(B)(N) The Dow Transports

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Drama. The Dow Transports are rocking again. Last year, they doubled our money. What are they going to do for us this year?

Actually, we already know that the transports are going to carry as many passengers and as much freight as possible at the lowest cost and highest price they can charge – that’s their job.

Our job is a lot easier. We need to figure out what the investors are going to do and whether they will buy the stocks that we own – and we own them all – at a higher price. For whatever reason, the airlines have already taken off and four of five of them posted double digit gains in January with an influx of $9.8 billion and a gain in market value of +17%. Please see Exhibit 1 and 2 below.

Exhibit 1: The US Airlines – Fundamentals – January 2014

The US Airlines – Fundamentals – January 2014

Exhibit 2: The Undervalued US Airlines – January 2014

The Undervalued US Airlines – January 2014

Without our magic compass, we would be lost and wonder why investors bid up the stock prices by 3× last year’s earnings in January for a dividend yield of 0.6% and a return of earnings of 13%.

Possibly they think that the earnings will triple this year with lower fuel prices and more passenger-miles in the burgeoning US economy and that the nearly 10:1 debt-to-equity ratio is not a hazard because, after all, should something bad happen, the airline snacks will be reserved for the shareholders at the creditors meeting (Reuters, December 23, 2013, AerCap in no rush to order new jets after buying ILFC).

In any case, our magic compass allows us to safely fly them all in the Perpetual Bond™ with our usual stop/loss provisions in place should there be a hard landing surprise and our estimate of the portfolio risk due to the demonstrated volatility is minus (12%). Please click on the link The US Airlines – Prices & Portfolio for more details.

The US Freight Carriers also lifted a heavy load last year and returned 44% of their earnings and a dividend yield of 1.8%, paying $5.8 billion to the shareholders which is nearly 16× the rather meagre $372 million returned by the airlines. But have they run out of steam as far as the investors are concerned?

Exhibit 3: The US Freight Carriers – Fundamentals – January 2014

US Freight – Fundamentals – January 2014

Exhibit 4: The Undervalued US Freight Carriers – January 2014

The Undervalued US Freight Carriers – January 2014

On balance, the portfolio has not increased in value since December and there seems to be no rhyme or reason in the relationship between the demonstrated earnings, [P/E]s and the stock prices.

Nevertheless, our magic compass has again pointed us in the right direction and investors might eventually want to buy some of the “high-priced” stocks that we currently own and have owned in the Perpetual Bond™ since much lower prices last year.

We’ll just have to be patient and ride this one out. Our estimate of the downside in the portfolio due to the demonstrated volatility is minus (7%) and we can afford that more readily than investors who just bought their stocks yesterday, so to speak. Please see Exhibit 4 below.

Exhibit 4: US Freight – Prices & Portfolio – January 2014

US Freight – Prices & Portfolio – January 2014

(Please Click on the Chart to make it larger and again if required.)

For more information and additional references to the theory, please see our Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.