On The Great American Road
When I was growing up, I always looked forward to getting into the car with my grandparents. For my parents, in their wisdom and possibly for their sanity, thought this a good idea to spend time with them, never standing in the way. And once we were in that magical car, my grandparents would whisk us off to some great adventure, where we got to experience a place new and different. Sometimes it was a trip to their home followed by a fishing expedition out on the waters off of Long Island. Sometimes, it was a trip up to New England, where we would stay in some inn and then enjoy hiking in the mountains. Sometimes, it was a trip out to the Delaware Water Gap to stand in a stream and enjoy the water. And I mean enjoy the water. At that age, I was not a very good fisherman and would typically watch in envy as my grandfather caught fish on a regular basis trying to teach me the basics of fly fishing. And sometimes it was a trip to a farm in Pennsylvania where we could eat corn on the cob picked right off the crop and fly remote controlled model airplanes. But it did not matter as we were out On The Great American Road where we could discover wonders and enjoy the unending majesty of the country.
For Americans, over the past year, with lockdowns and shutdowns, the ability to travel both wide and far seems remote. This is backed up by numerous statistics on travel. According to airline industry data, North American Flights fell 55% year over year in mid-January while TSA Checkpoint Traffic fell 65%. And with passenger ticket prices down 26% from January 2020, the hit to their bottom lines significantly exceeds the short, but sharp downturn after 9/11. Hotels show data just as grim. In the US, Occupancy fell over 34% in December 2020 compared to the prior year. And with room rates down more than 27%, survival of the fittest reigns. For those wishing to cruise the waters, this option currently is out of stock. Cruise lines have shut their operations, mothballing their ships, in an attempt to preserve cash. The only bright spot in travel stands RVs. These hotels on wheels continue to attract those shut out of hotels or afraid to travel. Retail sales of RVs rose an estimated 28% year-over-year in November, the latest month for which industry statistics are available. But with annual industry sales of less than 500,000 units, few Americans can enjoy them.
However, help is on the way in the form of vaccines. Currently 1+ million Americans per day receive a vaccination for COVID-19. The Biden Administration promised to accelerate the pace to over 1.5 million in short order. Assuming that the logistical hurdles disappear as manpower and money gets thrown at the bottlenecks, then, at a rate of 1.5 million injections per day from February 1 to June 30, more than 228 million shots will occur, immunizing almost 115 million people, assuming 2 shots per dose. If the 1.5 million shots can rise to 2 million per day by March 31, then an additional 45 million shots could occur. This would fully immunize almost 140 million adults. With Pfizer delivering over 200 million doses by the end of May and Moderna delivering 100 million doses by March and another 100 million by June, there should exist enough vaccine to inoculate 200 million people in the US just in the first half. And by September, anyone who wants a shot should receive both doses. And this excludes the potential vaccine from Johnson & Johnson and others that continue to finish their vaccine trials.
With Herd Immunity in place, travel should see a resurgence as Americans’ wanderlust, repressed by lockdowns and shutdowns, breaks free. Recent consumer surveys indicate vaccination remains the only holdup. Over 80% of Americans plan to travel in the second half of this year. And over 50% indicate they plan to fly more than twice. And for every body that gets on an airplane, there usually exists a warm, hotel bed waiting on the other end. For airlines and hotels, recovery can’t come soon enough. As an indication of this new and better future, bookings for cruise lines continue to explode upward. According to a January 11th Press Release issued by Carnival Corporation, the largest cruise ship company in the world, “cumulative advanced bookings for the second half of 2021 are within the historical range. Additionally, the cumulative advanced bookings for the first half of 2022 are ahead of 2019.” In other word, say Bon Voyage to the millions of frustrated cruise enthusiasts waiting for their turn to embark for the seas.
For Americans, the future beckons with its endless possibilities. Whether to spend a night at the local bed and breakfast or to hop on a plane for parts unknown, heading out the door to somewhere new holds a long tradition. And with vaccination, lockdowns and shutdowns standing athwart the threshold will get swept aside as the crowd breaks free. And for the country, it will truly become On The Great American Road, Once Again.
The Nifty 50 and The Lost Growth Stock Decade
For those of us who remember the Nifty 50, the one decision growth stocks of the late 1960s to early 1970s, it appears “Deja Vue All Over Again” as Yogi Berra used to say. Valuations appear reminiscent of that era as do investors’ beliefs in the current crop of these companies. At the same time, there exists a non-negligible risk that the Federal Reserve drives inflation higher. In fact, the Federal Reserve stands on the record indicating that it desires an inflation overshoot of its 2% target to normalize Nominal GDP Growth and Monetary Policy. And given the U.S. Government desires faster real growth, which means looser monetary policy and likely tighter trade policy to boost domestic production, the likelihood of inflation rising over the next few years continues to increase significantly. Thus, a bit of history might illuminate the issues facing today’s growth stocks, which spout P/Es similar to that bygone era and may face a similar change in inflation.
In the 1970s, as inflation rose, the Price to Earnings Multiple (P/E) of the S&P 500 and the Nifty 50 contracted. The following table documents the history of that decade and how the Nifty 50’s performance compared to that of the overall market:
As the data makes clear, despite delivering superior earnings growth over the decade, the Nifty 50 actually underperformed the S&P 500 by a compound rate of 3.6% per year over the decade. The source of this underperformance came from the massive P/E contraction these stocks endured, as the table illustrates.
For a simple explanation, one need only think of the differing performance of various maturities of debt as interest rates rise. A short maturity instrument, such as a 1 Year Treasury Bill sees little impact. However, a 30 Year Treasury Bond sees a massive impact. Thus, as interest rates rise, the value of longer dated bonds falls much faster than shorter dated bonds. With Growth Stocks acting like 30 Year Bonds and Value Stocks acting like 2 – 3 Year Treasury Bonds, the impact of rising interest rates will cause a much faster contraction in their P/E. And this contraction in P/E can more than offset the growth in earnings. Given this mathematical reality coupled with a Federal Reserve and U.S. Government desirous of higher levels of inflation, investors might want to review carefully The Nifty 50 and The Lost Growth Stock Decade.
Upcoming Speaking Events
Our “live” Public Speaking continues to accelerate in 2021 as groups have adjusted to the Zoom and Skype dominated world. Recent appearances include Executive Leaders for Advisory Boards and Beacon’s Private Equity Group. We have upcoming appearances for a number of C Level Executive associations and industry groups. In addition, podcast requests continue to grow. For example, we will be appearing on the Bigger Pockets podcast over the next month. And with our vaccination likely to occur in the next 60 – 90 days, we look forward to appearing live at the United States National Strategy Seminar in June in Carlisle, PA. It will feel good to get up in front of a large audience once more. As to speaking for your group, please feel free to contact us. We would be happy to accommodate your needs.
Monthly Letter Preview
“This Month we return to our What’s Good For GM Is Not Good For America series and how politics and the rising rivalry with China likely force an end to this golden era for corporations:”
- What’s Good For GM Is Not Good For America, Part V: The Coming Ascendance of The National Interest, Reshoring, & Made In America – Corporations enjoyed a long period, from the early 1990s until ~2015, when the U.S. government allowed them to dictate economic policy. However, starting with the 2016 Presidential election, the environment changed drastically. With the rise of China as an economic power and a military threat, the United States needed to focus on The National Interest to meet the growing challenge. The policies required under such a rubric differed dramatically from those followed for the prior 20 years. As a result, U.S. economic policy began to focus on domestic over foreign production and protecting the country’s Intellectual Property. This change in policy, which will accelerate despite the change in Administrations, will ultimately put an end to Corporations putting their interests ahead of the Nation. This month’s piece reviews the positive impact of such changes for the United States. Future installments will review the impact on corporations that have benefitted from this over the past 30 years.
As always, we end the Monthly Letter with Economic Observations on the US Economy through Interesting Data Points that provide color on the happenings in America. The link to the Monthly Letter is:
https://greendrakeadvisors.com/views-from-the-stream-february-2021/
Should you have any questions on how the above issues or the items discussed in our accompanying Monthly Views From the Stream Letter impact your family’s financial position or your business’s future as well as the potential actions you could take in response, please do not hesitate to contact us. We welcome the opportunity to discuss this with you.
Yours Truly,
Paul L. Sloate
Chief Executive Officer