Hunkered Down

As I write this post I am hunkered down in the Kort family bunker, deep below the towering McMansions of Leawood, Kansas. Present are my wife, daughter and granddaughter and a fair supply of provisions, including toilet paper. We are some of the lucky ones.

My tongue-in-cheek intro does absolutely not mean to minimize the health threat among us. It is serious, and it is causing and will be causing a tremendous short-term disruption to our lives and economy.

Nonetheless these are panic times in our economy. The market and the super-market aisle are stark evidence of this ( especially recent runs on TP and hand sanitizer). In times like these it is always good to step back and try to get a perspective on what things might look like down the road after the storm passes. My sense is, through this lens, you may see that some tremendous values have been created. The only question is, “when do you seize them?”

The Media Is Not your Friend

The media will not be your friend in this quest, especially in times like this, because they know one thing for certain, “if it bleeds it leads.” It is not about an unvarnished, non-editorialized presentation of known facts. It’s about opinion, speculation and hyperbole (mainly negative) … all designed to reel you in and glue you to the tube, favorite website or newspaper.

CNBC is adept at this. Here is an item they dropped on us during the middle of this morning’s panicky trading: “Bill Ackman advises Trump to shut down US, says market … ” “‘Hell is coming’ — Bill Ackman has dire warning for Trump … “

Contrary to Mr. Ackman’s alarming rhetoric, I might point out that it would appear state and local governments, on their own initiative, have already been taking strong precautions for last two weeks without federal government guidance. The streets in opulent Leawood are empty, shops are closed and people are sheltering in self-quarantine, only to venture out to the local grocery or pharmacy. Restaurants are operating with limited carry-out menus. Life has changed for a while but it is not the end of life as we know it.
 

An Example of Crazy from the Kort Portfolio

AerCap Holdings NV (AER $15.14)

AerCap is the worlds largest aircraft leasing company. As of December 31, 2019, the value of all their aircraft assets, net of all their debts, was $72 per share. On top of that the company has a long term record of selling depreciated aircraft at a profit. They’ve been conservative at accounting. I would agree if they tried to sell those airplanes today, they might not find a bidder.

I believe that air travel is a secular growth Industry and will come back strong after we get through this viral speed bump. The current $12.48 price (11:27 CDT, 3/18) on the stock seems like a surreal value. However, I was saying that when the stock was $25.00. Subsequent to this quote AER traded as low as $10.42. As you can see there was a somewhat happy ending for AerCap today. It closed at $15.14, up about $5 from the low but still down $2.32 from the previous close. This is Crazy!

Any stock with leverage has become the target of short selling … The prospect that the customers will not pay their bills and therefore the company will not be able to make obligations to the bank or bond holders has become a focal point. This is regardless of their reserves, financial record or assets. There is a remedy for this unbridled short selling and it is called reinstating the ‘uptick rule.’

Unfortunately there is no one in the administration that I know of suggesting a return to using the uptick rule or, for that matter, banning short selling for a defined period until people better get their heads around the problems, problems that are great but not insurmountable. Meanwhile for the savvy investor the shorts are creating opportunities.

Real Estate Envy

It’s times like these that make me want to be in real estate. The value is never quoted in the paper or on CNBC. I would imagine, like those issues causing uncertainty for AerCap, a real estate owner might have a tough time foregoing current rents. They may also have a tough time finding a bidder for their real estate assets, especially with all the tenants closed or out of work, not earning money, maybe not able to pay rent on a timely basis. My question is if you did own that property would you begin eviction proceedings on your tenants or would you make accommodations?

As it pertains to all business my sense is a lot of accommodations are going to be made and owners will forego short-term income to insure coming out the other side in good shape. The market is saying I’m absolutely wrong.
 

Canaries In The Coal Mine -  A Final Thought

There are two canaries (indicators) that people look at as harbingers of tough times for the stock market, the 10-yer US Treasury yield and the price of gold. Back on March 8 and 9, they were both flashing bright red. On March 9, in Asia the 10-year recorded a all-time low yield of .31%. This signified extreme fear in the market as investors looking for absolute safety of principle flooded into this bond willing to take next-to-nothing in return for safety. As I write this post, Wednesday evening, March 18, the treasury is yielding 1.16%, that’s with the US Fed in the market, buying, trying to keep that yield down. The other canary (flight to safety asset) gold traded as high as $1704.00 on March 8. It is currently trading at $1493.40. The move in this direction would also signify a drop in the perception of risk.

I hope you found my e-postcard useful.

What do you think?