Looks like it's going to be a day of red in the markets as poor economic news continues. Flash purchasing manager indexes in both Europe and China continue to portray weak economies, while railroad company Norfolk Southern (NSC) warned significantly on earnings as coal shipments have suffered. While not a lot of this is "new news" it continues to portray the dichotomy between a market at yearly highs and global economic conditions that are not very good. Transports have continued to be one of the main weaknesses in the market and obviously with the double warning from FedEx (FDX), multiple trucking companies, and now a railroad – it is no surprise why.
- Thursday's purchasing managers indexes (PMIs), which survey thousands of companies worldwide every month, also showed Chinese factory activity wilted for an 11th month in September, as Europe's troubles continued to hit Asian exporters.
- While the downturn in Europe's largest economy, Germany, eased by a surprising amount this month, French firms fell deeper into the mire in September – and at a far faster rate than expected.
- A good indicator of economic performance, the composite euro zone PMI fell to 45.9 in September from 46.3 in August. Below 50 denotes contraction and survey compiler Markit said the surveys were consistent with a roughly 0.6 percent economic contraction in the third quarter.
- The euro zone services PMI fell to 46.0 in September from 47.2 in August, below even the most pessimistic forecast of 46.5 in a Reuters poll of nearly 40 economists.
- France represented by far the biggest disappointment of Thursday's PMIs, as both its manufacturing and services PMIs fell beneath the lowest forecasts from 20 economists. Conversely, both the manufacturing and service sector PMIs for Germany came in above the cheeriest prediction from a sample of nearly 30 economists.
- The China manufacturing PMI inched up in September to 47.8 from August's nine-month low of 47.6, suggesting the world's second-largest economy remains on track for a seventh quarter of slowing annual growth.
As for NSC:
- A drop in coal carloads and merchandise shipments will offset container-freight gains, paring revenue by about $120 million for the three months ending Sept. 30, the company said late yesterday. Fuel-surcharge receipts will decline by $80 million.
- Third-quarter profitat Norfolk Southern will be $1.18 to $1.25 a share, according to a railroad statement, short of the $1.63-a-share.
- Rail volumes historically have started to peak in the last two weeks of August as shipments of consumer products bound for store shelves converge with the U.S. harvest and coal for utilities’ winter stockpiles. Instead, the Midwest drought scorched crops, and some electric utilities have been burning cheaper natural gas rather than train-hauled coal.
While Q3 earning estimates have come down the past few weeks they still seem a bit heightened compared to where the economy is, especially for global companies who do business in Europe and Asia. Q4 is another story altogether as analysts (last I checked) had 11% type of growth. I'd expect another quarter where companies ratchet down guidance in October.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog