Friday, March 28, 2008

Fwd: Airlines

Subject: Airlines
To: Jack Miller


Can you talk about your views again on airlines given the lastes situation w merger status, request for DOE to intervene on energy costs, etc? How low can airlines go? The PE is already so low.

Given the status of airlines, is it ever reasonable to move out into another beaten down sector to spread the risk?

A timely question as a new merger proposal was offered this afternoon.

I know of no other industry where one can buy shares for less than the cash on the books per share and no other industry that is sitting right on the business/consumer cycle turn in the way the airlines are. I understand that I sound like a broken record but what was true at $25 per share is all the more true at $18 per share. It is time to buy these stocks. The short term pain is over or almost over, the gains over the next several years will be substantial.

I do not know the details of the latest merger offer yet but I understand the terms are not as attractive to the pilots as the last offer. Soon, the pilots will have to make decisions. The CAL plan is like that of many other industries where the pilots share in increases in profits. The payout last year was a nice bonus. It will be a nice bonus in the coming years but it will not force the airlines to take the full hit during downturns.

There are less volatile "plays" available. As I have mentioned a few times, the Russell Small Cap Fund and other funds that hold shares in lots of regional and small banks will do well over then next couple of years. Banks are now enjoying the recent dramatic reduction in cost of funds. The Fed Funds Rate (which is the rate at which banks borrow short term funds from other banks) has fallen in 8 months from 5.25% to 2.25% and most of this drop happened since mid January. The important point to remember is that it is correct portfolio theory to increase volatility when stock prices are low. This is hard to do in practice but obviously stocks are lower than a few months ago when it would have been smart to have reduced volatility. It is the exactly wrong move to decrease risk at or near bottoms.