The chasm between Wall Street and Main Street continues to grow. In the latest leg of the stock market rally, the attention of traders has focused more on the grammar in each Federal Reserve policy statement than on the “soft” depression that’s taking hold across America. Traders should really get outside of Manhattan more often.

Trucking is one of the many businesses hurting badly right now. It’s a tough business during the good times, and a terrible business in a soft depression.

The outlook you have for the trucking business is highly sensitive to your outlook for the economy. I consider the economy to be at the tail end of an upswing within a decade-long deleveraging cycle. All of the analysts covering the trucking stocks assume we’re in the early stages of a typical postwar recovery. This is reflected in their earnings models: Earnings in the trucking industry are expected to rebound in a hockey stick fashion.

Yet despite the bullish outlook for the economy, the momentum behind the recovery is petering out. In his March 15 “Breakfast With Dave,” David Rosenberg of Gluskin Sheff noted: “The smoothed ECRI Leading Economic Index for the U.S. fell last week for the 12th week in a row, to stand at its lowest level since July 2009. Something tells us a slowdown is about to start.”

Here is a chart of the ECRI Leading Economic Index:

This index accurately foreshadowed the sharp stimulus-induced recovery in sales and inventory. It’s not good news for bulls that it’s turning down. The impact of the stimulus bill will wear off as we go through 2010. After that, the economy faces many head winds, including:

1. State and municipal budgets: They have yet to reduce payrolls to a level that the private sector can afford.
2. Banking: Banks will remain in “recapitalize” mode for a few more years. In 2010, banks will be more interested in earning risk-free profits trading Treasury bonds than in making loans to small business.
3. Threat of protectionism: There’s a good chance that the Treasury Department will soon label China as a “currency manipulator.” A group of U.S. senators recently sent a letter to the Treasury exhorting it to implement protectionist policies. This would incite retaliation from China, which could in turn depress international trade. Lower international trade is terrible for trucking companies, especially now that so many customer supply chains stretch across the globe. With its state-sponsored economy, it’s clear that the Chinese communist party doesn’t believe in true free trade. But even if the U.S. is right to complain, it has little negotiating leverage in this situation, and is openly asking for retaliation. And further reckless government spending and borrowing from foreign creditors only weakens the U.S. negotiating position even further.

In this context, and outlook for the economy, let’s consider a short idea in trucking…

The LTL Stocks Offer Us Another Chance to Buy Puts

The stock market has handed us another opportunity to buy cheap puts on the “less than truckload” (LTL) sector. The LTL industry is trucking with a high level of service and logistical support. LTL carriers usually pick up multiple shipments from multiple customers on a single truck and then route those shipments through service centers, where freight is transferred to other trucks with similar delivery destinations. Fixed costs in LTL are high, so the industry is quick to cut prices to keep its network fully utilized.

The first opportunity was on Dec. 18, when the stocks had soared in advance of the widely anticipated bankruptcy of YRCW. In the December issue of Strategic Short Report, after the stock had risen to $34, I recommended puts on Old Dominion (NASDAQ:ODFL). We booked 85% profits when the stock fell to $27 on Jan. 22. The profits came quickly because the time premium on the puts was dirt-cheap, and the stock fell hard on the news that YRC Worldwide wasn’t going to liquidate as expected.

You can find the short thesis for ODFL in the December issue of SSR. In that issue, you’ll find plenty of detail on the big-picture issues facing the LTL sector, and the increasingly competitive environment after the entry of FedEx and UPS into the LTL sector.

But things have changed notably since December, and I’ve already written to my readers about a fresh new options play against the trucking industry – one that I think could deliver 150% gains this year. Visit the SSR website to learn more about Strategic Short Report, and to get the name of my latest LTL play.

Regards,
Dan Amoss
Penny Sleuth

March 31, 2010

Dan Amoss

Dan Amoss, CFA, is a student of the Austrian school of economics, a discipline that he uses to identify imbalances in specific sectors of the market. He tracks aggressive accounting and other red flags that the market typically misses. Amoss is a Maryland native, a graduate of Loyola University Maryland, and earned his CFA charter in 2005. In spring 2008, he recommended Lehman Brothers puts, advising readers to hold the position as the stock fell from $45 to $12. Amoss is managing editor of the Strategic Short Report.

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