Wall Street Greek: Railroaded by Burlington Northern (NYSE: BNI)

Visit the front pages of Wall Street Greek to see our current coverage of economic reports and financial markets.

(Tickers: BNI, UNP, JBHT, DRYS, MSFT, AMZN, NSC, CSX, GSH, CNI, LSTR, CNW, WERN, KNX, HTLD, DIA, SPY, QQQQ, NYX, DOG, SDS, QLD)

Railroaded by Burlington Northern (NYSE: BNI)

The Merriam-Webster Dictionary defines "railroad" as "to convict with undue haste and by means of false charges or insufficient evidence." The definition seems to fit snugly around what happened on Wall Street Friday, while also offering an interesting play on words. Based on popular press reports, investors convicted the market on the earnings data and forecast warnings of a couple key railroad companies. Specifically speaking, Friday's downturn was placed squarely on the engine car of Burlington Northern Sante Fe (NYSE: BNI).

Railroad companies and other shippers of goods, including truckers like J.B. Hunt Transport Services (Nasdaq: JBHT) and shipping companies like DryShips Inc. (Nasdaq: DRYS), are considered barometers of the economic lifecycle. After all, if manufacturers and distributors are moving product, it is going to be visible in the results of the shippers.

So when Burlington Northern reported third quarter results that fell short of analysts' consensus, a call to arms went up. Investors moved even more to the defensive when the popular press pointed out how well Burlington's bad news complemented the dastardly economic diagnosis out of its railroad peer Union Pacific (NYSE: UNP) from just one day earlier. The corporate leaders of both important transportation firms noted a common view for little improvement in the year ahead.

Burlington Northern's shares tanked 6.5% Friday, and while aided by Union Pacific's 5.5% decline, drove the DJ Transportation Average (^DJT) down 3.5% on the day. Lower moves for the Dow Jones Industrials and S&P 500 Index Friday erased a previously established gain for the week. The Dow slipped only fractionally through the period, while the higher-flying S&P 500 Index moved about 1% lower on the week.

Still, we are not so sure you can blame the railroads for the market's re-evaluation. After all, even an overwhelmingly stellar earnings season could not keep Wall Street on track Friday. Microsoft (Nasdaq: MSFT) and Amazon.com (Nasdaq: AMZN) both reported market-pleasing news last week, though Microsoft's lift came from its forward guidance. Amazon's estimate beating result simply aligned the tech giant with 81% of the S&P 500 companies that have bested estimates this quarter, according to Thomson Reuters. We should note that just less than 50% of traded firms have reported results thus far for the third quarter.

The overwhelmingly positive earnings trend, coupled with a less than surefooted recent market response, suggests to us that stocks may be fully valued currently. The S&P 500 Index is up 60% since the closing low set on March 9 of this year. Thus, stocks would need further economic reasoning to move higher in the months ahead. You would think the market might have found its economic reasoning in Friday's Existing Home Sales data though. Sales of pre-owned homes ran at an annual pace of 5.57 million in September. That otherwise dismal rate compared favorably against the economists' consensus for 5.35 million and against August's 5.10 million sales pace. However, the market found a flaw in those numbers, since first-time homebuyers are about to lose their special incentive to purchase when the relative federal tax credit expires at the end of the year. The rush to buy now is attributed to the processing time involved in buying a home and qualifying for the credit. We note, however, that many industry experts expect another extension of this important incentive for 2010.

Given Wall Street's modest reaction to good news at current valuation, and its tendency to run for cover at the sighting of a single cloud, market correction seems possible through the short-term. Unfortunately, a solid support for the market seems about to be pulled away. Paper gains and tax consequences are perhaps keeping institutions and retail investors alike from selling-off stocks. Most stock sales now would lock in taxable profits for the 2009 tax year. Thus, as the fiscal year for many a fund manager concludes, and a significant minority of them will before December, investors are likely to exchange winning holdings for cash or other securities. While that exchange could include perhaps shares in companies better positioned for this point in the economic cycle, short-term market consolidation would still seem likely from November through January.