DailyAlts Playbook: Buffett Ditches Airlines, Wall Street Movies, Black Swans, and Stimulus Estimates.

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THE DAILYALTS PLAYBOOK

May 4, 2020

The DailyAlts Playbook: Two Years of COVID? , The Meb Faber Interview, Amazon’s Coronavirus Shift, and Tesla Tussles…

PRIME OVERVIEW

This morning CNBC is covering the Berkshire Hathaway meeting the same way that ESPN covers the day after “The Last Dance” on ESPN. The big focus is on Buffett’s message “Nothing can basically stop America.”

But my two key takeaways – as I assess Buffett’s career and philosophy – center on Berkshire’s decisions during March. My generation is one that looks at Buffett as a nice grandfather who likes to spend time with the family – not the ruthless businessman who was able to get General Electric to pay him 10% in 2008 on top of $3 billion in stock. It’s one of the reasons why people say “You mean the guy getting ice cream with his grandkids in HBO’s Too Big to Fail.”

No… that was the Wilford Brimley version of Warren Buffett.

The Buffett I think about is the Ben Graham investor. The guy who assesses companies based on value and then looks to exploit any additional anomaly while squeezing every ounce he can from market participants.

Buffett surprised investors with news that Berkshire Hathaway (NYSE: BRK.A) had sold off its full stake of airline stocks. Buffett’s firm unloaded its positions in American Airlines (NASDAQ: AAL), Delta Air Lines (NYSE: DAL), Southwest Airlines (NYSE: LUV), and United Airlines(NYSE: UAL). Buffett had taken large stakes in those companies in 2016 after reversing his long-time stance against airline investing.

It is surprising that on a scale of 1 to 10 on Deep Value – Buffett assesses that the airline companies are effectively worth – ZERO. The selling of airline companies says that Berkshire isn’t going to ride this out at all – and quite frankly – neither should most investors.

With so many unknowns, unknowns – why sit around?

But more important – I can’t help but wonder if Buffett is angry at the Federal Reserve and Congress. The dramatic action by the Fed and the huge loan programs stopped a free fall. I’ve seen estimates that the Dow could have fallen by 50% to 80%. I think that the latter number is quite realistic when you assess the panic selling and the lack of buying pressure. Momentum was so negative that one Ph.D. I follow realizes that his models were incorrect – and that momentum was actually twice as negative as his initial models had shown.

Berkshire was really in a position to make a big purchase for the first time in a while. But the Fed’s decision to step in and provide support blunted those plans. For now, Berkshire is building cash, avoiding various sectors, and waiting. That takes a lot of discipline.

No one needs a lifeline like GE, Goldman Sachs or Bank of America did between 2008 and 2011.

But we’re still in the early innings.

MORNING MOMENTUM

CASE UPDATES: According to Johns Hopkins University, the number of global COVID-19 cases topped 3.4 million over the weekend, with about one-third of those cases happening in the United States. Over the weekend, New York Gov. Andrew Cuomo raised concerns about the ongoing reliance on China for PPE and medical equipment. Cuomo called the issue a “national security issue” and announced that six northeastern states are developing a regional supply chain to consolidate demand, reduce prices, and improve security.

DATA DROP: This week will be a very important period for U.S. economic data. This morning, the U.S. Commerce Department will announce the March report on factory orders. In February, factory orders were effectively flat; however, economists anticipate an average contraction of 9.8%. That report is an appetizer for the upcoming nonfarm payroll report on Friday. With more than 20 million people filing for unemployment benefits over the last month, the consensus expectation is that U.S. unemployment will hit 16%.

CAPITALISM: An update on venture capital. A great primer by Axios discusses why venture capital groups aren’t bailing out their investments and why they don’t have access to the Paycheck Protection Program. Axios puts the trend on three factors: Structure, valuations, and fundamental rules of capitalism.
ACCRUED INTEREST

RICH: The Irish Times did a profile of Mark Spitznagel over the weekend. It highlighted that he runs a tail-risk hedge fund. It highlighted that he farms newborn alpine goats. Oh… and it reported that his fund has surged more than 4,000% since the start of the year. Universa continues to show that the Black Swan model remains a viable strategy for investors when volatility is low, markets are frothy, and everyone is very complacent.

OUTRAGE: Long pitchforks and short listicles. Over the weekend, CNBC put together its list of iconic money movies for coronavirus binge-watching that teach a lesson about finance. Each included the profile and the money lesson involved. Making the list: Trading Places, Moneyball, The Big Short, Wall Street, the Money Pit… and Bridesmaids because of its scene about commingled accounts. Grumble. Grumble. Grumble. It’s a list of six? Make it a list of 10, grumble, grumble. Missing from the list: Glengarry Glen Ross, Other People’s Money (the Ben Graham lesson), The Hudsucker Proxy, and Margin Call.

RECOVERY: Goldman Sachs released a report over the weekend suggesting that reopening the economy has its risks. The report said that reopening has been “too optimistic” in other nations about their recovery. Meanwhile, that same report indicated that manufacturing has recovered in different nations at a faster pace than consumer services companies. Goldman also suggested last week that we could see another $1 trillion in stimulus in the next two years, because who needs intrinsic value when it comes to currency?

 

QUOTES OF THE DAY

Should be the last chance to sell near the top on the Fibonacci retest. Just like 1929, only this relief rally happened more quickly. Stocks peaked just two months ago at record valuations and corporate leverage. Still very early in the global recession and bear market.”

That’s Kevin Smith, CIO and Founder of Crescat. He’s… bearish to say the least.

“Our hopes that 2020 would finally be the year were dashed.”

That’s David Einhorn of Greenlight Capital. The hedge fund manager has dumped his stake in General Electric after a five-year bet that the conglomerate would finally find good fortune. However, coronavirus has pounded those hopes into sand.

CARRIED INTEREST

These are the other headlines gaining our attention today:

HEDGE FUNDS IN FOCUS

Finally, a new report by the Department of Homeland Security reveals a troubling trend out of China during January 2020 while the virus was slowing spreading across the planet.

The agency concludes that the Communist government did more than just lie about the transmission of coronavirus between humans. It allegedly delayed this news while actively stockpiling medical and safety supplies before a global run on the market transpired.

The report dives right in, saying that the CCP bought time to hoard gowns, gloves, ventilators, and other supplies like a grandmother with $50,000 in cash and a QVC account.

However, at the end, the report states that “no public evidence to suggest it was an intentional plot to buy up the world’s medical supplies.”

I don’t understand how that works. The agency contradicted itself right after coming out of the box with the accusations and stating that a 95% probability existed that “China’s changes in imports and export behavior were not within the normal range.”

Meanwhile, the U.S. is going on the offensive – pushing back against China’s narrative that America is responsible for the virus. Over the weekend, Secretary of State Mike Pompeo highlighted the increasing likelihood that the virus escaped from a lab in Wuhan.

“These are not the first times that we’ve had a world exposed to viruses as a result of failures in a Chinese lab,” Pompeo said. “And so, while the intelligence community continues to do its work, they should continue to do that, and verify so that we are certain, I can tell you that there is a significant amount of evidence that this came from that laboratory in Wuhan.”

There has been a lot of chatter about a new report from Five Eyes – the intelligence cooperative of Australia, Canada, New Zealand, the United Kingdom and the United States. It reportedly suggests that China destroyed evidence about the origin of the virus and that it may have escaped a lab.

However, I have seen some people in the intelligence community push back on this – particularly Australian intelligence – that it was based on news reports and not intelligence documents.

We’ll keep watching for updates.

SOCIAL RESPONSIBILITY AND THE DAILYALTS PLAYBOOK

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DailyAlts Playbook: @DailyAlts

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ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.

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