DIA

ICYMI: Never Been More Bullish Even as Buffett Dumps Airlines

by

Image Source: IATA. Data Source: McKinsey & Company (IATA). Airlines haven’t been able to earn their estimated cost of capital for as long as we can remember. There have been hundreds of airline bankruptcies since deregulation in 1978. By Brian Nelson, CFA On Saturday, May 2, Berkshire Hathaway (BRK.A, BRK.B) reported expectedly weak first-quarter results. We won’t be ditching Berkshire Hathaway’s stock in the Best Ideas Newsletter portfolio so long as Uncle Warren is at the helm, but there were a couple takeaways from the report that we want you to be aware of (we’ll have another more extensive note focusing more exclusively on Berkshire coming out soon). The first big piece of news, something that should not be surprising … Read more

US Fiscal Stimulus Update

by

Image Source: frankieleon The US Congress is debating and working on a massive multi-trillion dollar fiscal stimulus package to mitigate the negative impact the ongoing novel coronavirus (‘COVID-19’) pandemic is having on the domestic economy and to provide for additional healthcare funds to cash-strapped entities to combat the virus. To read our previous US fiscal stimulus article, click here. By Callum Turcan After a failed vote on the U.S. fiscal stimulus bill (specifically, a shell bill to speed the legislative process along) in the Senate on Sunday, March 22, a program that’s worth around $1.5-$2.0 trillion (negotiations are ongoing), the legislative body picked up where it left off on Monday, March 23. After initially proposing to hold a vote in … Read more

Fed and Treasury Efforts Might Not Be Enough to Avoid Another Great Depression

by

Image: The Energy Select Sector SPDR and Financial Select Sector SPDR, two securities removed from both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio in August 2019 have been ravaged during this market selloff. We maintain our view that the energy and banking sectors are worth avoiding during this market meltdown. By Brian Nelson, CFA Let’s not mince words: We’re facing a global financial crisis and the real and growing probability of another Great Depression (not recession, but depression). The Fed has unleashed just about every backstop facility that it did during the Great Financial Crisis of 2007-2009, with the announcement the morning of March 23, and it is now even buying corporate bond ETFs (LQD). It’s possible … Read more

Extreme Volatility and Crisis Economics

by

Image: The Dow Jones has now registered 8 consecutive trading days with a 4% move in either direction, from March 9 through March 18. This is the most volatile time in history, a streak that is longer than the 5 consecutive days registered in November 1929 (Great Depression), 4 consecutive days in 1987 (Crash of 1987), and 4 consecutive days in 2008 (Great Financial Crisis). From Value Trap: “There may be just one other period in history that had more price-agnostic trading than today, and that may be the period pre-dating the publication of John Burr Williams’ work The Theory of Investment Value, or roughly 1928-1940. This was the most sustainably volatile period in stock market history, as measured by … Read more

Buybacks and Wealth Destruction

by

Buybacks and Wealth Destruction — — From Value Trap: “According to S&P Dow Jones Indices, S&P 500 stock buybacks alone totaled $519.4 billion in 2017, $536.4 billion in 2016, and $572.2 billion in 2015. In 2018, announced buybacks hit $1.1 trillion. Given all the global wealth that has been accumulated through the 21st century, it may seem hard to believe that another Great Depression is even possible. However, in the event of a structural shock to the marketplace where aggregate enterprise values for companies are fundamentally reset lower, the vast amount of cash spent on buybacks would only make matters worse. The money that had been spent on buybacks could have been distributed to shareholders in the form of a dividend or even … Read more

Caterpillar Reports Cratering Demand for its Products Amid COVID-19

by

Image Shown: Caterpillar Inc is hoping that efficiency improvements at its construction equipment business will help revive retail sales growth at the segment. That’s no easy task given the exogenous headwinds facing the company. Image Source: Caterpillar Inc – CONEXPO March 2020 IR Presentation By Callum Turcan The ongoing novel coronavirus (‘COVID-19’) pandemic is beginning to wreak havoc on the global economy. Major agriculture, construction, energy, resource extraction and transportation equipment supplier Caterpillar Inc (CAT) filed an 8-K report with the SEC on March 12 that highlighted just how rough the start of 2020 has been for the industrial space at-large. Even before the COVID-19 pandemic started spreading, Caterpillar’s retail sales had been coming under fire from slowing global economic … Read more

Seeds of Financial Crisis May Have Been Sown, Volatility Soars

by

Seeds of Financial Crisis May Have Been Sown, Volatility Soars — Image Shown: The broader market indices continue to reveal tremendous levels of volatility. The Dow Jones Industrial Average dropped 5.86%, or 1,465 points, to 23,553 during the trading session March 11.—From Value Trap: It seems like the markets experience a new financial crisis every decade or so. During the past few decades alone, there have been three significant banking crises: the savings and loan crisis of the late 1980s/early 1990s; the fall of Long-Term Capital Management and the Russian/Asian financial crisis of the late 1990s; and the Great Recession of the last decade that not only toppled Lehman Brothers, Bear Stearns, Washington Mutual, and Wachovia but also caused the seizure of … Read more

Boeing Down 15%, Turbulence Still Ahead

by

Image: Boeing’s shares have faced a perfect storm of negatives. We’re still not interested. By Brian Nelson, CFA I couldn’t have told you in any clearer terms in our January 23 note about my thoughts on Boeing, “Why *NOW* Do You Care About Boeing’s Stock” — “In no, way shape or form should you *now* (January 23) be interested in Boeing’s stock.” Here were my concluding thoughts in that note: I’ve written about working on resetting investors’ mental models, and getting investors to use our research in a forward-looking capacity. What I’m saying is that now (January 23) is not the time to evaluate our work on Boeing. Many months ago was the time to have had the Boeing “conversation.” If … Read more

S&P 500 Hits Target Range, Nibbling at Ideas?

by

This article was emailed to members the morning of March 10. The email can be accessed here. — By Brian Nelson, CFA — Very few bearish targets on the S&P 500 (SPY) ever get hit, but with the momentous all-time worst decline in the stock market March 9 (on a point basis), our target range of 2,350-2,750 has been breached–yet, another great call for those watching at home. The S&P 500 closed at 2,746.56 March 9, off about 19% from the all-time highs it reached just a few weeks ago. You have been ahead of developments. — As we have outlined extensively in Value Trap: Theory of Universal Valuation, the combination of indexing and quantitative algorithmic trading is creating a situation of tremendous … Read more

Oil Prices Collapse, Reiterating 2,350-2,750 S&P 500 Target Range; Credit Crunch Looming?

by

Image Source: Value Trap: Theory of Universal Valuation From Value Trap: “The banking sector was not the only sector that faced considerable selling pressure during the Financial Crisis of the late 2000s, of course. Other companies that required funding to maintain their business operations faced severe liquidity risk, or a situation where refinancing, or rolling over debt, might be difficult to do on fair terms, making such financing prohibitive in some cases. Those that faced outsize debt maturities during the most severe months of the credit crunch faced a real threat of Chapter 11 restructuring had the lending environment completely seized. In thinking about share prices as a range of probable fair value outcomes, equity prices tend to face pressure as … Read more