Forget banks, keep an eye on trucks

Transportation stocks have outperformed the broader market lately. That's a good sign as long as freight shippers say the economy is stabilizing.

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By Paul R. La Monica, editor at large

Does Wells Fargo's outlook signal the start of a bank recovery?
  • Yes
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The Dow Jones transportation average has outperformed the benchmark Dow for the past month. If transports continue to surge, that could be a sign the rally is for real.

NEW YORK ( -- Earnings take center stage next week and everybody's going to be focused on how the banks will do.

Wells Fargo (WFC, Fortune 500) ignited a monstrous stock-market rally Thursday after it announced that first-quarter profits would be much stronger than expected. Now investors are hoping that other banking giants, such as JPMorgan Chase (JPM, Fortune 500) and Citigroup (C, Fortune 500), will also beat the Street.

If so, that could be a sign that the worst is finally over for the beleaguered banking sector. And that would be great news for the markets and economy, with more loans available for homes and cars or to start businesses.

But investors might be wise to take a look at another sector that's equally important and actually is a more reliable indicator of rebounds. I'm talking about the transportation sector.

The Dow Jones industrial average has surged about 25% in the past month. But its lesser-known transportation counterpart has done even better. The Dow Jones transportation average, which includes 20 of the nation's largest railroad, airline, trucking and marine companies, is up nearly 40% since early March.

It's easy to forget how crucial truckers, railroads and freight shippers are in this age of tweeting and downloading music. But people still need to buy lots of physical goods -- which in honor of George Carlin, I'll simply refer to as "stuff" -- for their daily lives.

And even though more and more people may order that stuff online, that stuff gets shipped from factories to warehouses and then to a retailer or your house thanks to transport companies.

If transportation companies are doing well, that should be a good sign for the rest of the markets and overall economy. In fact, some market strategists use something called the Dow Theory to try and ascertain if a broader market rally is legitimate.

The Dow Jones Indexes Web site, which includes information about all the various Dow market barometers, has a section that succinctly sums up this theory.

"The industrials make and the transports take. If the transports aren't taking what the industrials are making, it portends economic weakness and market problems."

With that in mind, the rally in transports could be encouraging -- as long as fundamentals are justifying it. If transportation companies start warning of more weak demand ahead, that may be even worse news for the markets than more bad news from the banks.

Investors won't have to wait long to find out if the transport rally is for real. Four of the companies in this group are on tap to report results in the coming week. They are: truckers J.B. Hunt Transport Services (JBHT) and Landstar System (LSTR), railroad CSX (CSX, Fortune 500), and low-cost carrier Southwest Airlines (LUV, Fortune 500).

Each of these companies are expected to report declines in sales and profits for the first quarter as demand for shipping remains anemic.

However, there are some tentative signs that the worst may be over for the transports. The American Trucking Association reported late last month that shipments, as measured by the weight of freight truckers haul, did rise in February from January. And that was the second consecutive monthly increase.

Still, shipments were down sharply from a year earlier, leading the trade group's economist to warn people to not read too much into February's gain. Bob Costello, the ATA's chief economist, said in a statement that the February increase "doesn't mean the economy is on the mend" and added that the year-over-year drop "highlights the current weakness in the freight environment."

Railroads are feeling the pain as well. The Association of American Railroads recently reported that freight traffic was down 17% in March. Bad weather in the Midwest combined with the weak economy to create what AAR senior vice president John Gray described in a statement as a "kick them when they're down element to the month, dropping already-depressed rail traffic levels even further."

So what people need to pay attention to is the guidance for the next quarter and the rest of the year.

Investors are hopeful that the housing market may be stabilizing and that consumers are slowly regaining confidence in the economy -- even though the unemployment rate is expected to rise for the foreseeable future. In other words, more and more economic "green shoots" are starting to appear.

But if the transport companies don't confirm that things are starting to look up for their businesses, those green shoots may quickly wither. Here's hoping that railroad CEOs are as optimistic about a recovery as banking CEOs seem to be and that transport stocks keep on trucking.

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