Wednesday Briefs – 17 March 2021

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THIS WEEK: Everyone is Bullish; Price to Story Ratios; Airline Traffic.

Everyone is Bullish

Everyone seems to be bullish now. The input of stimulus money combined with the improving economy has turned even light-hearted bears (assuming that such a creature exists) into lonely curmudgeons. The Conference Board estimates that real US GDP will grow 5.5% in 2021 and 3.4% in 2022. These are growth figures not seen in seven years (Q2 2014 was at 5.5%), albeit due to the post-Covid rebound.

About the stimulus, there is widespread belief that new money inflows into the vessel that is the stock market will raise the water mark to new heights. That will work for a while, in particular as long as there are no significant cracks and leaks in the vessel. As these things go however, cracks will inevitably appear at some juncture. Most of the resulting leaks will be small and temporary but some will grow into streams that will drain more of the vessel. The most significant such cracks in the past were recession, inflation and geopolitical events. None of these are in the cards at this moment, but one of the last two could in theory develop quickly.

At the best celebrations, everyone feels in a bubble. But leaving early is also a proven way of keeping an untarnished memory of the event. On the time-tested adage that the market will at any time do whatever maximizes the number of fools, some caution is warranted. A better time to have been a superbull was one year ago when the market was in free fall and all celebrations were shut down.

Price to Story Ratios

The famed investor Seth Klarman relates this story1 in his book Margin of Safety:

“There is an old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.””

In the new ‘trading sardines’ mode of stock investing, it does not matter whether some companies expect to generate profits or free cash flows in the foreseeable future, so long as they rank highly on the cool factor and/or operate in a sector that is popular with retail investors. These names are being bought not for the “eating” (not for their profits) but for the trading. As such, some common stocks have taken on the characteristics of derivatives and trade like options. To trade is to buy into the optionality of a success that is by no means guaranteed. GameStop is the most visible of these names but not the only one.

Most important in this new method is for a company to have a good story and a well-liked spokesperson. It is better for its market action if such a company has no earnings at all. If it did, it would be easy to measure its value against its earnings and to determine whether it is reasonably valued. No such hassles with a company that has no earnings for the next few years. The market value can then be whatever investors want it to be, with no limitation to the upside. The Price to Story ratio here easily supplants the PE ratio. Because the Story is not quantifiable, the Price can simply be set at “always higher” for as long as market liquidity is supportive.

  1. The sardines story first appeared in the Sequoia Fund’s 1986 Annual Report.

Air Traffic

LaGuardia Airport in New York has two runways, one of which Runway 4 starts within feet of the Grand Central Parkway, a busy highway that takes Manhattanites to Queens and through the Northern State Parkway further east on Long Island. Before the pandemic, it was not unusual when driving on the Grand Central to have a low-flying aircraft suddenly roar overhead on its very last seconds before landing. After months of quiet and clear skies, of airplanes sitting idly in airports all over the country or in the southwest desert, the roaring overhead is now back.

Until workers start heading back to offices in large numbers, this is now the best and loudest expression of the return to normality. Last Friday, the TSA reported the biggest passenger day at US airports in a year, with nationwide screenings at 1,357,111. This figure is still 38% below the comparable March 2019 number but it is expected to rise rapidly in the weeks ahead. For the still hesitant and pandemic-shocked, airlines are offering attractive fares, for example a May round trip from New York to Miami at $118, less than half the usual.

As the weather warms and the virus subsides further, demand could surprise on the upside. The challenge for some airlines would then be to bring back sufficient capacity for the summer. Pulling an aircraft and its crew out of lockdown is a complex process. It is possible as a result that some routes could see higher than usual prices during the high season. New York to Paris fares for July are at about half the usual summer fare but this could change quickly.

Meanwhile airline stocks are pricing in the gains. Year to date, American is up 58%, Delta 23% and JetBlue 47% (as of midday on March 16th). This all assumes that the virus variants remain under control, a likely scenario.

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