The Stock Market - A daily diary

As if the cruiseline industry didn't have enough issues to contend with, the industry is now facing some  pretty scathing indictments.  

The U.S. Coast Guard said it was investigating whether two cruise ships owned by Carnival violated federal law by failing to alert health authorities about sick travelers disembarking in S.F. and Puerto Rico.  A criminal investigation and a separate government ordered probe are under in Australia about similar suspicions regarding another Carnival cruise ship.

Arnold Donal, Carnival's CEO , said at an April 16 news conference that cruise ships aren't the cause of the virus ( true), nor are they the reason for the spread in society ( excuse me ?! Did he really just say that ?!  Certainly they played a key "contributing " role in its spread) .

With these investigations,  The cruise line Industry  just might be the worst of all to even consider bottom fishing on an high risk investment.   Quite the contrary.   These guys just seem to be taking on more water (pun intended). Lol. 

So, over the weekend, Uncle Warren revealed to everyone that he has sold all of his stakes in the Airline Companies.  This marks the second time he has taken a bath with airline stocks.  Back in 1989, Warren decided to buy preferred stock in US Air, a predecessor to American Airlines.  The investment quickly went downhill. For 25 years thereafter, Buffett repeatedly criticized the airline industry as being a terrible place to invest. Perhaps he should have listened to his own advice back then to  "Never"  invest in this money losing business segment...  Here are his own words back then.  

Airlines have been perennially money losers.. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little to no money.  Think Airlines.  Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.  Indeed, if a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down (Lol). 

-- Warren Buffett, in the 2007 Berkshire Hathaway shareholder letter --

....   It's puzzling why he ever went his sage advice nearly 13 years ago.  Buffett is one that constantly talks about business "moat".  Competitive Advantages are big in his book, and airlines have None of that at all.  There is very little differentiating one airline from another ; they all have the same input costs & structures, etc.   These airlines are nothing more than buses in the sky.  What a terrible business model to invest in.  

...went "against" his sage advice.... 

Another muted day on the markets for the most part.  DJIA was down around -200 pts for most of the day, and then managed to squeak out a gain at the end of trading.  The VIX fell again, seeming to settle into a new normal.  The panic of March feels like much longer than 6 weeks ago, and the FED Put has worked like a charm... so far.   I see where Uncle Warren has even praised Fed Chief Jerome Powell, saying many companies can thank him for having any access to the credit markets.  Indeed, the FED came to the rescue  w/ a bazooka in both investment grade & junk bond markets.   Having market access is great to help keep these companies afloat, but as an investor trying to price these assets makes it almost impossible..  

Oil has been acting quite nicely recently, aside from Friday's turmoil when RDS cut its dividend, and XOM and CVX posted their earning results.  Frankly, I can't see how any of the results and commentary from Exxon & Chevron should have been a shock to anyone.  Perhaps it was just some profit taking on Friday, but they (and some of the smaller drillers)  responded nicely today to advance w/ Oil.   I think a reasonable price of oil in the mid-20s is appropriate  given  our current environment as we look to re-open this economy (  $50 is reasonable in a healthy economy, if not more IMHO).   I think we will look back on history and see that 2020 was lowest "demand" we will ever see in our lifetime again.  To that point, almost 30 million barrels per day are not being consumed (that were just a short 6 months ago).  If OPEC + can keep their supply agreements, perhaps we can stick to a mid-20s target on oil w/ this economic malaise. 

Rush. There is no doubt that in the absence of a deadlier pandemic, a world ending nuclear war or an alien invasion, the oil consumption in April of 2020 will be a record that will never be broken. That said, we will always be at the mercy of the Saudis and Russia and OPEC in general. I have somewhere in the neighborhood of 50K of my portfolio invested in energy losers. Is it the time to double down? I think not. 

Airlines have always been tricky.  There are times to have some of them.  I think one of those times is coming toward the end of the year.  It would not surprise me to see Buffet back in around then.  The only issue is that it would look bad and seem as if he manipulated the sector.  Since the deregulation the industry has been very hard to make money longterm.

Airlines have mostly been a sector to trade and not to invest in.  They have really been best if you are day trading or speculating short term.

Drivers are recessions, mergers, low oil prices (and any oddball news about oil) and a booming economy.

They are sensitive to everything and very fickle.

But they do tend to go up after the economy has turned around.  They lag behind other things, as it takes time for things to settle in and travels to get back going.

However, with oil prices so low and some airlines usually locking in prices and with a very slow economy for the next several months there may be opportunities late in the year.  One of the theories is that some are going to have a hard time surviving this and will be merged or bought out.

RASM and CASM are the usual way of looking at them. And it will be very interesting if a social distancing is put into place on flights.  Some are suggesting to keep going with the current policy of not using the middle seats, etc.  If so, this will need to be more closely scrutinized.  Because load factor is a truer tool to use in analysis — the question is how do you determine a good number then?

But for sure there will come a time when there is a chance to make money with them.  I just don’t see it anytime soon — unless things turn around very quickly.

As usual, most small ‘investors’ will miss out on the ‘good’ stock’s run-up.  So many people tend to get in too late and get out too late.  I think for the folks that miss out on getting the good stocks that go up (because they are worried, etc.) — a good sector to get into late would be the airlines, just because they lag everything else and percentage-wise the value would be there — but only for a time.  Then the issue is always that these type of ‘investors’ would not know when to get out in time.  They might take an extra hit when the airlines drop again.

For sure, there is a place for them in a portfolio from time to time.

There are a ton of stocks/sectors right now that should come with an asterisk akin to the Surgeon General warning for cigarettes. Casinos, cruise lines, airlines, hotels, restaurants and the list goes on and on. 

This is why I mentioned the groceries sector the other day. They should boom for the next few years and perhaps a decade.

What looks good to you there Raiders? 

On a side note I think Buffet is vastly overrated, especially in the last couple of decades.  Not to take anything from him at all, because he knows the market and the business of longterm value-investing.

But when he said he did not ‘understand’ dotcom stuff like Apple, Facebook etc, — I think he lost a lot of folks.

I know at one time if you followed him you were taking on twice the risk to get 1/4 more return than S&P.  I know he has had considerable more drawdowns than you would want to stomach as well.

His returns vs S&P have had a very considerable drop off the last few decades.  One of the theories is that he got in the market at a tremendously fortuitous time in the US economy when it really did very well — and he just has not adapted very well.

Still — not taking anything away from one of the greatest longterm investors ever — but I would scrutinize very carefully what he does nowadays before I followed him.

Wow. Out of those — I think the recovery in order might be:  restaurants, hotels, casinos, airlines, and cruise lines. 

My contention, as everyone well knows, is this thing is way overblown.  We should not have shutdown for this long — if at all.  

But we seem to be trying to help out the folks as much as we can while they are out of work. Whether, I agree with how it is being done is another deal.  

But as shutdowns are lifted people are going to be ready to go eat — so restaurants that are still able to open will do fine. A lot I think are doing okay with the takeout only deal, especially with the delivery apps.  They also are not having as much overhead— no waiters, lights in seating areas, etc.  Bottom line people will be ready to go eat out. 

I think the travel sector gets back very slowly. But — when people can — they will want to drive to a casino or somewhere for a vacation they missed during spring and summer.   Then I think they start to stay at hotels, then start to fly more — because business travel and tourism will pick back up.   I think cruise will be last to recover — they have other issues.  

Thats off the top of my head.  I just don’t have a ‘handle’ on any sort of timeframe.  Because we have handcuffed ourselves to the whim of ‘health experts’ and models that have been very wrong at nearly every turn.  At some point politicians have to do their jobs as well in conjunction.  

How do you see those you listed playing out? Any timeframe?

Well. I agree with your timelines. However, if you are asking which area I am investing in first?.....then I say none of the above.

Raiders.. You hit it on the head.  I had started writing about this very topic today as well, but then my long post got deleted somehow when I pressed "submit".  I got so ticked off  I never came back to it.  But you've hit on it so I'll try it again.   You're exactly right ; Buffet said he couldn't understand the tech companies , so he completely avoided them.  I think one of his first tech ventures last decade was in IBM (Lol).  Hardly "new tech", but he tried... and failed.  IBM had an unbelievable streak of declining revenue for "years", and Buffet stood by their side I think because he loved the stock buybacks, etc.  (I frankly think the IBM board and CEO were so preoccupied with Buffet's presence in the stock that they didn't focus on long-term growth, and focused too much on buybacks and dividends).  Buffet bailed on IBM a few years ago, and didn't do so well. 

More recently, Buffet has relied on his "younger team" to do more of the stock picking, particularly in tech.  Guys like Todd Combs were key to Berkshire taking big positions in Apple.  This investment has really worked out for Berkshire, but by and large, Raiders is right... Berkshire has underperformed the S&P 500 the last couple of decades.  My own thinking here is that their investment choices are much more narrow than they once were.  They must think BIG now because Berkshire themselves is so BIG.  When Berkshire was small and up and coming, they could keep on adding small & mid-cap companies to their portfolio with incredible results.  Now, those same additions won't even "move the needle" on the revenue/earnings results.. so they don't do them.  In many ways, the Law of Large Numbers appears to have found another victim in Berkshire.  It should come as no surprise that Buffet has advocated for most investors to have the majority of their  portfolio in a low-cost S&P 500 index fund.. If memory serves, I think he has even directed most of his assets to be transferred to an index fund for his beneficiaries... Not Berkshire..  That is telling.. 

I agree with that for sure — may change depending on this potential economic situation. 

I wouldn't advise anyone to double down.  But for those that don't already have a significant energy exposure,  it can make sense.   I mentioned earlier that energy makes up only 2-3% of the entire s&p 500.  That is miniscule. 

For me, it's seems like learning not to touch a hot stove. I have been in energy and Europe for nearly 3 decades and it's possible I have an overall negative return even after dividends (it's close). I have been waiting on their respective rebounds for over a decade.

They say the hardest time to buy is when things look the bleakest. Maybe that's the case here but I can't recommend it.

For sure, you're going to have losers.. But if  you keep a diversified portfolio (and don't overweight significantly in any one market sector) , your winners should have take care of your losers in the recent bull market , and then some.  I own international mutual funds as well as part of a diversified portfolio ; they have been dogs for some time, but I don't abandon their exposure in the portfolio.  

So, Norwegian Cruise Lines just announced today they see "substantial doubt"  about its future, warns of possible bankruptcy as it seeks to raise $2B. 

I'd mentioned just a couple of days ago how the U.S. Coast Guard + Australia + NZ are all  investigating whether cruise ships owned by Carnival violated federal law by failing to alert health authorities about sick travelers disembarking.  I have a hard time believing  Carnival was the only one engaging in this behavior.  Big Debt + No Demand + Potential Fines is a toxic combination for the Cruise Line Industry right now... I think I found some businesses for Detox to short.  I wonder if he ever ventures into this thread ( I think not. Lol). 

I read that CCL is burning through a billion dollars per month. How long can they survive that? One thing that certainly doesn't make sense is to burn through a billion a month for a year or more and then declare bankruptcy. 

As far as shorting CCL, that's one I think Detox could do well with. I'm sure you read I chose to leave his crypto thread yesterday. We were disagreeing on basically everything, including the fact that it's apparently impossible to fund little more than a fast food value meal with dividend payments. It's a good read if you missed. I guarantee you will be entertained.....and that's part of what Covers is about right?

Yes. Very interesting what will happen with some of these cruise lines and, as mentioned before, some of the airlines as well.  

For sure, you invest for the future — longterm. But you have to reevaluate your portfolio from time to time.  If you have something that is consistently not performing as you’d expect — you really need to reconsider if you should continue holding it.  If the reasons for why you got it to start with have changed or, maybe, you just evaluated it wrong when you got it — you should move it.  

I understand your point about the ‘good-performing’ picking up the ‘under-performing’ — but that really is bad logic after awhile.  Get it into something a little better.  That way the ‘good’ doesn't have to pick up the rest as much.  Then you will see more out of your ‘good’ — and, of course, less ‘bad’ out of your others.

All money managers and investment managers do this on a regular basis.  It has to be done. 

Yes, you want to be diversified.  But, you do not want to have bad holdings just to be diversified.  Move the bad into something else.  Obviously, that’s right when the ‘bad’ finally takes off like a rocket — but you cannot look back with regret.  

Sped through the crypto thread.  Just because it is not my thing — but still curious from time to time. 

But I think the thing people miss is the multiple revenue streams.  I’m not saying he missed that.  

But you have basically 3 (4?) ways to plan for retirement.  It is not an either/or approach.  

Most folks will have some SS.  Most will have some 401k.  Some will have have their own personal investments.  Fewer will have a pension.  But if you can have other things that help — dividends, rentals, etc.  They will all help out.  You really do not want to depend on any one source.  

Even before retiring you don’t want all of your money coming from one place. 

Lol... I did read that discussion in the other thread, Gamble.. Entertaining for sure.  

Detox and I have gone back and forth for years. I always enjoyed the banter, but Wall probably did the right thing by intervening. 

To this day, he never held a lead for not even a single day in the Bitcoin vs s&p challenge he proposed in early 2018. That's just brutal. I can understand his frustrations.

Signs of trouble....Disney just advised they will not be paying their July dividend and will advise on the second half of the year in the 3rd quarter. I wouldn't be surprised if EVERY company in the sectors we discussed yesterday (airlines, cruise lines, etc) followed Disney on this. Liquidity is key to surviving this depression and shareholders will suffer.