An end to several
weeks of earnings, Janet Yellen’s senate confirmation, the Dow and S&P 500
at record heights, and a profitable week that wiped out all losses from the
previous three.
This week had proven
exiting to say the least. The future Chairman of the Federal Reserve, Janet
Yellen, announced this week during her senate hearings that the Federal Reserve
will not be ending its $85 billion bond buying program for at least another few
months. This announcement on Thursday sent the Dow up 85 points to end at a new
record high, alongside my own portfolio.
Yellen has been a
favorite to take Ben Bernanke’s position as the new Chairman of the Federal
Reserve. Wall Street believes that she will continue Bernanke’s loose monetary
policies and even more importantly keep pumping cash into the U.S economy.
Personally I think
Yellen is the perfect women for the job, for two reasons. First she has the experience;
she has served as the Vice Chair of the Federal Reserve since 2010, before that
she had served as the president and C.E.O of the Federal Reserve Bank of San
Francisco. These credentials clearly show that she has the business talent to
guide the U.S through an economic recovery, but more importantly she had been
Ben Bernanke’s right hand for years. This is a great thing since it is not the
time to completely shake up leadership at the Fed, considering the fact that
the U.S is in the middle of recovering from the worst economy since the Great
Depression.
Janet Yellen’s
senate confirmation did send stocks to record highs but to me personally one
event more than any other impacted my stock portfolio. That event was the
Justice Department reaching a settlement with U.S Airways and American Airlines
allowing those companies to merge into the largest Airline in the world.
The decision was
announced by the two airlines on Wednesday, and in response sent shares of
American Airlines through the roof (stock soared over 25%). Personally I had
hoped that the merger would not go through, this would have caused a selloff in
American Airline stock which I could have then acquired at cheap prices,
allowing me to exploit the Airlines low evaluation, growing profits and
resurgence. I also was very surprised that the merger passed since although it
is great for the Airline industry as a whole it is terrible for consumers, who
are now going to have to deal with rising airfare and expensive fees. But I
cannot change the decision, all I could do is accept it, and at the very least
it made stock in other Airline companies go up.
Now that American
Airlines is merging with U.S Air what’s next for the stock in the bankrupt
airline? The answer to that is simple, it will continue going up, currently the
company is undervalued, and I had bought shares in American on Thursday (just
in time to see the stock fall on Friday). In any case as soon as the news that
a settlement was reached allowing the merger to go through I began to look into
investing into the New American Airlines (which will be listed on NASDAQ under
the symbol AAL).
What I came up
with led me to decide to not invest into the new American. There were a few
reasons why, the first one was that I saw the struggles United Continental had
after its merger. The newly merged Airline had trouble integrating two different
fleets into one, and profits suffered as a result. Another reason not to invest
into the New American is because traditional carriers such as United and the
New American are rapidly losing ground to smaller low budget airlines, like Jet
Blue and Southwest. These low budget airlines are cheaper to operate, more
attractive to fliers and as a result are gaining a greater share of the airline
market.
These
low budget airlines also got a lot more attractive after details of the
settlement were released. It appears that the price of the merger between
Americana and U.S air came at the cost of selling slots in Reagan National Airport
in Washington D.C to low budget competitors, Jet Blue and Southwest. This was
one reason the justice department wanted to ground the merger in the first
place, the government did not want a single airline controlling almost 70% of
the slots in a key airport. But in selling these slots the New American had
empowered low budget competitors in Washington D.C.
The
New American Airlines seems to face a number of large problems that in my
opinion, will compromise its position on the market. With strong competition
from small low budget airlines increasing I would strongly recommend avoiding
stock in the New American. A better alternative would be investing into a low
budget Airline like Jet Blue, Southwest, or Spirit. But if you are looking to
put your money into a large Airline that will compete internationally with the
new American, I would recommend investing into Delta (I am currently invested
in Delta Airlines myself). Delta Airlines is expanding in all directions,
purchasing slots in JFK Airport in N.Y.C, buying a 49% stake of Virgin Atlantic
Airlines, and most importantly reorganizing itself as a low budget carrier.
Low
budget airlines are a fantastic investment at the moment but if you are looking
for short term investment opportunities I would suggest investing into
Entertainment Arts (EA).
Electronic
Arts is a company valued at over $7.2 billion that manufactures games for
gaming consoles such as Sony’s Play station and Microsoft’s Xbox. In addition to
producing games for PC’s, networking sites (such as Facebook) and mobile
devices. What originally attracted me to this company was that its stock had
seen a sell off on Friday of over 7.32%, which was another hit in a serious of
sell offs that had driven the stock down 10% over the last 3 months. Now I don’t
play video games very often so I normally I would avoid buying into the gaming
industry but with the new generation consoles coming out, such as the Play
station 4 and Xbox 1 I saw an opportunity to exploit the sale of these consoles
without betting on which one would sell better.
Buying
into a company that produces games for both consoles opens the door for immense
profits over the next few months, since consumers who buy a new console will be
forced to buy a whole new set of games to service them. This tied to the recent
sell off in the stock seems like a golden opportunity to invest.
In
the end this week was very profitable but over the next few weeks investments
in low budget airlines and Entertainment Arts could send your portfolio as well
as mine to blistering new heights.
I would ask that if you may please
leave comments about how you liked the article and any suggestions you have
about how to make it better. Also if you enjoyed this article I would ask if
you please spread the word since currently I am advertising only through word
of mouth.
I will be posting an article every weekend
and looking back at the political and economic events of that week, both
personally impacting events and suggestions about my opinions on the future of
the market
