Why I'm Looking at Biotechs, Not Airlines
Posted at 3:50 p.m. EDT on Wednesday, May 20, 2015
As a traveler, I love it when I can pit airlines against each other to get low fares. But as a shareholder, I am aghast because competition is the bane of profits, and the scourge of stocks as we found today when the transports, which got "taken to the woodshed" threatened to take down the entire market for most of the day.
Yep, today's horrendous trading action in the key transportation average can be defined by too much competition, mainly in the airlines. The transports can cast a long shadow, if not a pall, over the entire market as they did for most of the day until the Fed minutes, thankfully, were released at 2 p.m. that showed there are no plans for a rate hike next month.
The transports are often seen as excellent harbingers of commerce to come because if it isn't sold it ain't shipped.
Sometimes, though, they are a sign not of weakening trade but a symbol of potentially ruinous cutthroat competition and that's what's driving this glaring subset at this very moment.
What I didn't count on is that Mad Money is driving the dialogue that's causing the weakness in the group.
Specifically, last night Doug Parker, the always incredibly candid CEO of American Airlines (AAL), came on Mad Money and said that some of his competitors in the industry have decided to ramp up capacity to be able to take advantage of the health of the travel market. He admitted that these competitors are being too aggressive in adding routes and planes and that can lead to dogfights for customers. In particular, Delta's (DAL) gotten very bullish -- meaning too aggressive -- and that means trouble ahead for profitability.