Monday, June 16, 2008

Is This Thing On?

Perhaps you weren't listening the first 10 times when Lehman told you the worst was behind them. When the stock dropped from 80 to 60 to 50 to 40 to 20, back to 40, back to 20, then up to $27 today. As I said, better to be too early than too late as there's been a near 30% bounce over the last 2 sessions. Fuld is fuld of you know what. We've decreased our leverage and bad loans across the board, we have strong capital and liquidity. We know. That's why you have to keep raising capital and taking writedowns. That's why you just fired your entire senior staff. Trot out Dick Bove to tell us this is very good for the company. Never mind how he just told us last week that this deleveraging will impair Lehman's ability to make any money for years to come. Thanks. Boring.

But Lehman's not alone. 50% of the prior 4 years' profits, gone. And that's if we take writedowns at face value. Probably not the best thing to do, right AIG?

Wachovia released their report on the impending doom of the commercial real estate market. Vacancy rates increasing at malls, apartment building, and corporate offices. While construction is winding down, there just isn't any money to fill all those empty rooms with. Stay strong SRS, maybe time to add.

Several of you have expressed concern that oil prices might plummet sometime soon. Ok. Good luck with that theory. It bumped up against $140 today and gas is getting closer to $5 than $4/gallon. In whose interest is it to have oil prices this high other than the lords of oil? As one iTuliper pointed out, you don't see CNBC pushing for a boom in this commodity as it has perilous effects on the economy and consumer. Exxon is selling their gas stations in N. America. The price of finding a new barrel of oil has tripled over the last few years and may increase dramatically if we have to continue to wash it out of shale and dig 10 miles under the ocean.

With that said, the oil dilemma has shattered the airline business. Why my brain didn't correlate that 2 years ago, I'll never know. But, while better too early than too late, better late than never. I see 5 scenarios for the airline industry, all of which can be parlayed into a profitable hedge I think. I'm working on it. For now, here are the scenarios:

1. Complete decimation, most carriers go kablooey. A few stay afloat, but business never makes real money again.
2. All continue to operate in red except for Southwest, who continues to steal low fare customers from the deaths of Jet Blue, Frontier, etc.
3. Some carriers make it, some don't, more consolidation. Business still generally stinks.
4. We've hit a bottom. Oil has peaked and cuts in capacity and routes turn some profit in the near future.
5. Govt. steps in (hey, why not!) and bails out most majors to keep business travel alive. Stocks go up.,,4325,00.pdf


Anonymous said...


I like the theory of the airlines going under. I too think it will happen if the govt stays out of it. As far as oil is concerned why aren't we digging? Speculation is driving up the cost but to me it is basic supply and demand economics. I do think we need alternative fuels but we also need to dig. With oil going up especially in this global market we need to do what we can to increase supply!

Looks like some dark days are ahead especially with the arms coming upon us. However, there are a lot of different ways to make money in this market. I just like the ideas of shorting more of the banks and financials. Keep it up ax doom and gloom can spell $$$!!!


Anonymous said...

Ax... Airlines will consolidate, and the government will bail them out as well. At the end of the day, infrastructure, commerce, and travel are keys to success. Watch for the RR which are already the most heavily subsidized industries to recv. more as well. Double-tracking a.k.a. (side-by-side tracks are on their way back.)

Oil will run the show right until green energies go on-line...then it will drop. People at the end of the day to not want to change unless it really hurts...the question then is how good is the American consumer's memory?

This is all a play for the Northern Slope... wouldn't it be interesting if Obama beat McCain to the punch on this one...a complete paradigm shift!

Maybe a Smokey and the Bandit with electric cars is in order...look what it did for the GAS GUZZLING Trans Am...

AX said...

Anon, thanks for your comments. You're right, my scenarios are not necessarily mutually exclusive. We might get a bailout on top of Delta-NW and whoever else merger. What is the significance of double-tracking? Increased volume/capacity for RR?

Also agreed upon oil hanging around. We've seen a 14X increase in the price of a barrel in the last 16 years. At each $10-$20 increment, there's been a doomsday call. It just won't happen until wind or solar can produce cheap energy in large outputs. We're a ways off...