The FedEx Effect
Why FedEx's CEO calling for a recession is a hint for what's to come.
On September 15th after the market closed FedEx reported earnings early and bombed. The stock dropped over 20% in the following session. Surely their earnings weren’t that bad were they?
“We are seeing volume decline in every segment around the world,” Subramaniam added. “So we just assume at this point that economic conditions are not going to be good.” Said FedEx CEO Raj Subramaniam after posting a -33% earnings per share miss.
Always a good sign when the CEO of a global shipping conglomerate says volume is declining and we are just assuming there will be a global recession right?
Now, why’s this important? FedEx is essentially a barometer of the United State’s economic health and the world to a certain extent. The world revolves around transport. Alan Greenspan former Federal Reserve chairman used to have weekly talks with the then CEO of FedEx Fred Smith. This was because he thought FedEx was a great worldwide representation of economic activity. FedEx currently holds a 36% market share in the United State’s transport and logistics sector essentially forming an oligopoly with UPS (United Parcel Services) making up a cumulative 75% of the market share.
Shipping and logistics are essential to a functioning society; when these companies are struggling, we may see others follow suit. Because when shipping volume decreases, that means overall activity is decreasing. For months now macroeconomic analysts have forecasted the destruction of the “healthy” economy we are currently living in. Profusely reminding us to “just wait” and that numbers like earnings forecasts, jobs, spending and others will eventually start to subdue to said economic pressures. Now we are 16 months into high inflation, is now the time for the numbers to soften? Let’s do a deeper dive.
My thesis on why we have yet to see numbers soften is all the pent-up energy that consumers had for over 2 years during covid. This allowed consumers to save and essentially create a piggy bank. Factually speaking, upon lockdowns we saw a vertical rise in commercial bank deposits which have been stagnant since January of this year and now slowly declining.
Now entering the post-pandemic world we saw intense amounts of spending, job openings, etc. However, the reality is now setting in and we are finally unwinding. The cost of borrowing is still increasing, inflation is still in full effect, and businesses can only handle it for so long. I believe numbers like earnings forecasts, actual earnings, spending, and job growth will soften within the next quarter and the picture will become complete. Much like this drawing of a horse.
Upon further examination of Raj Subramaniam’s statements during FedEx’s quarter three earnings report and his CNBC Mad Money interview with Jim Cramer, much of the slowdown FedEx has experienced is due to weakness in Asia as well as challenges to service Europe. He stated that these factors caused the reduced shipping volume. This is what macroeconomic experts have been preaching for so long. The stop-and-go nature of China’s economy and the European energy crisis and overall uncertainty has caused serious problems for FedEx and this will most likely spread to other logistics companies and sectors.
I believe that this is the first domino in a slew of earnings forecasts being cut significantly. It was only a matter of time before all the negative numbers like inflation, interest rates, and debt caught up to the good ones like earnings, and spending. As well, Goldman Sachs over the weekend cut their 2023 outlook for US growth alongside shedding 700 jobs because of the huge decline in deal flow.
Goldman Sachs stated that the Fed’s steady hawkish stance is not something that should be taken lightly. With the CPI report coming in hotter than expected Goldman among many other banks expects a 75 basis point hike, up from the 50 basis point hike previously expected before the CPI report.
To wrap up, FedEx’s struggles are everyone’s struggles. The global shipping conglomerate is facing tough times which has led to intense cost cutting via closing 5 corporate offices, and 90 locations as well as offering fewer flights and putting hiring on pause. This is partially due to the struggle out of the eastern hemisphere specifically in Asia and Europe as well as rising operating costs like the price increase of kerosene (jet fuel) which has risen over 75% in the last year. With Raj Subramaniam’s calling for a global recession in 2023, this begs the question. Will this leak out into other business sectors and cause further uncertainty regarding the future ahead? Time will tell. Week after week I write this newsletter so thank you to all who take the time to read it. Be safe and trade well!
Thanks,
Francesco
Ravineview Research
Might go into a 45% recession in my opinion