Delta Plummets As Bankruptcy Looms

Shares of Delta Airlines (DAL) are down 20 percent to 87 cents per share this morning. Hopefully readers of this blog sold their stock months ago. After JP Morgan's buy recommendation in May, at $3.30 per share, I pointed out that the stock was pretty much going to be worthless at some point, even though the rationale for JP's upgrade was their guess that the company would go under in 2006, not 2005.

Now that Delta will join U.S. Airways and United, is anybody next? While not as much of a sure thing as Delta was back in May, I do think Northwest (NWAC) could be the next victim, and have been short NWAC shares in order to try and profit from yet another bankrupt airline.

American Car Companies Failing Miserably

Profit/Loss Per Vehicle Sold in North America During the First Half of 2005

GM: $1227 Loss
Ford: $139 Loss
Chrysler: $186 Profit
Honda: $1203 Profit
Toyota: $1488 Profit
Nissan: $1826 Profit

It may not be surprising to see those numbers, given what we know about GM and Ford's union-related pension and benefit liabilities. However, given the employee discounts that U.S. automakers are offering, it is interesting to point out that the Japanese car makers are gaining market share in the U.S. even though they are not the ones purposely sacrificing profit in order to increase sales.

Evidently, consumers are willing to pay more for a higher quality vehicle that holds its value much better than its American counterpart. I know I am.

Buffett's Possible Successor

Probably the number one concern among Berkshire Hathaway (BRKA) followers is the successorship of Warren Buffett. Buffett is in his mid seventies and clearly will not be around forever. What will happen when the cockpit is turned over to someone else? Will someone else be as investment savvy as Buffett? Surely not. Will Berkshire stock drop as Buffett himself is most likely valued highly by current shareholders?

Many people think Lou Simpson will take over for Buffett when the time comes. Simpson is the CEO of capital operations for Geico. Basically, he manages the float for Geico's insurance business, which amounts to several billion dollars. Interestingly, while Buffett gets the credit for portfolio additions to Berkshire's investment portfolio, often the smaller buys are the work of Simpson, not Buffett.

Taking a look at Berkshire's holdings as of June 30th, we can get a good idea of which investments are the work of Buffett, and which have Simpson's fingerprints on them. Buffett's largest holdings are the ones he has held for years. Gillette, Coca-Cola, Wells Fargo, American Express, Washington Post, to name a few. After subtracting Berkshire's top 10 holdings (mostly those older buys) as well as its position in Proctor and Gamble (due to the pending merger) and PetroChina (which was one of BRK's largest holdings until it was trimmed dramatically in the first half of 2005), Berkshire's $35 billion public company portfolio is narrowed down to less than $3 billion invested in 20 companies.

Since Buffett has stated in the past that Simpson manages about $2.5 billion, it is safe to assume this small portion represents what investors should expect to see on their position sheets should Simpson be named Buffett's successor. As a result, more often than not relatively small new additions to BRK's portfolio are the work of Simpson, not Buffett himself.

Bye Bye Delta?

That table pounding of Delta by JP Morgan back on May 18th looks awfully foolish...

From Reuters:

CHICAGO, July 27 - Shares of Delta Air Lines (DAL) sank more than 20 percent on Wednesday after the struggling No. 3 U.S. carrier's chief executive said the airline's restructuring plan is not enough to save it. The comments from Chief Executive Gerald Grinstein in an internal memo stoked concern of a possible Chapter 11 filing, sending the stock down more than 20 percent, analysts said. "In light of what we have accomplished together so far, there can be no doubt that Delta's transformation plan is delivering results," Grinstein said. "What is also clear is that it is not enough."

Market Holds Up Despite Oil Spike

All year we've heard numerous pundits citing high oil prices as a main reason for the market's year-to-date losses. However, after seeing oil spike from the mid $40's per barrel up to nearly $57, along with a stock market that is holding up very well, we can see that oil has not been the primary driver of stock prices, up or down.

Instead, it's all about interest rates. Speculation of the Fed stopping at 3.5% Fed Funds, coupled with tame inflation data recently, has more than made up for higher energy prices in the minds of investors. This is not to say oil prices are completely irrelevent, but rather to imply that if the market gets everything else it is looking for, $60 oil most likely will not hold back equity prices in a meaningful way.

So, where are interest rates headed? You may have noticed that in a relatively short period of time the consensus view has shifted from "Greenspan always overdoes it and will take rates too high which will slow the economy" to the current view that "Inflation is low and Greenspan doesn't want to overdo it again so he'll stop after 1 or 2 more hikes, taking Fed Funds to 3.25% or 3.5%."

The consensus on the 10-year bond has also shifted from "It's just a matter of time before we see 5%" to "We could stay under 4% for a very long time." Bill Gross of PIMCO has even said publicly that he sees the 10-year going to 3% in the next couple of years.

While I certainly think we could see the rate hikes come to a halt at 3.25% or 3.5%, and would welcome such a development from an investor standpoint, I'm not as convinced as most are that this will occur. I still think there is a good chance we'll get to 4% Fed Funds, with the 10-year bond around 4.5%.

If this happens, the market will have to once again adjust expectations and we could give back some of the recent gains. I have been playing this thesis by trimming some equities during this run-up, along with shorting the 10-year bond under 4%.

J.P. Morgan Recommends Buying Delta

Delta Airlines (DAL) shares are jumping 10% this morning to $3.30 per share on a J.P. Morgan upgrade.

From the newswires:

Delta Air Lines was upgraded to overweight from neutral at J.P. Morgan due primarily to valuation. Analyst Jamie Baker believes Delta may have to declare bankruptcy in 2006, but the shares are pricing in a high probability, about 75%, of the air carrier going bankrupt in 2005. "While the market's bankruptcy conclusion may ultimately prove accurate, we believe it is one winter season premature," Baker said. "With equity purgatory not far below current levels, the option value reflected in Delta shares is expected to improve as capital-raising efforts gain momentum." Baker estimates "equity purgatory" to be at about $1.50.

Recommending a stock that you think will be worthless a year from now is a very interesting call.

As I always do, let's take a look at this analyst's track record on Delta shares. Here are prior opinions with closing prices on the day of the recommendation:

03/12/03 Buy $7.48 close
07/20/04 Neutral $5.40 close
10/15/04 Sell $3.42 close
10/26/04 Neutral $4.63 close
05/18/05 Buy $3.35 open

If you're wondering if you should buy Delta at $3.30 a share today, it's tough to feel confident with this analyst's call. After all, Baker wanted you to buy at $7, do nothing at $5, sell at $3, do nothing at $4, and buy at $3.

Kerkorian Pockets $100 Million in Paper Profit

General Motors (GM) stock is shooting higher by $5 to just under $33 today after Kirk Kerkorian offered to tender 28 million shares at $31 each. Kerkorian's Tracinda Corp already owns 22 million shares, which it bought recently at $26.33. Tracinda's one day gain on its nearly 4% stake stands at $110 million as I write this.

This move is really a brilliant one for Kerkorian. He was well aware that hedge fund managers were shorting GM stock for a variety of reasons, including as a way to hedge long positions in GM debt securities. Short covering is explaining most of this move higher. With GM stock higher than $31 on this move, Tracinda would get no takers on its $31 tender offer, and therefore has made a nice profit on no incremental investment.

The reality is that this offer does nothing to change GM's fundamental outlook. Therefore, one can argue this $5 move in the stock is not totally justified. I don't own GM stock, but if I did I would be tempted to sell some here at $33 a share.

Plains Exploration Update

Here's a quick update to the piece I wrote on April 1st regarding one of my favorite energy stocks, Plains Exploration (PXP). If you missed it a few weeks back, you should take a look, but the jist of it was that Plains sold some oil wells to XTO Energy (XTO) and used the proceeds to get rid of some old oil price hedges it had in place (that were preventing it from reaping the full benefits of $50+ oil).

As I pointed out, the stock was up 3% that day, to $36 a share. Since then, oil has fallen from a high of $57 to the current $50, and Plains stock has dropped from 36 to 31. It was obvious that earnings estimates were going to rise with the new strategy, but how much exactly was unclear on the day of the announcement.

Well, a quick look at Wall Street's updated profit numbers for PXP shows even more of a positive impact than I had anticipated. EPS estimates for 2006 have gone from $3 to $4 per share. The stock, meanwhile, has dropped 15 percent. The current P/E on '06 is less than 8 times.

On days when oil prices are weak and the stocks are suffering, Plains is one stock that should be accumulated, in my opinion.