• November 29, 2020

ELAM: Overcapacity all around - Odessa American: Dennis Elam

ELAM: Overcapacity all around

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Posted: Sunday, October 25, 2020 3:00 am

That is the case everywhere one looks. Southwest Airlines lost $1.2 billion in the third quarter while American (AAL) doubled that loss at $2.4 billion. American has a negative book value and net debt of $24 billion. The end result is most likely dissolution and break up.

Bear markets clear out the excess speculation of previous bull markets. The problem is simply that the U.S. (world) is on the downside of the business cycle. We have previously noted that only the U.S. stock markets have made new highs earlier this year, the rest of the world did not. So what happened?

From the March 2009 low, social mood turned positive for a 10-year boost in the markets. Positive social mood coupled with low Fed induced interest rates prompted multiple industries to expand capacity, a lot. Retail strip centers, movie theaters, air and cruise lines, hotels, stadiums and airports themselves all expanded. Now airlines are retiring planes. The problem is that they cannot retire the debt assumed to fund the expansion.

Schlumberger (SLB) peaked in 2014 at $95 along with $100 oil. Today SLB has its shale fracking unit for sale and trades at $15.30. The largest movie theater chain is AMC Entertainment Holdings. It’s $1.4 B bonds due in 2026 are trading for less than 10 cents on the dollar. That sounds more like liquidation than reorganization.

Everywhere business is trying to operate on limited or reduced capacity. But 25% utilization won’t support 100 percent of the former fixed overhead. The Hilton and Marriott here in San Antonio each have 1,000 rooms to fill. Filling 25 percent of them won’t make any money. Unnoticed regarding the big bets cities and counties have made on now near-empty airports and sports stadiums. Fast-food chains with drive-in windows will survive, but smaller family owned dine-in restaurants cannot continue on curbside take out.

Everyone who is positive on stocks is really positive on a small sliver of the market which is big tech. We noted last week that AMZN is trading at an eye-popping 122 price earnings ratio. But that is cheap compared to the real Wall Street darling, Tesla. Tesla trades at 800 times forward earnings. Its market capitalization is five times the combined value of Ford and GM. It would have to take over the American car industry to justify such a valuation.

The markets continue at high levels buoyed by tech stocks trading valuations typical of past market peaks. I doubt markets will move much between now and the election. Stay cautious.


DAILY OIL PRICE: November 24

  • Crude Oil: 44.91   (+1.85).
  • Nymex MTD AVG:  40.2075.
  • Natural Gas: 2.775   (+0.064).
  • Gasoline: 1.2582   (+0.0542).
  • Spreads: January/February   (-0.20)   February/March   (-0.14).
  • Plains WTI Posting: 41.50   (+1.75).
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