| Monday's Headlines 1. US markets stage late comeback, erasing losses 2. Buffett bails on airlines 3. California takes federal loan 4. Earnings are weak, and forecasts are rare Markets Closed
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Markets Today U.S. markets staged a late-afternoon rally, erasing heavy losses, to close in positive territory. Big tech stocks led the gains, naturally. Today had all the makings of a down day for stocks, as terrible economic reports out of Europe and Asia revealed the early extent of the economic freeze that impacted those regions. The COVID-19 death count reached its highest level yet, although it appears to be peaking.
Now we know how much the federal stimulus is actually costing the government. Today the U.S. Treasury requested to borrow $2.99 trillion, a record amount. Who is the Treasury borrowing from? Itself, and us taxpayers, who the money was set aside for in order to pay future obligations. Our kids are going to hate us for this. Airline stocks went into another tailspin as Warren Buffett told shareholders this weekend that he has emptied them out of Berkshire Hathaway's portfolio following steep losses. Buffett says that industry is changed forever. He also said he hasn't been buying much lately as the Federal Reserve's moves into the bond market have made things a little confusing.
Not that we should be copying the 89-year old Oracle of Omaha, who is sitting on $139 billion in cash, but if he doesn't see opportunities in this market, how can we?  Chart courtesy YCharts
Headlines:
 Earnings Expectations We are deep in the heart of earnings season, and the report cards have been rough. Everyone gets an excuse for the past quarter, and should probably be pardoned for much of the current quarter.
Still, a company's results and forecasts are kind of all we have to go on right now. Results are weak and forecasts are elusive right now:
The best earnings are coming from you know who, the FAAMG stocks, (Facebook, Amazon, Apple, Microsoft, and Google), which have also been among the best performing stocks in the index. As I have written many times, these companies now account for 20% of the market value of the S&P 500. They are the market. Collectively, they generated 14% sales growth and 12% earnings growth in the first quarter, compared to 1% and 2% for the other 495 companies in the index, according to Goldman Sachs.
That won't last forever, and that concentration is dangerous if investors lose faith in these companies.
chart courtesy Goldman Sachs  Many companies aren't telling us what business looks like for the rest of the year, or even this quarter. The SEC has basically told investors to ignore first quarter results and focus on what the companies are telling us about their financial health. The problem is, 20% of the companies in the S&P 500 have pulled their forward guidance.
We are flying blind.  Dividends & Buybacks Slashed Another casualty of the steep economic drop are stock buybacks and dividends. Buybacks are out of style as the government has prevented any public companies that are taking stimulus loans from using them. Dividends are being slashed (except by Apple, which also announced an increase in its stock buyback program) as companies run low on cash.
To date:
It's sometimes easy to forget why we own stocks in the first place. We own stocks for the future claims on excess cash flows to be distributed to shareholders in the form of returns and dividends. The current price of a stock should reflect the discounted value of future dividends to shareholders.
When companies start stripping and eliminating those dividends, and not providing financial guidance, it makes it kind of hard for investors to value companies.
That's the pickle we are in, my friends.
chart courtesy MorganStanley 
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(chart courtesy YCHARTS)  All of the biggest winners today were oil stocks, as concerns regarding the commodity's oversupply have begun to lessen. Phillips 66, a natural gas liquids and petrochemicals producer, is up the most at nearly 11%.  Shares of Tyson are down 8% after the food processing company reported a drop in its Q2 earnings due to the limited supplies of meat in the U.S. Multiple airline stocks, including American (nearly 7%), Delta (nearly 6%), and Southwest (over 5%), fell today after Warren Buffett announced his holding company Berkshire Hathaway sold all of its airline shares. Word of the Day A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.  photo courtesy Fortune.com
Today in History May 4th, 1979: The first modern leveraged buyout using high-yield junk bonds—a $381 million deal to take Houdaille Industries private—is completed by Kohlberg, Kravis, Roberts & Co. Over the next six years, Houdaille produces a 33.9% average annual return for KKR's institutional investors.
Source: https://archive.iww.org/history/library/misc/origins_of_mayday/
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Monday, May 4, 2020
Flying Blind
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