As a 10-year-old, the East Bronx was my world. It was 1941 and Bell Lab wouldn’t introduce the transistor for another 20 years. There was no technology sector, unless you consider the IBM typewriter high tech. For the next couple of decades, brokers, bought utilities and Exxon for their clientele. American Telephone was a religion embraced by odd lot investors.
I was then filled with wanderlust and sneaked out my brother Gene’s 28-inch 2-wheeler. I needed to wait for the pedals to elevate to their maximum for me to make headway. Then, I’d pedal out to the Marine Terminal adjoining LaGuardia to watch the lumbering flying boats of Pan Am take-off. The resonance of their engines filled the air with deep baritone tonality.
The worrisome interlude, waiting out my bike's pedals became history. Decades later, I’d compare such pedaling to no-man's land or the crazy feeling of a bean market when there is no road to bail you out of no man’s land. God forbid you should flub the pedal’s elevation
Days of the market selling at a steep multiple of revenue, not earnings, lay decades ahead. Can you remember when Yahoo sold at 100 times revenues, not earnings? Analysts rationalized such nonsense on cash flow projections.
The basic problem with markets is periodic overvaluation, not wars, famine or a pitiless Federal Reserve Board. In my book the market today is 20% overvalued. It should be selling at 16 times forward earnings, not 20 times optimistic projections. My findings are based on historic relationships between price-earnings ratios and interest rates.
But, to date, I am wrong. After all, the NASDAQ 100 Index, first half, rose 32%. Being 40% long in equities was a heavy cross to bear. Plus, I didn’t project the negative yield curve, nearly 100 basis points between 2-year and 10-year Treasuries. Two-year paper yielding 5% is what you’d expect to see in a Banana Republic. The bond crowd must fear recession around the corner, but the music plays on for tech paper starting with Apple. Nobody cares to invest in 5-year corporates yielding 7%, either. I’ll take my chances with BB rated debentures with 5-year duration.
The only saving grace in my equity performance is an overweight in airlines. Namely, Delta and American. So far so good, but their history is checkered, much more than I expected to find.
Now, we are saddled with a FRB that acts like an odd lot investor with minimal conviction. Who dares project oil futures, wage inflation? The Saudi cutback in oil production was on nobody's list. Nobody is entitled to pound the table waxing bullish. We’ll see.
So, I delved back into my stat books to review the financial history of airlines. I was a big player, but amazed at how much I’d buried for decades past. Over 50 years ago, I remember buying Pan Am’s converts selling in the low 50s, yielding 10%. This airline sold at 25% of book and 2 times cash flow. The market feared integration expenses on introduction of its 747’s.
When the Penn Central bankruptcy erupted in 1971, the sympathetic reaction in Pan Am was immediate and vicious. But, Pan Am‘s credit lines held up for a couple of years and a couple of hundred million. The stock at $8 and the converts at $36 were bottom-of-market best buys. The stock market was so reluctant in the summer of 1970, you could barely push the animals out of their cages to meet the 10 am opening bell.
It turned out to be the bottom for that cycle. Today, I own huge positions in Delta and American Airlines. Nobody dares recommend them in the chancey setting we do face. The bulls rest crowded into tech plays starting with Apple and Microsoft. Lest we forget, bankruptcies in airlines dotted the landscape throughout the nineties, and during the 2008–’09 meltdown. Pan Am, Eastern, America West, American, Braniff and Midway, bit the dust, followed by TWA. US Air was an almost. I was thinking of buying control at 4 bucks.
When the Iraqis invaded Kuwait, international air traffic slowed to a standstill. Over a few months, carriers ran through their working capital. Ironically, exiting the financial meltdown in 2010, emerged solidly structured were American and Delta.
Takeaways seem ominous. Nobody foresaw how readily airlines could flop and self-destruct. Convertibles were like equities and swirled down the drain along with the senior debt.
When I was 10 in 1941, Pan Am’s flying boats enthralled me, totally. The resonance of their engines and majestic take-offs filled the air space. My experience having to wait for the pedals to lift on my brother's 28 – inch two-wheeler was suitably imprinted.
Later on, I became a professional risk-taker, for life, my equilibrium continuously a touch out of control. The bucolic Marine Terminal where the flying boats revved up was my awesome take-away.