DOW Transports vs. DOW Industrials
Heading into 2010, advocates of Dow Transport outperformance were chided in a similar fashion to our Virtus friend Pete Batchelar suggesting that his Montreal Canadiens can eliminate the Washington Capitals. But here we are and the Canadiens lead that series 1 game to 0 and the Dow Transportation Average Index has roughly an 800bps lead on the Dow Industrials. How should investors interpret that outperformance?
Dow Jones Transportation Average Index Source: Bloomberg
Dow Jones Industrials Average Index Source: BloombergFirst, let's begin with the astonishing strength from the airlines - Continental (CAL), Delta (DAL), and Jet Blue (JBLU) in particular - those 3 airlines are the top performers in the Dow Jones Transportation Index. Rather impressively, the increase is concurrent with an increase in energy prices back above $85 in oil. In past years, those airlines would not have been able to navigate the oil price increase. But, if clear confirmation is needed that this recovery is a V, one must acknowledge the performance of airlines. Capacity has been reduced, planes are full, and the ancillary fees that were introduced in 2008 are being accepted by fliers. In fact, recent M&A chatter surrounding CAL, United (UAUA) and US Airways (LCC) is further supporting the space. In 2010 the investment community is acknowledging the inaccurate end of 2009 assessment of the potential economic recovery; it is reflected in the outperformance of the Transports. Recently investment banks such as Goldman Sachs, have raised GDP outlooks for the US and Europe for 2010. So what does that mean going forward for the underperforming names in the Dow Industrials?
For 2010, the surprise within the Dow Jones Industrials is not what is leading the Index or conversely "what is on its heels," such as Alcoa (AA) - the worst performer in the Index. The surprise comes from the defensive stalwarts - Wal-Mart (WMT), Microsoft (MSFT), Exxon Mobil (XOM), and IBM. Collectively, those four names have over $50 billion in cash sitting neatly on those great balance sheets. However, for the year during the tortoise rally, they are clearly underperforming with all four vacillating on either side of unchanged for the year, none of them either up or down more than 1.5% year to date.
This is clearly worth watching; in fact, investors might want to add those four names to their watch list. Why, you ask? Because eventually this year the market will make a shift from cyclical to defense. Those four names will be the names that lead the transition. Everybody is searching for "what will go wrong, and stall this rally." I suggest the investment community might be looking for the wrong ideas. Rather, as I love simplicity, look for a simple appreciative move in those four stalwarts that stalls the outperformance of the Dow Transports relative to the Dow Industrials. Once that happens, the shift is under way.