Barron's Streetwise - Vacation Edition: Jack Answers Listener Questions

Episode Date: May 22, 2020

Questions about airlines, Uber, a stock market bubble, and globalization on this special edition of Barron's Streetwise hosted by Jack Hough. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. Hi, I'm Jack Howe. This is the Barron Streetwise podcast, but the podcast is on vacation this week. It told me it has some work to do around the house. It's going to be hanging out with the kids, maybe playing a round or two of socially distanced golf. It'll be back next week. In the meantime, how about we spend a few minutes answering some listener questions? No big CEO interview.

And Meta's not even going to say anything funny. Meta, say something funny. No. Coming up, questions on airlines, Uber, a stock market bubble, and globalization. I think you might have blown out our audio levels, Meta. Yeah, I'm sorry. I'll get us back on track. Meta, do you want to say a quick word about how difficult this week has been being without me,

or should we jump right into the questions? Let's just jump into the questions. Okay, fair enough. Straight to business. What have we got? We've got a question from Sean, and he is talking about bringing supply chains back to the U.S. Let's hear it. Hey, Jack, digging the pod. And Meta, I just want to say, hunske liva, Jack. It's Danish.

You're going to have to ask Meta about it. Now, on to my question. Jack, with everyone wanting to bring supply chains back to America, all that's going to do is increase the cost for the final product, i.e. iPhone prices are going to go up. When is this realization that prices that everyone is so used to paying are going to go up and with people out of work, they're simply not going to be able to afford it? I don't think that is being priced into the market. Prove me wrong. Thank you, Sean. There's a lot to get to here. Now, Huns Gleivach, Meda, do you know what that means? I think what Sean is saying is, may she live a long time. Definitely she, though. He's

not saying something nice about me. To be clear, he's only wishing you well. It sounds like it's a feminized. All right. Yeah. I'm going to take your word for it. Okay. So Sean's question is, will deglobalization raise prices? And the answer is yes, to the extent that moving manufacturing abroad lowered prices, bringing it home could raise prices.

There's a trade-off here. Domestic manufacturing is good for job creation. Overseas manufacturing can be good for lower consumer prices, and it's not an either-or choice. It's a trade-off. I'll just say two things about the subject. First of all, the rise of factory automation, that reduces manufacturing jobs with or without globalization. So if a country brings home an industry that it sent abroad decades ago, that industry might not need as many people. And second, all else held equal, you'd prefer to keep high-value manufacturing in your country.

So think cars, but not necessarily undershirts. As for the prove-me-wrong part, Sean, about whether the expectation of higher prices is priced into the stock market, I can't prove you wrong and I can't prove you right. The stock market isn't a simple machine or a closed system where we can understand it perfectly using the laws of physics. It's a daily synthesis of the hopes and fears of millions of participants, synthesis of the hopes and fears of millions of participants and we can only guess about what's already priced in. I'm guessing that no, the distant threat of inflation is not priced in, but I'm also guessing that in the immediate future,

based on two straight months we've seen of a falling consumer price index, that policymakers regard deflation as the bigger threat. Thanks again, and whatever the male version of Hoons Gleevock is to you. Meta, how's my pronunciation there? It's not too bad. It's okay. Okay, who's up next? Okay, next up is Chandra Kumar from Iowa. Hello, Jack. If I may, I have two questions for you. Chandra Kumar wonders whether airlines

are a buy. He says he's surprised to learn that Warren Buffett has sold his airlines while continuing to hold other troubled companies. He ended up selling all his investments in airlines, but he's holding on to Kraft Heinz, even though it has gone from bad to worse. And same is the case with Wells Fargo. We'll leave Kraft Heinz and Wells Fargo for another day. Chandra Kumar points out that the oil price is low, which should help airlines in their jet fuel prices, and that the COVID-19 crisis will eventually pass. He asks whether investors should consider buying shares of Southwest and Alaska Airlines,

which he says have strong balance sheets relative to the group. Thank you, Jack, for your advice and your Streetways broadcast. Thank you, Chandra Kumar from Iowa. Hello, Iowa Airlines. I had a view of this industry before the pandemic that is totally moot now. My view was that the industry has gone through a profound financial restructuring. It's become much more profitable than ever. The number of airlines has decreased over time, less competition, better margins. But the pricing of the stock market was very low. You had shares trading at five, six times earnings. It seemed very pessimistic. And my thought was that when that next recession comes, that the industry will

remain profitable through the downturn and investors will see, aha, this is something that should trade like a normal cyclical industry. And that when that recession was over, investors would pile back in and airlines would trade, who knows, 12, 15 times earnings like normal cyclical businesses. I didn't expect a downturn that would take air traffic to near zero overnight. So that obviously has not played out. And you're right, Chandrakumar, anyone trying to bargain hunt this industry now should be focused on balance sheet strength. As an example, when Delta reported first quarter financial results, a lot of Wall Street's focus was on its plan to build $10 billion in liquidity by the end of June. And the reason everyone's focused on liquidity is

obvious. Part of the business model of commercial aviation is running packed airplanes. But with traffic having barely begun to rebound, there's already a backlash against planes being too full. Everyone wants to see that middle aisle cleared out, and if airlines need to put more passengers somewhere, they put them in the middle aisles, and you're hearing a lot of complaints already. I don't know how you reconcile those two things until COVID-19 is completely a thing of the past, and that could take years. Between now and then, you either need full planes, which customers won't like, or you need sharply higher prices, which customers won't like, and which they might not be able to afford. Longer term, one of the big carriers might fold, which would leave the others

probably stronger, but it could take a very long time to see if that thesis plays out, and you need carriers to be able to get from here to there without having to resort to financing measures that could hurt stockholders. I'm guessing that's part of why Warren Buffett sold. You can make your own decision about whether you're brave enough and patient enough. Meta, do you want to have a 30 second intermission here where we talk about frivolous things? Sure. Okay, go.

I've been drinking a lot of soda lately. Is it a big name brand soda or is it one of these artsy-fartsy, you know, artisan... It's just a big brand, like the really strong colored... What's the color? Green. Green. We don't want to say the brand because obviously they're probably considering sponsoring this podcast right now. Obviously.

But is it Mountain Dew? Have you been drinking Mountain Dew? I might have. Betta, this is shocking. You're a health nut. What's going on here? Just being inside all the time. You need to treat yourself.

How many Dews a day are you up to? I mean, more than one can, for sure. Really? More than one per day? Yeah. Two? Probably, yeah. A double do per day. This is quite a development. We're going to have to come back to this. Who's next on our list of listener questions? Next up are Jake and Nicole from Chicago. Hi, Jack. Hi, Meta. Me and my girlfriend, Nicole, have really enjoyed listening to your podcasts over the last few weeks. I wanted to ask if the coronavirus crisis and the economic impact that it has will actually help mitigate a longer-term financial crisis that could have been brought on by the growing financial bubble,

and if the government funding and the allocation of those resources will actually help mitigate that as well, specifically towards small businesses. Thank you, Jake and Nicole from Chicago. I think you're asking whether the COVID-19 crisis has mitigated concerns about a growing financial bubble. When stocks turned lower earlier this year, did that help take some of the air out of a market that might have gotten worrisome based on price? The answer is maybe briefly, but if anything, the response of the Federal Reserve might have exacerbated concerns about a financial bubble. The Fed has cut interest rates to near zero and it's spending massively to buy bonds and bring down lending rates. The initial goal was to stabilize the economy.

While the coronavirus economic shock appears to be the largest on record, the fiscal response has also been the fastest and largest response for any post-war downturn. Next will be to try to stimulate growth. Those might certainly be worthy goals, but what happens is we saw during the decade leading up to the pandemic, it's a lot easier to stimulate the stock market than it is to stimulate gross domestic product. So we've seen now a rapid bounce back for the stock market, even though some of the economic signs out there are still weak. Bank of America calculates that with the S&P 500 trading at 20 times forward earnings estimates,

the market is one and a half standard deviations above its historical average. In other words, prices are high. They're not quite crazy high. They're about three quarters of the way to where they were during the dot-com bubble of just over 20 years ago. The fact that prices are high now doesn't necessarily mean the market will crash or that long-term returns are going to be negative, but it might very well mean

that long-term returns will be below their historical average. I think it's fair to assume that the S&P 500 might return something in the neighborhood of 5% a year, including dividends, over the next decade. As for whether we're in a bubble now, it's difficult to say because there's not really a standard definition of what constitutes a stock market bubble. I would just say be on the lookout for rapid price gains in the near term. If you see those in coming months, we might get to stock market valuations that are more worrisome. Matt, it's time for the grand finale. Who do we have? We have a question from Steve.

And this question is not in audio. Steve just wrote us an email. Let's do his question. But which one of us should read it? You should. I think I would like to hear you read it with a lot of gusto. All right. As a short-term holder of Uber,

I am curious to get your view on the long-term proposition of this company. On the plus side, food delivery is in a massive growth wave. Less public transportation may lead to more ride-sharing. Higher unemployment may create more drivers. On the negative side, less travel with more work from home equals less moving around. Thoughts? Thank you, Meta. And thank you, Steve.

I think you've summed it up nicely. Now, Uber doesn't generate free cash, and it's not expected to still for years. And suddenly the future of the ride sharing business is unclear. Will virus fears make people reluctant to use shared cars? Or will it make them even more reluctant to use commuter trains and buses, sending some of those customers to Uber? Some markets like Hong Kong have already begun rebounding. That's a good sign. Uber is trying to buy Grubhub. Uber's made a takeover approach to Grubhub in an all-stock deal. We're going to watch that along. Which will give an enormous market share in U.S. food delivery, but that could draw scrutiny from regulators. Wall Street loves the stock.

More than three quarters of analysts who cover it say to buy. But the stock is up nicely this year, even though uncertainty has increased. A year ago, Wall Street expected Uber to bring in $18 billion in revenue this year. Now it says $13 billion, and most of that decline has happened since February. We don't know whether the Grubhub deal will go through. We don't know what the price will be. In the near term, Uber stock is likely to trade on excitement rather than fundamentals, especially with other tech stocks shooting higher. There's too much uncertainty for

me, but if you decide it's for you, Steve, good luck. Thank you, Steve, and thank you to all the other listeners who sent questions. I bet it has a Mountain Dew to go chug right now. The Barron Streetwise podcast will return next week. Keep the questions coming. Just tape on your phone, use the voice memo app, send in an email to jack.how, that's h-o-u-g-h, at barons.com. Thank you for listening. Meta Lutzoft is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts, and follow me on Twitter to find out about stories and new podcast episodes. That's at jack how h-o-U-G-H. See you next week.

I do have just a couple of follow-up questions, and they're all about Mountain Dew. In the advertising, they're always talking about extreme sports, and I'm just wondering, have you started, like, jumping mountain bikes off anything? I am sitting down for most of the day. You're still doing yoga. I am.

Aren't you almost a vegetarian? Getting there. It's just, you might be a demographic of one. I mean, I'm trying to think how many almost vegetarian yoga practitioners there are out there chugging two do's a day. Well. Is this just a quarantine fling or is this going to be a long-term habit? No, no, no. It's just a spring thing.

You're not still doing the hard kombucha, are you? No. All right. So for people out there who are curious about hard kombucha, just know it's a gateway to Mountain Dew.