$130 Oil Leads to Irrational Moves at American Airlines

With oil prices surpassing $132 per barrel today for the first time ever, American Airlines (AMR) has reacted by raising prices. Most notably the airline will charge travelers $15 to check a bag. The company calls this a “revenue growth initiative” in their press release, but it is really just silly. When high fuel prices are pressuring an already bloated cost structure and a weak economy is reducing air travel, price increases are not going to help AMR. It simply does not address the problem.

In such a competitive industry, weak players increasing fees will only result in more people going to discount airlines, which are run far better than their larger counterparts. There is a reason Southwest Airlines (LUV) has been taking market share and has never lost money in any year since its founding more than three decades ago and it is not because they started to charge their customers for things like checking baggage. In fact, they have used those boneheaded ideas in their brilliant marketing campaigns:

The problem for AMR and the rest of the airlines that go bankrupt every five or ten years (this time will be no different) is that they rarely directly tackle the problems that are causing them to bleed red ink. Raising prices in a price sensitive industry reduces revenue and does nothing to address bloated costs. The airlines need to get their costs in line with their revenues. It is not rocket science; Southwest and JetBlue (JBLU) have done wonderfully over the years.

The AMR story is not very much different than the management of our federal government lately. Gas prices are crippling lower class Americans? Okay, then we will give them tax rebate checks and tell them to go out and spend that money on $4 gasoline. How does that solve the problem? As Dr. Phil would say, “money problems are not solved with more money.”

All the government is doing is paying us to buy gas when buying gas is exactly what is causing fuel prices to be so high in the first place. We are sending money straight to the oil executives and the nations who export their oil to us. This transfer of wealth, both from poor to rich and from the U.S. to the oil producing nations, doesn’t even begin to address the energy problems we face. As 5% of the world’s population using 25% of the world’s oil, paying our citizens to buy gas is the last thing we need.

As long as these are the things that AMR and the government are doing about sky-high oil prices, the investment strategy is not very difficult to pin down: stay long oil producers, foreign currencies, and the rich and stay short the airlines, the dollar, and the poor.

Full Disclosure: No positions in the companies mentioned at the time of writing

Lampert Sells a Third of AutoNation Stake

SEC filings reveal that Eddie Lampert, hedge fund manager and Sears Holdings (SHLD) chairman, has been selling his shares of AutoNation (AN) aggressively over the last month. Between April 19th and May 16th Lambert sold more than 26 million shares between $22.50 and $23.00 each, netting proceeds of about $600 million. Should we go out and short AN off this? There are probably better trades to make. I suspect he is raising cash for reasons other than to avoid an upcoming collapse in AN (after all, he stills owns over 50 million shares). It will be interesting to see where he puts the money.

Ford Axes Quarterly and Annual Guidance

Investors will likely view Ford’s decision today to refrain from offering future financial guidance as a negative. After all, it could very well indicate that the company either has no idea how their financials will look, or that they have little confidence in meeting the objectives they will set.

Even if true, companies should join Ford and realize that it’s too difficult and unproductive to accurately predict future profits, especially if you are managing a business for long-term success, not to simply meet investors’ short-term goals.

Wall Street might not like it, but now Ford could be better able to make the right decisions to get back on track. This is not an endorsement of the stock, as I have not looked closely at it, just a pat on the back for getting rid of guidance that benefits nobody except the research analysts who rely on it to do the bulk of their jobs.

GM Moves Away From Incentives, But Cuts Prices?

So General Motors (GM) is looking to reduce its reliance on consumer incentives to boost car sales. Sounds like a good idea to me. When you have offered employee discounts and zero percent financing for months on end, the buyer knows they have huge negotiating leverage when they walk into a dealership. Ideally, buyers would be willing to pay market prices for quality vehicles that they want.

The interesting part of this story is that GM is cutting prices by up to $2,500 per vehicle to make up for the reduced incentives in order to entice consumers. It seems like they are changing the name of the discounts, but still don’t have the product line to charge full price. Cutting incentives and reducing sticker prices simultaneously seems like a zero sum game to me.

Is U.S. Airways the Next Kmart?

Well, judging from the stock price action lately, you can see some correlation. Kmart stock began a rapid ascent after emerging from Chapter 11 bankrupcty (it has risen 700% in fact). Similarly, U.S. Airways (LCC) recently completed a merger with America West and new equity began trading in late September at around $20 per share.

Here we are only six weeks later and the stock is breaking through $30, for a move of 50 percent. Is this the start of a bigger move a la Kmart? Let’s not get ahead of ourselves. It is true that the airline’s cost structure has been greatly improved and debt has been wiped away by the courts, but we are still talking about an airline here, with oil at $60 a barrel.

With other airlines also emerging from bankruptcy court, LCC is not alone is having a new, leaner, and meaner business. However, these companies still can’t make money with energy prices this high, and the competition will hardly let up with carriers able to revamp and go at it all over again.

Monitoring future financial results out of LCC (they just reported Q3 today) may prove a valuable use investors’ time, as it’s quite possible the new U.S. Airways will turn out to be nothing like the new Kmart.

Toyota Continues to Close In on Big 3

October market share numbers for the domestic automobile industry tell the whole story. For years the Big 3 (GM, Ford, and Chrysler) have commanded the majority of sales in the United States. Once as high as 70%, their combined market share has been falling fairly precipitously in recent years, hitting 55% last month.

More interestingly, however, is the fact that Toyota Motor (TM) is closing in on Chrysler’s number three position in terms of market share. Not only should they surpass Chrysler soon, but Ford’s number two position is also in jeopardy, as seen by the six top sellers:

GM 22%
Ford 17%
Chrysler 16%
Toyota 15%
Honda 10%
Nissan 7%

Investors, after seeing these numbers, will probably want to rush out and buy shares of Toyota Motor (TM). However, does increasing share in the U.S. thanks to superb quality, value, and fuel efficiency, translate into a winning stock price?

As you can see from this chart, TM shares have been on fire recently but still trail the highs set in 2000. After more than doubling in the last two years, investors might want to wait for a pullback before adding TM shares. Although business is good and Toyota is taking share, the car business is still a tough one, and the stock today is pricing in a lot of good news.

Much like Southwest Airlines (LUV) and JetBlue (JBLU), the best companies in extremely competitive industries don’t always shine as much as some might think.

It’s Decision Time for General Motors

It has been widely reported that General Motors (GM) is considering selling a huge stake in its financing division, GMAC, in an attempt to sure up its finances. With net income of $2.5 billion expected this year, GMAC is worth somewhere in the $30 billion range, so a majority stake would yield the leading domestic automaker a substantial sum of $15 billion.

What’s interesting is GM’s current value. At $28 per share, Wall Street is valuing the entire company at $16 billion. In essence, GM’s car business has an implied value of negative $14 billion. GMAC itself, therefore, is worth nearly $60 per share.

Maybe GM should try and sell a stake in its auto division, not GMAC. Such a move would substantiate a positive dollar value for the car business, and maybe get the stock price up. If GM could ever sell cars and trucks for a profit consistently, you can see why value investors like Kirk Kerkorian think the upside is tremendous.

Selling GMAC, though, could backfire if the $15 billion generated slowly disappears. Right now GMAC is the life support for GM. Perhaps that’s something they should hold on to in its entirety.

More Northwest Craziness

This is a first for me; an analyst upgrades a stock to sell.

Standard & Poor’s Equity Research upgraded Northwest Airlines to “sell” from “strong sell” but cut the price target. “With the shares off sharply today amid market talk about possible bankruptcy, we think the current share price more adequately discounts the risks of bankruptcy we foresee,” S&P Equity Research said. Investors should sell shares of Northwest, “which we do believe is likely to file for bankruptcy, but our upgrade reflects possibilities for the share price,” the research firm said. S&P Equity Research said shares could see upside if Northwest denied bankruptcy talk, reached agreement with striking mechanics, or if there are further oil price declines or “meaningful progress” with other unions. The firm cut Northwest’s 12-month target price to $1.50, from $3.

So, let me get this straight. They think NWAC will go bankrupt, and their 12-month price target is $1.50 per share? Has a bankrupt airline ever given equity holders anything when they come out? And what is the difference between a sell and a strong sell? Do you use a market order if you want to sell strongly, versus a limit order if you just want to sell?