Wednesday, July 23, 2008

The Most Important Airline Question

A regular reader purchased CAL yesterday, before the $4 per share move. Naturally his friends are now curious about airline stocks. One friend asked the the following key question.

Do you know the percentage of airline travel that is business vs. leisure?

The question is almost a bulls eye in regard to the upcoming boom in airline shares. I cannot recall the percentage (a detailed search of my emails over the past 8 years would probably reveal the answer), but the key point is that the major airlines make their profits from business travelers. The main thing they do with individuals is to fill up empty seats to recover costs.

Major airlines make their money during the second half of the Juglar 9-Year Business cycle. It is during this time that demand is high and high demand is wonderful for an extremely leveraged business (airlines are extremely leveraged from the operating point of view and from the financial point of view). The price of the last seat sold pushes up the price of every other seat on the plane. Take a look at the 1991 to 2000 cycle to see the full cycle play out. After the recession of 1990-1991, consumer stocks took off and the "normal" business cycle was underway. Airlines did OK. Then, in 1995, the economy went through its normal mid-cycle correction. As it came out of this correction, the airlines soared for three years.

When it is time for business travel to take place, the cost of the ticket is a relatively small consideration. The value of the business to be achieved might be 10,000 times as much as the cost of the trip. Of course, business trips do not have equal value but during the second half of the Juglar Cycle, the value of most trips is more than the value placed on the majority of leisure trips. As a result, leisure seat sales are diminished and $79 seats are frequently sold for $399.

The very tricky part of the current cycle is that the 18.3 year real estate cycle trough has hit during the mid cycle correction of the 9-Year Juglar Business Cycle. The good news is that the down turn will not be as long or as deep as it would have been if the 18.3 year, Long Cycle, had hit at the end of the 9-year cycle. The real estate cycle tends to be 17 to 22 years long but the smoothed curve is 18.3 years. Since it was 11 years from the bottom in 1991 bottom to the 2002 bottom, it appeared that this real estate cycle would be of the long variety. In 2005, it appeared that there was not enough time to have a real estate caused stock market trough and a recovery prior to the 2008 elections. As a result, I made the mistake of selling my bonds and holding on to my airline stocks, that was a 3 million dollar mistake. As we know now, the Secretary of the Treasury "engineered" a very swift run from top to bottom.

As Chairman of Goldman Sachs, Paulson was able to use the eagerness of congress, to give anybody and everybody in any and every location a home loan, as a tool for "infecting" "safe" mortgage backed securities with "dirty paper". After Paulson became the Secretary of Treasury, it was easy for him, in cooperation with the FOMC to bring about a crash in the mortgage markets. Along the way, an arch old enemy of Paulson, at Bear Stearns, was reduced from a billionaire to a 10 millionaire. Today, the congress passed legislation which will increase the power of the treasury and the FOMC over the mortgage market, Paulson has scored a win, win, win for the "big boys". In only two and a half years, the housing market went from a top to a bottom. The top made in 1985 took almost 6 years to make it to the 1991 bottom. One should never bet against the treasury secretary or the FOMC but to bet with them you must first figure out up they are up to. Now that the "fix is in", the markets can show considerable recovery well before the election.

Each day, Obama pushes his hoax in regard to the importance of the war in Afghanistan forward. The reality is that there are no al Qaeda bases in Afghanistan (any more) and Iran was the big spending rich oil country that gave much of the support to terrorist. Obama is doing a good job of "selling goods" but he will be forced to change his position again as the events on the ground change.

If you do a poll about belief in business cycles, a number of people will respond negatively. If you further inquire about cycles in general, a slightly higher number will acknowledge belief in cycles. If you ask if they believe the days in summer are longer than the days in winter, they will say of course.

From May 5, to June 2, 2008 we experienced a Blue Moon. In other words, we experienced an "extra" moon cycle during the spring. This is not such an unusual event. It happens every 2.73 years but, when it happens, few people even notice.

The 18.3 year (Long) real estate cycle and even the 9-year (Juglar) business cycle are discounted by investors who have short term outlooks and short term memories. Since the 9-year cycle is composed of two separate (Kitchen) inventory cycles and since the second cycle is substantially different from the first, the average investor does not put the cycles to good use. We have circled around to the importance of the business phase of the Juglar Cycle. It is the second half of the Juglar Cycle when business spending goes berserk.

Think about what is about to happen in regard to the hand held computer. The Amazon Kindle, the Apple iPhone, the Google Android are just three examples but the business application of these and other products will drive the markets. Today, one can buy a book for half the retail price and start reading it a few seconds after ordering it from Amazon. Service technicians have had this capability for a long time but the cost is now so cheap that Amazon can offer the downloads for free. One can subscribe to a bulky newspaper and the price charged is considerable than even the cost of physical delivery. The speed of connections is jumping. The average number of times a person accesses the Internet per day is getting ready to grow exponentially for several years. Companies such as Cisco are going to sell billions of new routers and companies such as INTC are going to sell billions of chips.

My grand daughter and I are headed to the beach in a couple of minutes. I will cut this short. The summary is that we are at the start of a new 18.3-year real estate cycle and we are about to start the second half of a 9-year Juglar Cycle. This means that almost any US stock will work out well. During the late stages of the Juglar Cycle, it will be the big cap US growth stocks leading the way. The emerging growth shares will struggle the most. The steep decline in commodity prices could cause a pull back but it will be energy, basic materials, utilities and consumer staples that take a hit during such a pull back. The business cycle stocks, every thing from the big IBM's and GE's to the INTC's and airlines will do well.