Thursday, June 4, 2020

Evening Note: Knee-jerk Nature

For this evening's note I'm going to simply cut and paste from a Bloomberg article to point out:

1. The knee-jerk nature of much of the latest stock market action.


2. How conditions call into serious question the fundamental logic (lack thereof) behind jumping in right here.

Here's what happened to AAL stock today:
"The airline’s shares jumped 41% to $16.72 at the close in New York, the biggest gain since trading began in 2013. American’s surge was tops on the S&P 500 Index and sparked a broader industry rally, with the next two slots on the stock gauge claimed by United Airlines Holdings Inc. and Delta Air Lines Inc."
Here's why buyers rushed in:
"...the carrier said it would boost July flights 74% compared with this month, signaling that U.S. travelers freed from shelter-in-place orders are returning more quickly than expected."
“People are hungry, eager to get back into the economy,” Raja said in an interview. “We feel a real confidence to fly a much bigger July.”
"American’s expanded schedule builds on recent indications from rivals that customers are starting to make their way back onto planes, at least for domestic flights, after fleeing in April because of the coronavirus."
Here's why we're not joining the crowd:
"American’s flights were booked to new capacity limits that have been set to promote social distancing onboard."
"Demand is still weak on lucrative routes to overseas destinations, with the company planning to fly less than 20% of last year’s international schedule."
"The Fort Worth, Texas-based company is still retiring more than 100 aircraft, including three separate fleet types."
"Wall Street expects a full recovery to take years for the airline industry, with Moody’s Investors Service predicting “severely depressed” demand for flights next year and no substantial recovery until 2023."
"...a reasonable extrapolation of American’s domestic-centric commentary implies that 3Q consensus revenue forecasts (and, by extension, liquidity forecasts) may need to worsen somewhat.”"
"And for all of American’s expectations for July, real-time passenger data has yet to show a dramatic up-tick. An average of 314,000 people went through U.S. airport security checkpoints in the past week, according to the Transportation Security Administration. That’s 13% of the equivalent week a year ago and only slightly above the 12% recorded the prior week."
"The number of daily passengers has grown to 110,330 from 32,154 in the first three weeks of May and “is inching north all the time,” Raja said. By comparison, the airline carried about 600,000 passengers daily pre-Covid 19."
The above essentially adds weight to the opening paragraph to our morning note:
"...the state of global macro affairs and their go-forward setup offers virtually zero odds of companies in the aggregate returning a level of profitability that comes close to justifying present equity market valuations."
Also from our note this morning:
We’re experience quite the study in “behavioral economics.”
"It studies how people misinterpret information, how their emotions distort their decisions, and how they miscalculate probabilities."
--Mandelbrot, Benoit. The Misbehavior of Markets

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