The Weekend Edition # 38
Market Recap, Sector - The Airlines $JETS, Earnings Quotes - $JPM, $BLK, $UNH, $DAL; Economic & Earnings Calendar; The Poison Pill
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover this week:
Sector Focus - The Airlines
Earnings of Week - Quotes from Management - $JPM, $BLK, $UNH, $DAL
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - The Poison Pill
Let’s dive in ⬇️
Market Recap - 11 April to 14 April, 2022
We had a shorter trading week with the US markets closed for Friday. But, definitely not a dull week at all - earnings season kicked off with the banks, bond yields rose to the highest in 3 years, mortgage rates hit 5%, Monthly OpEx on Thursday had about $2T expiring and the CPI report showed the smallest increase in months. People are getting excited about inflation peaking. This remains to be seen. China is still in lockdown and we still have the geopolitical situation in Europe at a dead end. Input costs are far from normalizing.
Despite a relatively good set of earnings from most of the banks, other than JPM, all the indices closed lower on the day and lower on the week. Energy still leads based on a 5-day performance.
Sector Focus - The Airlines
With Delta beating earnings this week, and American Airlines putting out upbeat estimates, the entire airline industry seemed to have gotten a boost to stock prices fueling some optimism. While the recovery has been bumpy, the question remains - are we out of the woods?
While the fog is lifting, I think the industry is still in for some pain and it would be wise to be cautious. Stock prices are nowhere near pre-pandemic levels and neither are earnings or financial stability.
I went out and bought SouthWest in May 2021 in the hopes of the re-opening party. Didn’t quite work out because we had new wave Covid. And while the Covid situation has improved, we’re now hit with supply side issues so I’m not going on a buying spree just yet.
The Supply Side
In 2021 as a whole, Jet Fuel and Brent crude oil prices surged by 68% and 63% respectively compared with 2020. But, incidentally Jet Fuel is also the highest it has ever been since 2015. It was big news this week.
Jet Fuel usually comprises 20 - 30% of a company’s operating costs and airlines such as American Airlines don’t hedge their fuel costs. Globally, the story is no different. ⤵️
And then there’s the cost of labor - the second biggest chunk of operating costs. We’ve been hearing about labor shortages for 3 quarters now and the result has been wage increases.
Finally, most of the airlines are structurally weaker. Airlines are notorious for never having enough cash and when the pandemic hit, most of them decided to drawn down on their standby credit lines, which tend be based off of floating rates. With rates rising, this is sure to hit their bottom line.
The Demand Side
Leisure travel demand is returning but, business travel is still slow. Although, Delta did report a surge in bookings for March. But, much of this is pent-up demand and I’m sure you’ve already heard this but, business travel will likely not return to the same level as before. Not only are companies low on cash themselves, they’ve come to realize that travel isn’t always required. So while economy class is already recovering, premium class is still lagging and that’s where the real money is.
Consumer confidence has also dampened. While leisure travel will pick up at least initially - eventually inflation and the cost of higher jet fuel will catch up.
It would seem that this summer airlines will likely have a better season as people are exuberant about being able to travel again. But, afterwards, we may see another slump.
And finally, international travel still has some catching up to do.
It’s not that the airlines are not a good investment. I still think stock prices see a boost from summer travel but, the industry has certainly been damaged and it will take time for them to be considered solid companies once again.
Earnings of the Week
We started earnings season on a depressing note with JPM reporting an EPS miss and several other troubling performance numbers. Fortunately, most of the other banks fared quite well and so did Delta, United Health and Taiwan Semi. Let’s see what management had to say.
Jamie Dimon, JPM on Volatility
And I'll just add to that. I cannot foresee any scenario at all where you're not going to have a lot of volatility in markets going forward. We've already spoken about the enormous strength of the economy, QT, inflation, war, commodity prices, there's almost no chance that you want to have volatile markets. That could be good or bad for trading, but some of -- no change won't happen. And I think people should be prepared for that.
Larry Fink, Blackrock on the Economy
“Central Banks are in a difficult position as we look to carefully raise rates to contain inflation without harming economic activity and employment. They may eventually have to live with a supply-driven inflation rather than take policy rates above neutral levels. However, they may be forced to be more aggressive policy stance of inflation expectation become unchartered.
Bond markets have been quick to price in the Fed's rate projections and saw one of the worst quarters on record for the U.S. bond market. The market was down or the U.S. aggregate index was down more than 5%. Equity markets, on the other hand, has shown some resilience.”
Brian Thompson, UNH on Covid and Hospitalizations
On strain dynamics, maybe another thing I'll point out, clearly less severe in Omicron than what we saw in Delta. We saw hospitalizations at about half the level that we saw. But again, confirming what John said, really no signs of deferred care, and we've been watching this closely throughout the pandemic, looking at screens, diagnosis, severity, progression. And it usually cycles through pretty quickly after we've seen large infections, within 2 to 3 months to get back to baselines. And that's where we're at right now leaving the quarter.
So feel good about where we're at as we pace forward into the next quarter.
Ed Bastian, Delta on Labor
We've been at this for the better part of the last 18 months and getting ahead of it. And we hired over 10,000 people last year. We've hired another 4,000 people already this year, so we've hired 15,000 people.
And we are largely where we need to be on staffing. Yes, pilots have a training pipeline and will take some time before pilots are fully in category and where we want them positioned. It'll probably take another year or 2. Flight attendants, likewise, we're hiring flight attendants, and there's a queue as to how much -- many people we can put through the training pipeline.
But that's not where the real congestion is. It's in the airport, it's on the ground experience. It's making sure we have our suppliers ready and positioned.
One thing we did last year, really almost 2 years ago now, is we took over a lot of the functions at the airport that had been outsourced, catering, cleaning, wheelchair pushing. And we have Delta people in position, and we've hired Delta people to do it to make certain that we get the best experience for our customers. And you know what? Not only are people doing a much better job at it, we're also doing it much more efficiently and effectively, and customers are appreciating it.
So the labor situation, you're right, has changed pretty dramatically over the course of the last 2 years. We've been out ahead, and that's why you look at our operational stats over that time frame, we've led the industry consistently.
The Week Ahead
Economic Calendar (time in ET)
Closing Thoughts - Poison Pill
The whole market was a like a poison pill this week, with all the drama of Elon Musk making a bid to takeover Twitter. With Tesla reporting earnings next week, I can’t help but wonder about the timing of this offer. Who knows how this play out - personally, I think the takeover doesn’t go through. I could be wrong but at least, we all remain entertained.
Next week’s earnings should be interesting - a lot of large cap value companies, metal & mining and transportation. It’s like suddenly the boring companies have become the hot companies of the quarter.
Here’s wishing you a happy weekend, and safe investing.
Ayesha Tariq, CFA
There’s always a story behind the numbers
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None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $FAS, $UNH as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.