Warren Buffett told shareholders on Saturday that Berkshire Hathaway unloaded all of its positions in the airline sector. “I was wrong about that business,” he admitted.
For one group of investors, him being wrong had to feel so right.
According to S3 Partners, short-sellers made $188 million in mark-to-market profits in Monday’s session as airline stocks, led by United UAL, -4.51% , American AAL, -3.15%, Delta DAL, -3.81% and Southwest LUV, -4.13% , took a hit after Buffett’s announcement.
Here’s how it broke down by company:
And there could be more to come, according to S3 Partners Managing Director Ihor Dusaniwsky,
“We should see continued short selling in AAL, UAL and DAL and a resumption of short selling in LUV after Buffett’s comments and today’s price action,” he wrote in a blog post on Monday. “Shorts, who are already deep in the money, should be letting their profits run as long as the airline stock prices trend downward. But if prices start to rebound, we can expect a quick rush to cover some of their short exposure in order to realize their mark-to-market profits.”
Even before Buffett’s move, shorting the airline industry this year has paid off in a big way, with the entire sector delivering $4.13 billion in net-of-financing mark-to-market profits. That’s almost a double since the beginning of 2020, according to S3 Partners’ data.
Finger on The Market Pulse
Tuesday evening U.S. stock-index futures rose modestly, hours after the benchmarks suffered a pullback that eroded part of a powerful rally.
Futures for the Dow Jones Industrial Average were up 0.2%, at 23,805, those for the S&P 500 index were rising by 0.2% to 2,864.50, while Nasdaq-100 futures gained 0.3% to 8,950.25.
Stocks lost steam near the close of the regular session Tuesday, with the Dow gaining only 133.33 points, or 0.6%, to end at 24,883.09, the S&P 500 index advancing just 25.70 points to finish at 2,868.44, a gain of 0.9%, and the Nasdaq Composite index adding 98.41 points, or 1.1%, to close at 8,809.12.
The loss of momentum on Tuesday was partially attributed to comments from Federal Reserve Vice Chairman Richard Clarida, who, in an interview on CNBC, said, “We’re living through the most severe contraction in activity and surge in unemployment that we’ve seen in our lifetimes.” This was in reference to the coronavirus-induced slowdowns. “This is not a typical recession. It’s going to be a very, very sharp contraction in the second quarter,” he explained.
The remarks appeared sufficient to knock some of the stuffing out of an equity market that had just been enjoying a sharp broad-based rally. However, the Fed’s No. 2 did note that the “recovery could begin in the second half” of 2020.
Meanwhile, President Donald Trump, speaking Tuesday evening at a Honeywell International Inc. Arizona plant (where N95 masks and other personal protective equipment are being manufactured), acknowledged reports that his administration may be phasing out the coronavirus task force.
During an interview with Bloomberg on Tuesday, Vice President Mike Pence said, “As states are reopening, we’re seeing progress.”
Markets have been rising on easing of lockdown protocols in a number of U.S. states. However, worries about China-U.S. tensions, centered on Beijing’s handling of the viral outbreak and lingering concerns about how companies will be able to adapt to the new era, combined to inject some uncertainty in equity markets.
In corporate news, shares of entertainment giant Walt Disney & Co. were down 2.3% in after-hours trade following the company’s quarterly report showed that its profit dove more than 90% in the second quarter. More than $1 billion in lost profit was from its theme parks alone, which have been shuttered due to the deadly infectious disease.
Meanwhile, alternative-meat maker Beyond Meat Inc. saw its shares surge more than 10% after the regular session Tuesday after it reported a first-quarter net income of $1.8 million, or 3 cents a share, compared with a loss of $6.6 million, or 95 cents a share, in the same period last year. Their revenue grew 141% to $97.1 million from $40.2 million since then.
The Next Gold Rush?
Paul Singer, the hedge-fund billionaire behind Elliot Management, warned last month that the ultimate path of global stock markets is a drop of at least 50% from February highs.
What’s an investor to do in the face of such a grim outlook? Load up on gold, perhaps. After all, according to a report from the Financial Times, that’s what the smart money’s doing.
Gold, advised Singer, is “one of the most undervalued” assets available and it’s worth “multiples of its current price” due to the “fanatical debasement of money by all of the world’s central banks.” His fund gained about 2%, primarily thanks to profits from its position on gold.
Andrew Law’s Caxton Associates and Danny Yong’s Dymon Asia Capital have also joined in seeking protection in their gold positions amidst the further loosening monetary policy.
“Gold is a hedge against unfettered fiat currency printing,” said Yong, whose fund is currently up 36%.
Caxton has also enjoyed double-digits gains, the FT reported, with its Global fund rallying some 15% and its Macro fund logging a 17% jump so far this year.
“Risk appetite among investors improved with moves by major economies to ease lockdowns related to the coronavirus crisis,” analysts at ICICI Bank wrote in a market update.