Follow the Leader

Wednesday, 20 Mar 2013 07:49 AM

By Gary Jakacky

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My favorite thing about our ongoing "Raging Bull" market? The most recent phase began on my birthday last November. To boot, the bull market itself just celebrated a fourth year. May we both carry on a lot longer!

Just as it takes a deep breath to blow out the candles, it takes a close look at the market to find the sources of strength, and more importantly, perhaps the sources of weakness that might bring this rally to an end.

Since mid-November, the broad market, as measured by the Dow Jones Industrial Average and the Standard & Poor’s 500, has rallied 15 percent. But the Dow Transports have nearly doubled that gain, up 28 percent. Why?

Cheaper oil prices? Perhaps. Sure oil prices have fallen recently, but they are still up nearly 5 percent over this four-month span.

Bond prices have fallen, which is to say interest rates have risen over this period. Not only does this suggest the economy is strengthening, but it also means that consumers and businesses might be tempted to lock in purchases before rates rise further. We see this effect in the real estate market in some regions of the United States.

Stronger retail sales (despite the dreaded payroll tax increase) and increased railroad shipments (not just manufactured goods, but natural gas and coal), despite seasonal weakness, are another reason why the Transports are doing well.

But the best explanation? We are in the midst of a major change in how our railroads and trucking fleets are fueled. Natural gas not only is cheaper and cleaner than oil or diesel, but also has huge sources of domestic supply and supply from countries that are not hostile to us.

Adoption of these better internal combustion engines can cut fuel costs by 30 percent. Maintenance costs for natural gas vehicles are cheaper. And there isn’t the pollution from the numerous additives to gasoline and diesel fuels.

While many transportation stocks have more than doubled in price since the bear market bottom four years ago, I believe a new secular bull market has started in this sector that has years, perhaps even decades to run. We are still in the early innings of this game: environmentalists are losing their battles against fracking and the Keystone XL pipeline and they remain largely oblivious to the nation's clamor for the jobs and wealth the Marcellus and other tight shales have delivered in North Dakota and elsewhere.

Let them remain ignorant. In the meantime investors would be foolish to overlook additional gains in this sector.

In the very near term the Transports might see some weakness as they approach the top of a trend channel that they have pursued since late 2009 on a logarithmic chart.

So you technical analysts might need a few antacid pills over the next few months. Use any weakness as a long-term buying opportunity.

Dividend yields on transportation stocks tend to be stingy because their earnings growth is very cyclical, so those approaching retirement should look elsewhere for current income.

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