• Category Archives Investing
  • Wall Street is Clueless about Southwest (NYSE: LUV)

    Wall Street is Clueless about Southwest (NYSE: LUV) (this snippet from a recent article in the TheStreet …)
    Baggage Fees are NOT the Secrets to Profitability

    If you ever need a reason to doubt the wisdom of Wall Street “gurus,” look no further than the recent outcry from analysts that Southwest Airlines (NYSE: LUV) needs to impose baggage fees in an effort to bolster its value.

    Of course, I doubt most Wall Street hot shots ever take Southwest or even know how much it cost to book a flight to their favorite Caribbean getaways or ski chalets where the snow outside is about as high as the snow inside.

    In any event, check out this snippet from a recent article in the TheStreet …

    One such analyst is JPMorgan’s Jamie Baker, who, in one quote, summarized why most analysts don’t run companies, but instead, bet on their successes and failures.

    Check it out …

    “The impression that investors have is that your priorities at the moment might be somewhat out of order. The impression is that passengers come first, then labor unions, and then shareholders.”

    Of course passengers should come first. Without the passengers, you don’t have a viable business!

    Priority #1

    The truth is, the Southwest empire was built on the understanding that passengers come first.

    Most folks don’t have a lot of money these days, and Southwest offers a much-appreciated alternative to other airlines that often charge a hell of a lot more than Southwest. I would also argue that in the U.S., you simply don’t get better customer service with any other airline. I’ve flown them all, and Southwest’s customer service always comes out on top.

    Putting the customer first should always be the priority. But this is just not how most folks on Wall Street look at things. They don’t get it.

    And by the way, this idea that Southwest should start imposing baggage fees is absurd.

    In 2014, analyst Jim Corridore from S&P Global Market Intelligence, referred to baggage fees as “low hanging fruit,” and insisted that it wouldn’t lead to one passenger defection.

    Southwest has developed a relationship with its customers. Imposing baggage fees would undoubtedly damage that relationship which has been cultivated over many years.

    The fact is, there are a couple of other budget airlines out there that would be happy to take market share from Southwest. And if Southwest were to piss off its most loyal customers, this is exactly what would happen. How a smart guy like Jim Corridore doesn’t understand this is beyond me.

    Truth be told, I’d be more concerned about the company’s battle with the unions than the incredibly stupid idea of imposing baggage fees.

    Union Confusion

    Apparently, the Transport Workers Union Local 555 is calling for the ousting of both the CEO and the COO of Southwest.

    As reported by Bloomberg, the unions have criticized CEO Gary Kelly for spending billions on stock buybacks instead of plowing the money into updates of the airline’s aging computer system and for focusing too much on cost controls.

    As I understand it, Southwest is already investing about a half billion dollars in a new domestic reservations system that’s going to come online in phases over three years. So who knows what the spat is really about.

    What I do know is that whatever is going on with these negotiations, the longer they’re drawn out, the more they’re going to hinder operations and future revenue growth.

    While I’d be more than inspired if Gary Kelly responded to the next “demand” to impose baggage fees in this manner …

    parton

    I would be concerned as a shareholder and customer if the company didn’t kiss and make up with the unions. Not that I’m some huge union supporter, but I do firmly believe that a positive relationship with employees is paramount to the success of any company.

    In the meantime, while so many analysts are now lecturing Southwest’s CEO on how to run a business, let’s take a look at how Southwest has performed over the past couple of years.

    southwest chart

    Had you bought shares of Southwest just two years ago, you’d be up about 28 percent today.

    Not bad.

    Compare that with the other major U.S. airlines over the past two years:

    American Airlines (NASDAQ: AAL) – Down 10 percent
    United Continental (NYSE: UAL) – Down 5 percent
    Delta (NYSE: DAL) – Down 7 percent
    I’m not saying Southwest can rest on its past history as a measure of future success. And certainly management has its work cut out for it right now. But if shareholders do have concerns about the company, they should voice those concerns with management while understanding that the key to success for Southwest has always been, and will always be, its strong relationship with the customer.

    If management ever loses sight of that, Southwest will absolutely lose its competitive advantage. And at the point, no baggage fee or share buyback will restore it.


  • What Will Happen to Stocks With Oil Below $40?

    What Will Happen to Stocks With Oil Below $40? (this snippet from a recent article in the TheStreet …)
    Oil prices dipped below $40 on Monday for the first time since April. If the commodity stays low, stocks are set to suffer, according to one analyst.

    “I expect that if we dip below $40 sustainably, you will hear that drum beat of weaker global demand come back into play. But right now this seems to be supply-driven, with the reopening of the ports in Libya,” said David Lebovitz, global market strategist at JPMorgan Asset Management, based in New York. “If we begin to see fears around another global growth scare, it’s obviously going to be negative for risk assets.”

    Lebovitz said the defensive and income areas of the stock market will continue to garner support, while some of the cyclical sectors, which have rallied since the June 23 Brexit vote, sell off slightly. Lebovitz said the recent slump in oil is supply-driven, not demand-driven.

    Oil prices rebounded slightly on Tuesday, with West Texas Intermediate, the U.S. benchmark for oil, rising back about $40.

    The closely watched commodity fell 12.8% over the past month, but it remains well above the $26-a-barrel price reached at the beginning of the year.

    Lebovitz said it’s unclear where oil prices are going. Investors have been shrugging off the recent declines amid an improving earnings landscape, despite a weak GDP print, which showed an economy that grew 1.2%. Analysts had expected 2.6% growth.

    “We understand why it was weak: we lost over a full percentage point given the draw down in inventories,” Lebovitz said. Other factors investors have been worried about, including China, seem to have stabilized, he added.

    Oil prices dipped below $40 on Monday for the first time since April. If the commodity stays low, stocks are set to suffer, according to one analyst.

    “I expect that if we dip below $40 sustainably, you will hear that drum beat of weaker global demand come back into play. But right now this seems to be supply-driven, with the reopening of the ports in Libya,” said David Lebovitz, global market strategist at JPMorgan Asset Management, based in New York. “If we begin to see fears around another global growth scare, it’s obviously going to be negative for risk assets.”

    SMALL INVESTMENT, BIG POTENTIAL. TheStreet’s Stocks Under $10 has identified a handful of stocks with serious upside potential. See them FREE for 14-days.

    Lebovitz said the defensive and income areas of the stock market will continue to garner support, while some of the cyclical sectors, which have rallied since the June 23 Brexit vote, sell off slightly. Lebovitz said the recent slump in oil is supply-driven, not demand-driven.

    Oil prices rebounded slightly on Tuesday, with West Texas Intermediate, the U.S. benchmark for oil, rising back about $40.

    The closely watched commodity fell 12.8% over the past month, but it remains well above the $26-a-barrel price reached at the beginning of the year.

    Lebovitz said it’s unclear where oil prices are going. Investors have been shrugging off the recent declines amid an improving earnings landscape, despite a weak GDP print, which showed an economy that grew 1.2%. Analysts had expected 2.6% growth.

    “We understand why it was weak: we lost over a full percentage point given the draw down in inventories,” Lebovitz said. Other factors investors have been worried about, including China, seem to have stabilized, he added.


  • What to Expect from RBS Second-Quarter Earnings

    What to Expect from RBS Second-Quarter Earnings? (this snippet from a recent article in the TheStreet …)
    Investors in Royal Bank of Scotland (RBS) will be looking for commentary about the post-Brexit vote outlook, and bad loan write-downs when the Edinburgh lender reports second-quarter figures tomorrow.

    The bank, in which the government holds almost 72% of the voting rights after a credit-crisis bailout, is likely to post a loss attributable to shareholders of £410 million ($538.62 million) amid continued restructuring charges. That’s down from the loss of £968 million in the first quarter, when Royal Bank of Scotland made a £1.19 billion payment to the government to remove a constraint on its ability to pay dividends to other shareholders in the future. But it compares with a profit attributable to shareholders of £293 million in the second quarter of last year.

    Operating profit before tax is likely to come in at negative £81 million, compared with a pretax profit of £240 million a year earlier, according to a consensus compiled by FactSet. Analysts are looking for a net interest margin of 2.34%, up from 2.15% in the first quarter.

    In April, when reporting first-quarter results, RBS predicted stable revenue from its personal and business banking and its commercial and private banking units in 2016 and a “modest erosion” in business at its corporate and institutional banking unit.

    However, rivals’ bulletins have suggested that big-ticket banking transactions ebbed in the course of the second quarter, and economic data from the U.K. suggest economic growth slowed dramatically after April, with consumer and business activity affected.

    In April RBS predicted full-year restructuring costs of £1 billion and cost savings for 2016 of £800 million.

    Investors will be watching closely for news of bad-loan writedowns, including in commercial real estate, which JPMorgan said recently was a potential trouble spot for the bank. In the first quarter write-downs were dominated by a £226 million impairment related to RBS’ shipping portfolio. JPMorgan said RBS has about £25.2 billion of loans extended to the commercial real estate sector, which has looked vulnerable since the Brexit vote.

    Capital at RBS evaporated at one of the fastest paces in Europe under the hypothetical scenarios run by European Banking Authority against 51 banks in its stress tests last week.

    At the end of the first quarter the bank’s common equity Tier One ratio was a hefty 14.6%. Under the EBA stress tests this fell to a low point of 7.8%, still well ahead of the Basel III minimum of 4.5%.

    The bank’s adjusted return on equity in the first quarter was 10.9%.

    Investors will also be looking for news on the long drawn-out spinout of about 300 banking branches it has named Williams & Glyn. The Edinburgh institution in April warned it may not meet a European Commission deadline of the end of 2017 to sell the branches, which it must shed as a condition of Brussels approval for its 2009 government bailout. Two preliminary deals to sell the assets have since collapsed, starting with the August 2010 retreat by Banco Santander from a deal to pay £1.65 billion for the branches. Santander is understood to have submitted a new bid for the assets in RBS’ latest auction progress as the Spanish bank takes advantage of a decline in the pound’s value against the euro since the Brexit vote.

    Commentary on the rate outlook for RBS’ customers will be closely watched after the Bank of England on Thursday cut interest rates by a quarter point to a record low 0.25%. A division of Royal Bank of Scotland recently wrote to business customers warning it may charge them for accounts in credit


  • Short Domain Names Investment Case Study


    Why short domain names .com may make a good investment? Let us look at what happened on Nov. 2, 2007. Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Surprisingly, short domain investment can be explained directly and easily using this law.

    This is just a business case study, not investment advice. I am just showing you the way that worked, you still need to do your own homework.


  • January Barometer

    The January barometer is the hypothesis that stock market performance in January (particularly in the US) predicts its performance for the rest of the year. So if the stock market rises in January, it is likely to continue to rise by the end of December. Probably the best known is “as January goes, so goes the year”. Another says that the first 5 trading days determine the market’s returns for the whole year ahead. And another says that how January performs predicts the direction of the market for the remaining months of the year. The January barometer was first mentioned by Yale Hirsch in 1972. Historically if the S&P 500 goes up in January the trend will follow for the rest of the year. Conversely if the S&P falls in January then it will fall for the rest of the year.

    If an investor believes in the ability of the January barometer to predict the equity market’s performance, he will only invest in the market in the years when the barometer predicts the market will rise, and stay out of the market when it forecasts a market pullback. It is difficult to produce excess returns based on this theory. Since the improved performance by staying out of the market during bad times can be more than offset by larger losses incurred when the barometer incorrectly predicts a bull market. January tends to be one of the market’s best months every year, rising an average of 1.3% since 1929, see our January Effect. And because the stock market rises in most years, there’s some inherent bias in the data itself. So, while the barometer works well in predicting up years (some studies even suggest that up Januaries mean up years 85% of the time), it doesn’t do so well in predicting down years. When January is down, the market continues to fall only 46% of the time.

    From 1950 till 1984 both positive and negative prediction had a certainty of about 70% and 90% respectively with 75% in total. After 1985 however, the negative predictive power had been reduced to 50%, or in other words, no predictive powers at all. The following table shows the wrong prediction of January Barometer :

    Year January S&P End of Year S&P Comments
    1946 7% gain Loss 17.6% Start of bad misfire
    1947 2.4% gain Loss 2.3% Not right, but no biggie
    1948 4% loss Gain 3.5% What the f?
    1956 3.6% loss Gain 6.5% Minor
    1960 7.1% loss Gain 4.5%  
    1966 0.5% gain Loss 13.5%  
    1968 4.4% loss Gain 12.6%  
    1970 7.6% loss Gain 8.4%  
    1978 6.2% loss Gain 7.7%  
    1982 1.8% loss Gain 16.8%  
    1984 0.9% loss Gain 2.3%  
    1987 13.2% loss Gain 9.9%  
    1990 6.9% loss Gain 0.3%  
    1992 2% loss Gain 6.6%  
    1994 3.3% gain Loss 4.6%  
    2001 3.5% gain Loss 13%  
    2003 2.7% loss Gain 26.4% significant
    2005 2.53% loss Gain 8.36% Minor disappointment
    2009 8.5% loss Gain 35% Worst loss
    2010 3.9% loss Gain 12.6%  
    2011?      
           
           

    5 wrongs for the most recent decade:

    Year 2001: gain of 3.5% but loss of 13% year end.

    Year 2003: The S&P has a loss of 2.7% but the S&P finished with significant  26.4% gain.

    Year 2005: there was a minor misfire in 2005.

    Year 2009: the January barometer is a big fake. January 2009 saw the S&P 500 fall 8.5%, only to finish with one of the best years on record as stocks soared 35% the rest of the way. Anybody who followed the barometer religiously in the year 2009 missed out on one of the most profitable market swings in a generation.

    Year 2010: After a 3.9% January loss, the S&P finished with a 12.6% gain.

    The year 2011 is not finished yet, what 2011 is going to be? What about 2012? Evidence also suggests that other months, such as April and November, are just as good at predicting the year as January. So why does January get all the attention? Read our other theories such as the January effect, Presidential Cycle and Halloween indicator.