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The world has changed

If you follow markets at all, this past weekend you were amongst the many who focused on Berkshire Hathaway’s virtual annual meeting. What was the Oracle of Omaha going to say?! Jump to 2h22m in that link if you want to watch/hear his thoughts specifically on the airline industry.

The timing couldn’t have been more apropos – 30m people are unemployed, the fomc had just said they will throw the house at the market if the sink doesn’t work, the 61.8 fib retracement had been tapped, and we all wanted to know if Warren had bought – which could confirm whether we’ve been experiencing the new bull market or bear market rally/bull trap.

I’m not alone in wondering if Warren was looking at this crisis the same as he did in 2008/2009 when we saw him make major moves.  This time is definitely different.

Warren dumps the airlines

There were a few notable takeaways – he defended buybacks, added cash to a now $137B stockpile, made no big moves but is more than willing to, and he dumped all of his holdings in airline stocks. ALL of them.

Just a month ago there was speculation that the Oracle of Omaha may buy an airline outright, but that as far from the truth. Instead, and I’m sure airline execs were none too pleased at the rhetoric, he defended the divestiture with the following:

“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way,” he went on to say  “I don’t know whether 2 or 3 years from that as many people will fly now passenger as many passenger miles as they did last year”

He continued on to talk about what happens to airlines when demand shrinks. I’m paraphrasing, but what happens if just 70% of your passengers come back? You still have empty planes sitting around. This is around the 2h24m mark.

Berkshire had owned $8B+ of 4 airlines, a nearly a 10% stake in AA, Delta, United, and Southwest, at the end of December. His sale price? $4B

The loss isn’t as big a deal as to what he’s indicating could be the reason for the loss…consumer behavior. As a travel blogger, and one who believes we are entering a new normal of travel ( not in a good way ), I share similar sentiment. The lack of future demand in the airline industry isn’t stand alone, but just one symptom of a greater shift, and one that leans toward economic retraction. In fact, we can see this via the Fed’s personal savings rate chart – it just hit its highest level since 1981, 13.1%.

Economies expand when people spend, not when they save.

Buffett indicator

This has been widely discussed recently, but it plays into the same narrative.

Add up the total value of stocks and divide by quarterly GDP. If that number is over 100% then the market is overvalued. End of last week it was at nearly 180%.

Should it really surprise anyone that BHA didn’t make any major moves?

What this means?

I’m certainly not a financial advisor so obviously take what I have to say with a grain of salt.

As I mentioned, this news was part of a larger market signal in my opinion, and the meeting was timed just after the FMOC meeting last week ( which foreign markets faded ), a 61.8 Fib retracement, and failed 200 ma attempt. There has been an ongoing debate, war if you will, between the bulls and bears since the Fed intervened as to what we were going to see as a recovery.

Would it be a V shape, W shape, U shape, L shape.  Whatever Warren did could be valuable insight moving forward.

That has been a question on many investors minds as it might signal the markets move forward. What I heard from him was the Fed moved hard and fast ( he supported ) but the repercussions of the move are unknown, the airline business stinks, they’re sitting on a warchest of cash, but the loudest thing he said was nothing. They made no major moves.

To me this intimates that they believe markets are overvalued, and he doesn’t believe in the V-shaped recovery ( people saving 13.1% supports this as well – a V-shaped recovery is dependent on a lot of money being spent to pull us out of recession ).

When I studied finance at WashU the curriculum was predicated on fundamentals. For the last 10 years, especially last year when debt issuance outpaced GNP gains, Fed intervention has been the biggest reason we have seen major market moves. The divergence between markets and main street since March 23rd has been nothing short of what I believe the most dangerous trading environment ever. Fundamentals be damned, the market has moved higher.

Time will tell, but it seems Warren and co are positioning themselves for a pulback, and the fact that they didn’t buy in when the market hit lows in March, tells me they think the possibility of even lower lows are on the table.  Then again…I can’t help but think of the 4 most important words of the last 11 years. Don’t fight the Fed.

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