spread with yellow vest protest now inspiring similar actions in Belgium, The Netherlands, Germany, and of course, throughout all of France. Also, the uncertainty of the United Kingdom with their Brexit issue...
In the U.S., growth remains solid, driven by robust consumer spending in favorable conditions in the industrial sector. Internationally, economic strength seen earlier this year has given way to a slowdown. The peak for global economic growth now appears to be behind us...
Read that last line again: “The peak for global economic growth now appears to be behind us...”
Thanks for Nothing!
Here is an absolute gem from the CEO (I added some emphasis):
But I have a very timely question... from Helane Becker of Cowen. It said over the next 5 years, is it possible that while the rhetoric from politicians continues to be protection focused, companies will ignore it and continue to grow internationally. So let me answer that question from a broader perspective. The most important thing that is different about today than has ever been true in the history of the world is billions of people, and more being added every day are equipped with a personal order entry device, a mobile telephone. And you can now access the goods of the world and see them, compare shop and with the services we provide, you can get the landed cost of the item from FedEx CrossBorder and have it delivered in 1 to 2 business days to virtually any business or any person on the planet. That's never been the case before.
And so you have this tremendous bottom-up business ecosphere today that we're right in the middle of, and I think the profundity of that will, in the end, create the demand on an ongoing basis just like it has been for time immemorial for human beings wanting to travel and trade. This type of bottom-up commerce is completely changing the politics, for instance, in Africa and in parts of Latin America, which often had been politically mismanaged, but now people are not as dependent on the patriarchal or the corrupt political class. This is very, very important. And I'll just conclude by saying, most of the issues that we are dealing with today are induced by bad political choices. I mean, making a bad decision about a new tax, creating tremendously difficult situation with Brexit, the immigration crisis in Germany, the mercantilism and state owned enterprise initiatives in China, the tariffs that the United States put in unilaterally. So you just go down the list, and they're all things that have created macroeconomic slowdown.
That is just a remarkable series of observations. On the one hand, you have companies and customers working together across the globe. And then on the other you've got what amount to "local yokel" politicians — what he calls the "corrupt political class" — making stupid decisions that are getting in the way of the people and businesses that are engaged in global trade.
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And it goes deeper than that. As part of this discussion, Smith observed that FedEx is deploying 900 electric trucks made by a Chinese company, Chanje. China isn't so good at personal electric cars, but it is great at buses and large vehicles...
Americans tend to see a time when "Made in America" was a value-add for any product. We could charge more for a Ford because it was a Ford. Those days are getting fewer and fewer. Maybe China does electric buses best, Japan does passenger cars best, Germany does motorcycles, and England does scooters. No country has a total advantage, and all these workers are competing with each other.
This means sales are going to go to the most efficient operations around the world. In an environment of global competition, where technology has leveled the playing field, the notion of a "value-add premium" is disappearing. You just can't charge more. Which means there is constant deflationary pressure on prices and salaries.
The Fed does not understand this deflationary pressure. All its numbers and models and experience are from an inflationary world that is fading into the past. This is why $4 trillion in QE, along with unemployment under 4%, still can't create any serious inflation.
Look at oil. Technology has cut the price of drilling by over 60% here in the U.S. That's made billions of barrels viable and completely changed the oil market. It's all about supply now, OPEC is done, and Saudi Arabia is about to post is sixth straight annual budget deficit...
So the Fed is choking off investment, and the president is choking off trade. Great. I'm sure this will end well...
Market Always Wins
With any luck, you've got time to kill today, the day after Christmas. I realize I've gone pretty long here. But I don't want to leave you on such a negative note. Because the market will win. The companies around the world that are working together to get stuff done will prevail.
At one point, CEO Smith was even asked about companies leaving China to set up manufacturing in Vietnam because it's cheaper... amazing.
The value-add is going obsolete. Deflationary technology is leveling the playing field, and we are all in the same boat.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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