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  • Martin Sosnoff

My Love Sonnet To Airlines

Nothing on Wall Street ever is delivered prettily, like “Save for Xmas!”

Best trades I ever made in ragamuffins covered Geico at 4 bucks, Nextel at $3 bucks, even Halliburton at $5. They were troubled operators, but contained a exploitable franchise. You could buy millions of shares and not disturb the stock’s movement on the Big Board.

In the sixties, you’d buy Eastern Air Lines for a couple of bucks. Decades later, even Trump had his fling with north-to-south carriers then tapped out. I remember selling my Eastern convertibles at $400, but held onto Boeing’s paper. Their 707 jet was changing the face of the world early sixties.

I wasn’t smart enough to buy and leverage real estate in Honolulu. No Sam Zell to mentor me or free capital to exploit the blooming of abstract expressionist art movement when New York was its capital. If early in art purchases, returns are comparable with venture capital, 100 to 1, even more. Just hang in for 20 or 30 years and then gift your favorite museum.

My first job as a money manager, early sixties, was working for Jack Kaplan, then 75, but still hearty and opinionated. I was Jack’s eyes and ears, his bird dog. But, whenever Jack caught a bad cold, he’d bang out a bunch of his stocks. One day, when I was out-of-town, Jack sold out our American Express position which Buffett, had just latched onto as well.

I confronted my boss, whose nose was red and runny. “Gus Levy called and asked for some gross, so I kicked it out” , Jack mumbled.

“Why didn’t you kick out some of your crap, like United Fruit and New York Central? That’s dead paper.”

I pointed at Jack and he didn’t like it. He could rant and rave for 10 minutes, nonstop, crescendoing into physicality. His office was cluttered with half a dozen borax chairs, and he flung one against the wall, screaming "how dare you second-guess me.”

Such chairs were imitation birch wood covered with faux Moroccan leather seats. I wouldn’t play Leporello to his Don Giovanni so I grabbed a free chair and flung it against the opposite wall. These were 125th St., Lenox Avenue chairs, so expendable.

I lasted a year with Jack, a long hire for him, but my takeaway was worth a fortune. The rich do churn their capital capriciously. My notion that the wealthier you are the more research you do proved a romantic fallacy.

Jack, about Napoleon's stature, liked to trade blocks of his stocks because it made him feel like a big Street operator.

Early 60s, after Boeing ramped up its 707 jet, airlines turned into growth stocks. Money brokers financed convertibles at 10 points. I cashed in Eastern’s converts at $400, while Boeing, United Aircraft, and United Airlines all hit double par for me. God bless. Decades later airline paper traded down into single digits.

The physicality of managing money is never remarked upon. First, a bad trade keeps me up throughout the night. You may not tear out your hair, just toss and turn, toss and turn. I never owned Tesla, considering it unanalyzable, perceived as just another auto related piece of paper bound to sell at 10 times earnings, like Ford and General Motors.

If weak-kneed, don’t play airlines. They do jitterbug 5% or more intraday. Analysts’ numbers are never on the money. Management’s projections are worthless, too. Pilots stand grabby on wages. Then, how much forward hedging do you do in the oil futures market. Fuel is a sizable cost line.

Consider the analyst quandaries: Yearend 21 analysts expected American Airlines to earn $.61 a share in its fourth quarter. But then, boosted guidance to $1.12 a share. AAL even alluded to facing a shortage in planes. (Something I’ve never heard)Boeing was late with 2 dozen 737 deliveries.

Except for American, in the low teens, United and Delta no longer trade like ragamuffins. United Airlines actually sells in the fifties while AAL tracks at least 50 million shares per diem. Consider, none of the variables in income statements for airlines is consistent or projectable. You need to look elsewhere in the economic setting for clues.

First, I’m a believer that the inflection point for the economy is no more than 6 months away. The Fed then relents and interest rates decline over the entire spectrum of debt, both corporate and federal paper. Whether it’s 2- year Treasuries, or U.S. Steel’s debentures with a 6.65% coupon maturing on 6/1/37.

Forget about airlines if you don’t see economic recovery around the corner. The up cycle, for such stocks never lasts more than a couple of years so you’re not particularly early right now. My leading indicator is the yield on 2-year Treasuries. If you don’t think its yield declines from over 4% to 3%, forget about airline investment.

You are subjected to cost inflation. No earnings story unless traffic goes through the roof. This could happen with a resurgence in business travel, a legit hypothesis so long as you anticipate rising GDP. American Air’s management just boosted its 4th quarter earnings from $1.12 a share to $1.17.

I was taught how to build a stock position by my old partner, Milton, a confirmed commodities operator. Buy on the way up and never average down. Milt traded beans, (soybeans) on the Chicago Board of Trade. Finale of every bean cycle, same guys ended up with all the money, whether long or short side.

Airlines are soybeans too, not securities. The Fed is your leading indicator like it or not.

TOBIN’S Q-RATIO 1900-2015

As of January 2015

Take away here is stocks sell anywhere, in the dumps or at huge premiums to net worth. Note the wide range- from 30% of book value to over 1.6 times. Historically, stocks normally sell at little or no premium to book value. Today, most substantive properties sell at 1.5 times book or better. Don’t ever fall in love for too long with an airline or anything else.

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