Alaska-Hawaiian $1.9bn Merger
In this issue of the Peel:
Market Snapshot
Happy Monday, apes.
Hope everyone had a good weekend and that none of you apes got snubbed as hard as Florida State. Can we just skip to next year when the CFP bumps up to 12 teams and actually starts to make sense already? Whatever, I guess we’ll enjoy it while it lasts.
Fortunately, December’s trade hasn’t snubbed many investor’s portfolios just yet this month. It had been only one day, to be fair, but given that we saw all 11 S&P sectors in the green and the Russell 2k rip nearly 3% to start the month, I’d say we’re off to a good start.
Meanwhile, the Albert Einsteins who are building out the WSO Alpha portfolio, did pretty well once again, but the apes were just 1bp away from a beautiful 0.69% upday. I guess we’ll take 0.68%... for now.
Treasury yields continued their trend lower, as you’ll see below, solidifying November 2023 as one of the best months in the history of the asset class. What a time to be alive.
Let’s get into it.
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Banana Bits
Macro Monkey Says
The New Meme Stocks
Back in January 2021, GameStop shares became the international stock market news story of the century—or so it seemed. Shares ripped well over 1,600% in much less than a month, and we all watched on with awe, confusion, and, most of all, envy.
Of course, the envy primarily stemmed from the simple fact that no investor with a brain had exposure to the infamous $GME ticker prior to that fateful month. But, with our recently discovered new meme stocks, the vast majority of investors got in on the fun, too.
Well, really, it was the vast majority of boring, old, boomer-ish investors that are lame enough to actually have exposure to these new meme stocks—bonds.
Last month, the U.S. bond market had one of, if not the best, months since the Reagan Administration, when mobile phones were about the size of an average microwave. Measuring via the most used fixed income benchmark, the Bloomberg U.S. Aggregate Bond Index, these meme stocks in November ripped a massive… 4.73%.
"Last month, the U.S. bond market had one of, if not the best, months since the Reagan Administration ..."
I know. I had to catch my breath a little bit, too, before I could wrap my head around such daunting gains. But keep in mind, bonds are not at all like stocks—in fact, it’s the very idea that they’re uncorrelated that makes the classic 60/40 portfolio work so well for the average investor.
And last month, we got one of those all-too-rare periods where both stocks and bonds absolutely ripped. We can thank rate expectations for all the fun, but the surge in bond prices was actually the primary driver of strong equity performance last month.
Just take a look at the U.S. 10-year. Heading into the month, yields for this maturity sat around 4.9%-4.95%. Now, yields will open today closer to Elon Musk’s favorite yield at 4.20%. Keep in mind that bond yields and prices move in opposite directions—as rates rise, the opportunity cost of holding prior-issued notes at a lower rate increases, thus deteriorating both the relative and absolute value of the old bond.
That ~16% decline in the yield on U.S. 10-year notes in just a month comes from the market’s recent decision to say “f*ck that” in response to the Fed’s “higher for longer” narrative. Declining inflation and consumer spending figures have painted a picture of a slowing economy, with most institutions now anticipating rate cuts within less than the next 12 months.
"After plummeting in 2022 for one of their worst years ever, bonds are finally seeing the kickback in returns they’ve been waiting for."
While declining spending is just about the worst thing for most companies, the stock prices of those companies love to see yields go down. Lower yields mean we can discount future cash flows by a lesser rate, increasing their present value and thus leading to an uptick in price. Welcome back to Finance 101, apes!
After plummeting in 2022 for one of their worst years ever, bonds are finally seeing the kickback in returns they’ve been waiting for. The volatility experienced in the fixed income market of late is extremely anomalous as well—hence having the U.S. treasuries earning the critically acclaimed title of the “new meme stocks.”
This volatility essentially boils down to the drastic uncertainty facing investors, economists, and participants in the economy (a.k.a. all of us) in the short to intermediate term. Inflation remains above the Fed’s target, but consumer spending has been trending lower along with wage-price declines while some goods—particularly durable goods—have entered deflationary stages.
This put the Fed in a position about as precarious as Felix Baumgartner when he skydived from outer space. Clearly, the market is confident as we’ve basically just sent risk assets on a tear as all this uncertainty mounts.
Love the confidence, but we’ll see how this one goes. Just remember—if you’re under 87 years old, you’re probably good on bond exposure. After all, it has been almost 4-decades since this asset has had a monthly that’s even half as good as our first Ripe stock below. Speaking of which…
What's Ripe
Ulta Beauty (ULTA) ↑ 10.81% ↑
Coinbase (COIN) ↑ 7.25% ↑
What's Rotten
Dell Technologies (DELL) ↓ 5.19% ↓
Pfizer (PFE) ↓ 5.12% ↓
Thought Banana
Backer Than Back
Can we finally declare that we’re officially BACK yet, apes?
I mean, it’s been almost a year now since giant IPOs, acquisitions, and other M&A deals have slowly started to emerge from the grave. And this weekend, I think we finally got confirmation that we are confirmed to be so f*cking BACK.
In 1959, the same year that Barbie dolls debuted in the United States, the country got a little larger. Our 49th state, Alaska, was admitted to the union in January, while our 50th joined the ranks just a few months later in August.
"... on Sunday, a deal was announced for the two to finally become one."
Since then, both states have seen their very own airlines emerge in the forms of the creatively named Alaska Airlines and Hawaiian Airlines. Like the Red Sox and Yankees, these two have been beefing since day 1, each looking to dominate the Pacific U.S. market.
But on Sunday, a deal was announced for the two to finally become one. It’s been one of those love-hate romances since way back in the day that appears to finally be culminating in a long-anticipated marriage.
Needless to say, however, not all marriages are happy… or done by choice. This consummation comes with a dowry of ~$2bn from Alaska Air going to the slightly smaller rival, but even with that kind of arrangement, the marriage appears to have formed more out of necessity than actual desire from either party.
Four airlines control ~80% of the U.S. markets—Delta, United, American, and Southwest. Needless to point out, antitrust concerns are already flying high (no pun intended) in the industry, with a judge set to hear arguments in the JetBlue-Spirit merger later this week. Now, Alaska and Hawaiian’s deal will turn up the temperature even more.
Further, Hawaiian has begun having to share its namesake region since Southwest broke up the former’s party by entering the market of flights between Hawaiian islands back in 2019. Maui wildfires and shifting post-pandemic demand dynamics have raised the bar for scale needed to operate competitively with the big boys listed above.
"... what better way to get that scale than to take $2bn from one of your biggest competitors and join forces with them?"
So, what better way to get that scale than to take $2bn from one of your biggest competitors and join forces with them? From Alaska’s perspective, they effectively eliminated one of their biggest competitors in the Pacific-North American air travel market.
Essentially, scale has become the name of the game since C-19 showed up, and Alaska and Hawaiian have some catching up to do. The biggest question now is whether Lina Khan will actually allow the two to join forces. This week’s hearing on the proposed JetBlue-Spirit merger should give us a glimpse into that outcome, but you’ll definitely want to stay tuned for this one… especially if you’re ever looking to travel anywhere ever again. No pressure, though.
The Big Question: Will this acquisition go through, or will antitrust concerns block this deal? How will the JetBlue-Spirit merger impact this deal? Is M&A finally coming back?
Banana Brain Teaser
Friday —
Three men had $227 altogether. Joe had $35 more than George, while Craig had $7 more than Joe.
How much did they each have?
Answer
Craig had $92, Joe had $85, and George had $50.
Today —
A bat and a ball cost $1.10. The bat costs one dollar more than the ball. How much does the ball cost?
Shoot us your guesses at [email protected].
Wise Investor Says
“Every time you hear ‘EBITDA,’ just substitute it with ‘bullshit.’” — Charlie Munger
How would you rate today’s Peel?
Happy Investing,
Patrick & The Daily Peel Team