Thursday, April 16, 2009

Is this the bottom?

Remain confused by the Goldman results but can see that the Wells Fargo and JP Morgan numbers were reasonable. The market and the media are enthusiastic about the discovery of these first green shoots of Spring and are probably right in their view that the S&P at 680 was discounting armageddon. In this more optimistic vein it seems that discussion of the bear market rally has been replaced in the financial news networks by a view that this rally has 'legs' and that the S&P can top 1,000 in short order.

Yet, underlying this upbeat outlook I can't but help feel that there is something wrong. In thirty years in finance I've always found the airline numbers to be a pretty good reflection of what's happening in the real economy. Looking at the latest numbers from IATA it would seem to me that the bottom of the cycle may arrive in early Q3 but any rebound is going to be anaemic with yields not rising until 2011. US carrier dometic yields are shrinking fast , falling 14% in March .That darling of the Street,Southwest Airlines ,has warned that it may be driven into bankruptcy with the toughest revenue environment in its history and no bottom in sight..Premium revenues for US and European airlines fell about 30% in February which will exert strong downwards pressure on Q1 numbers.Making matters worse the reduction in yield across the Atlantic last month was the worst in a decade - beating even the post 9/11 decline.

I can see the Dow continuing to rise towards 9,000 but I'd like to see the airline traffic figures for May before believing that this is a structural change. My fear is that we may be closer to hitting bottom but the recovery at the tail end of 2009 will be extremely muted and the cashflow and balance sheet ramifications of over capacity are not yet discounted.

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