I have a quick theory regarding the stock market that I wanted to flesh out.
We know the Avengers movies (Ironman, Hulk, Thor, Captain America). The whole movie series spanned 20+ movies. Throughout a majority of those films, there was always the big bad guy lurking in the background (Thanos), with all the movies accumulating into the heroes having to face him.
In regards to the stock market, do you think we always need some what of a "big bad" that lurks in the background. Meaning, companies were still blaming the financial crisis in 2016/2017; maybe you just have a bad business at that point. With the fuel on that fire running low, we transitioned to other stuff (elections, impeachment), but finally landed on the COVID situation, Going forward, do you think the COVID pandemic will be the overarching cloud in the market for years to come, and also, it won't really go away untiI something else base comes along?
The "big bad guy" is shipping all manufacturing outside of the US and flooding the market with QE, forcing the working class of America (actual backbone of the economy) to slave away while the elite class becomes rich.
I'm sorry your boy Bernie just dropped out man. Maybe with Cuban health treatment and some defibrillator on hand he can run again in 2024.
Not a Bernie supporter lol
I applaud bringing in the avengers - watched Endgame on a flight and enjoyed it. Actually thoroughly enjoy all of them. Also - is it weird that I suddenly miss watching movies on flights? I might be losing it.
Anyway - there's always a narrative, story or trigger that we can point to that moves the market one way or another... the challenge is it's rarely that obvious and never actually causal. Corona is a good study of that - the virus itself, and health crisis, is just a backdrop to this - our response in shutting down commerce overnight is really what lit the match. Which, for what it's worth, used tinder that was created over the last 10 years with a leverage free for all, growth at all costs mentality that primed investors to embrace multiple expansion fueled by cheap money and 'risk at all costs' investment theses. In addition to a million other factors that went into play. Over levered companies suddenly find themselves in an unprecedented position of having their revenues go to 0 overnight - and the rest is, as they say, history.
Something I've learned as well is that most investment commentary is straight up bullshit. Especially anything that 'personifies' the market - like it's some mythical character fighting off demons. It's not. Candidly this obsession with 'stories' in the marketplace make us worse investors. We ignore fundamentals, trends, etc. and paper over reality.
A great example: Airlines. Everyone knows they are a shitty investment long term. Everyone. No one is stupid. There's a reason that in most countries they have been nationalized or quasi nationalized. They are low margin, high cap ex, high fixed cost, generally commoditized businesses. They go bankrupt every few years - restructure - rinse and repeat. They are highly levered, in part, because no equity investor is dumb enough to think they will see realistic returns over the long term.
Now - I can paper that over. Oil has stabilized and with a major variable cost staying relatively cheap that's good for margins - they've restructured a few times and have gotten labor costs under control - demand will only ever go up from here on out as travel isn't going to slow down - fee revenues will add to the bottom line, and consumers are willing (and able) to pay increasing fares.... blah, blah, blah.
So what's my point? I think it's easy to label Covid-19 as the 'big bad' with airlines - who could have expected this! A worldwide, all at once, immediate collapse in air travel - and you'd be right. No one could have. But we piled into airline equities thinking profits will grow, dividends will be paid out, shares bought back - with little regard to the underlying, fragile business model run in an industry marred by a lack of competent management teams.
This is all a rambling, somewhat incoherent way of saying I would limit trying to paint broad narratives over the markets, and drive down into what really moves things... versus simply painting the market with a storyboard approach.
This is the most thorough, practical and sensible post I have ever read on this website. Your sense of intuition and simplification is amazing.
Agree with all of your points.
I do think we can't paint the market with broad narratives, and that real work gets replaced with sound bites.
It just got me thinking, are we going to have companies in 2026 saying they are "reeling from the corona virus."?
It's always a joke in financial news will use events to explain bad quarters, ie, solar eclipse or snow storm.
Certainly - and what's probably near and dear to your heart as an equity research guy is determining whether it's a valid excuse or not and drilling the management team on it.
The reality is that it's a tough thing to truly parse out - the vast majority of companies can't, and shouldn't frankly, run their businesses as if a total economic shutdown will occur overnight. Imagine the drag on the growth of a business should we expect, or require, them to keep enough cash reserves to operate at full capacity - with zero revenue - over a two or three month period? It would have huge implications, and I really can't even blame the airlines, cruise lines, etc. for their actions over the last few years. In fact - it's probably irresponsible of them to NOT have rewarded equity holders with buybacks, dividends, etc. using their cash and/or cheap borrowing to do it.
Admittedly - after years of an unending appetite for risk assets, propped up by low rates and a Fed on steroids, we needed to be reminded that risk premiums exist for a reason.
Yes, but most businesses, airlines included, could be doing more to prepare for downturns. Have cash on hand, invest in cost-saving new equipment, etc etc. No one does this, because fundamentally most publicly-traded companies are poorly run, and that is by design. Executives have awful, awful incentives, in that all they care about is immediate returns to shareholders and not building long term value or resiliency. If I'm the CEO of Delta, to use the airline example (but sub in any company in there, really), what do I care about how the business will hold up 10 years down the road? I want the stock to do well in the immediate future, because that's how I get paid... and if I have 2-3 really good years of driving returns for shareholders, I'm set for life. Ed Bastian has made ~15mm a year for the last 5 years. Even if a lot of is in stock and he gets taxed, that's still a huge chunk of change he's banking. Retire and travel the world in whatever style you want money.
It's why such a huge percentage of the 2017 tax cut money didn't go to investing in the labor force or physical plant of businesses, but into stock buybacks - because that is what pays the executive committee. Until businesses (and the public) understand that short term gains in the listed price of a company's share value isn't the be all and end all of metrics, you won't see this problem disappear. Companies will always be underprepared for a crisis, because exceptionally few decision makers are incentivized to actually sacrifice short term gains for long term stability. That goes double when you consider that executive committees often resemble an NFL coaching staff, in that even abject failures get second and third and fourth and fifth chances, because the people hiring them also have no incentive to bring in fresh blood, since it is to everyone's benefit to make sure the same faces get those chances, since they themselves may one day need another job with another golden parachute.
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