Airlines Downgraded by Goldman Sachs Despite Higher Bookings

Wall Street appears to be living up to its roller coaster reputation as stock futures point to a lower open after yesterday’s rally. Inflation continues to be a concern for investors. European markets were shaken by European natural gas prices which exploded 13% overnight. The rising prices helped to prompt selloffs in the German DAX DBI and the London FTSE FTSE.  

ADP Non-farm Employment was better than expected but IS unlikely to change analysts’ projections for Friday’s Employment Situation report. However, the positive news helped trimmed some of the losses in the futures markets before the open. The travel and leisure sectors were among the biggest gainers for jobs.

The employment news is another positive sign for the service sector. Yesterday, the ISM Non-Manufacturing PMI report reported a better-than-expected uptick. The economy saw increased attention from consumers in the service sector. A focus from services over products should be a much-needed aid to supply lines that are struggling with bottlenecks and stoppages.

Stocks rallied on Tuesday, recovering most of Monday’s losses. The Nasdaq Composite ($COMP) dropped about 2% before closing 1.25% higher. The index failed to break Monday’s high, which some investors see as a potential signal that the selling isn’t done yet. Tech stocks were able to rally despite the rise in the 10-year Treasury Yield (TNX). However, financial stocks won the day as the Financial Select Sector Index ($IXM) rose more than 1.7% on the rising tide of yields.

Despite the congressional hearing around Facebook FB, the stock shared in the rally and rose more than 2%. The stock appeared relatively unfazed by the proceedings with whistleblower Frances Haugen. Many lawmakers called for stronger laws and regulations protecting privacy, fostering social media competition, protections for children, and transparency into social-media algorithms. But users and advertisers remain quiet about their future use of the social media giant.

Rising yields were driven in part by rising oil prices. Crude oil (/CL) rose another 1.88% on Tuesday, creating a new 52-week high. With so much attention on oil prices, Wednesday’s crude oil inventories report could draw some attention.

Rising oil and gas prices are infecting food prices. The China energy crisis is making the autumn harvest more difficult. Bloomberg reports that Beijing is scrambling to secure energy supplies to help meet electricity shortages. Corn, soy, peanuts, and cotton are at risk if the harvest falls short of production goals. 

Airlines See More Turbulence

Rising oil prices are one of the higher input costs cited by Goldman Sachs GS analysts after downgrading American Airlines AAL and JetBlue JBLU Wednesday morning. Airlines are sending investors mixed messages because other airlines are showing positive signs with higher bookings.   

Adobe Analytics found that flight bookings fell 24% from July to August and Thanksgiving flights were down 18% compared to 2019. However, two weeks ago, U.S. travel authorities said it would be lifting its international travel ban in November. German airline Lufthansa DLAKY reported that, and within a week, it saw a spike in bookings.

Delta Air Lines DAL Chief Executive Ed Bastian told reporters at the International Air Transport Association (IATA) meeting on Sunday that the company has “bottomed out” on bookings and that business travel is coming back. Southwest Airlines LUV was upgraded by analysts at JPMorgan last week and Barclays this week. The upgrades appear to have lifted the industry group as the AMEX Airlines Index XAL has risen more than 12% off its September low. 

CHART OF THE DAY: LAND, SEA, AND AIR. The AMEX Airline Index (XAL—candlesticks) appeared to peak in March before the Dow Jones Transportation ($DJT—pink) peaked in May. Could airlines lead out once again? Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Final Destinations: Once you’ve flown to your location, now what? Briefing.com reported that many travel and leisure companies are struggling with labor shortages. MGM Resorts MGM and Wynn Resorts WYNN increased their labor incentives to help cope with the problem and found that it was able to meet the higher expense.

In fact, some resorts have increased their forecasts. Caesars Entertainment CZR CEO Thomas Reeg said the company is on track to set an earnings record for the quarter. Travel + Leisure TNL will raise its fiscal year earnings guidance too.

Other resorts are counting on a need for increased company meetings because of a dispersed workforce. Apollo Global Management APO is spending $2.5 billion on hotels, casinos, and convention centers from Las Vegas Sands LVS.

From the Beverage Cart: Beer and winemaker Constellation Brands STZ was 2% lower in pre-market trading after failing to meet analysts’ earnings estimates despite beating revenue projections. The company failed to live up to some of its peers. Yesterday, PepsiCo PEP surprised analysts with better-than-expected revenue, profits, and forward guidance. However, the beverage company only traded a little higher on the day. Keurig Dr. Pepper Inc KDP received a similar reception last week while expressing optimism about its future growth. Food company Conagra CAG reports earnings Thursday morning. With the low number of companies reporting earnings, these Consumer Staples companies are getting extra attention and the fact is not many investors get too excited over food and drinks. However, they’re often one of the first places investors turn when the economy weakens.

The S&P Food and Beverage Select Industry Index ($SPSIFB) is down 7% from its June highs but has remained relatively stable throughout the previous market pullback. Many of these stocks are known for their stability and relatively high dividend yields, which is what can make them appealing to investors in bearish times.

Hitting the Road: If you’re one that prefers the cupholder in your car, you’re used to seeing the big semi-trucks on the highways. The cramped supply chains have increased the need for the big rigs but they’re having supply chain problems too. PACCAR PCAR is the maker of Kenworth, Peterbilt, and DAF, and it’s struggling to get trucks to market because of the ongoing semiconductor shortage. Its third-quarter truck deliveries were down 7,000 units because of the lack of computer chips. However, investors appeared to be ready for the news because the stock rallied 3.86% on Tuesday.

The Dow Jones Transportation Average ($DJT) has seen its growth stymied and has fallen more than 9% since its May peak. However, the problem isn’t from lack of demand but the inability to meet it. High demand for the Transportation sector services could mean this group could be back on the road again.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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