Wednesday, June 27, 2007
What's In The News?
As I read the Wall Street Journal, one of my three major news sources (along with The Economist and CNBC) this morning, I found myself strangely unmoved.
The headlines read,
"How Wall Street Stoked The Mortgage Meltdown," "Exxon, Conoco Exit Venezuela Under Pressure, and "As Competition Rebounds, Southwest Faces Squeeze."
None of them seemed all that interesting, relevant, or surprising to me.
We own Goldman Sachs in our equity portfolio. It's up more than 9% year-to-date, and has recovered some of its recent losses, which were only about 4% in total. I honestly don't think the sub-prime mortgage mess is either going to seriously harm Goldman, the financial services sector as a whole, or the economy.
Will some less stable, diversified funds suffer large losses as lots of that paper is truly "marked to market?" Yes. But it's unlikely to cause some sort of panic, much less a recession or "market meltdown." Last week and a few days this week saw equity investors worrying over this potential outcome. However, as time passes and nobody goes bankrupt, investors seem to be settling down.
How about Exxon and Conoco? Well, we don't own them. Instead, we own OxyPete, Allegheny Energy, and El Paso gas. They're all doing very well, thank you for asking. Occidental is up 24% this year, while the other two have returns of roughly 17% year-to-date. Evidently, none are affected by the Venezuelan mess.
I'm curious to read the article, of course. But I think it's rather obvious what the script is going to be. Does anyone else recall Libya in the late 1960s, when US oil firms were summarily ejected via nationalization?
Lastly, there is Southwest Airlines. Some years ago, our portfolio selection process actually picked Southwest. It was a rarity, as I have commented on the low barriers to entry in this sector. The first paragraphs of the Journal's piece tell you all you need to know,
"For years, Southwest Airlines managed to fly above the industry's storm clouds, trouncing rivals with a hard-to-match formula of low costs and low fares. Now it's facing a painful role reversal.
Its revenue growth has slowed, its costs are mounting, and its resurgent rivals have torn key pages out of its playbook.
"The threat to our future is real," says CEO Gary Kelly.
Don't say I didn't warn you- here, here and here, in these prior posts, in fact. In the last post, I observed,
"What seems to sound the death knell for these regional carriers is their eventual desire for passenger and revenue growth which requires them to outgrow their original, self-contained market segment of travelers. Just because an airline wishes to profitably continue its growth does not mean it should, or will, happen. Thus, Southwest’s dilemma.
It is pushing for growth while its total returns over the last five years are already penalizing its shareholders.
Hard as it may be to accept, many companies simply run out of profitable market segments in which to grow, and then their days of consistently superior returns are over. Airline total return performances seem to reinforce this conclusion with stunning regularity. So much for learning by example, or even from their own mistakes."
It would appear that I have, once again, predicted the outcome of another firm's strategic moves.
The airline industry is so beset with low barriers to entry and shared facilities that it does not take a genius to realize that long term, consistently superior total returns are very unlikely. Southwest had its run some years ago, in terms of consistently superior total return performance. Now, however, that is over.
As the Yahoo-sourced chart on the right demonstrates (click on it to see a larger version), Southwest Airlines has been flat for five years, and plunging recently. My rationale for this, as expressed in the post which I quoted above, seems to have been dead on.
I guess it's a good thing I am not an editor for a media publication, because my sense of "news" is probably very different than the average persons. I didn't find any of the three Journal pieces all that compelling. Yet, clearly, it's important and useful that the stories are reported.
Perhaps I would add a considerably greater amount of analysis. But, then, it would resemble some sort of, well, real analysis. Then again, maybe it's better to get in-depth analysis from a more objective source, such as a media publication, than a sell-side brokerage firm which you know is biased.