Doug Kass and I are still bullish on bank stocks; Berkshire Hathaway's stock moves in the third quarter; Southwest Airlines Seizes the Moment as Rivals Struggle; My daughters got rapid COVID-19 tests

By Whitney Tilson

Tuesday, November 17, 2020

1) In my October 13 and November 3 e-mails, I shared a bull case for bank stocks (which I agreed with) from my friend Doug Kass of Seabreeze Partners. He concluded:

Despite the near-universal hatred towards the group, the relative earnings momentum of banks (against the non-financial components of the S&P 500 Index) will begin improving materially in the quarters ahead. That positive momentum and change in the rate of growth will accelerate as 2021 progresses.

Not content with my already large financial holdings, I have recently added to my four money center bank positions, and established a new position in Goldman Sachs (GS).

Finally, let’s remember that in a market dominated by products and strategies that chase price and momentum (“buyers live higher”), should bank stocks make a move higher from here, the machines and algos will be following and buying bank stocks, post haste.

And the same cabal that is bearish on banks will then turn positive on banks.

The SPDR S&P Bank Fund (KBE) is up 22.5% since my first e-mail and 13% since my second, far outpacing the market.

In one of his missives yesterday, Doug outlined why he thinks we’re still in the early stages of a rotation from growth to value and why he continues to believe that banks will benefit from this:

Stocks are ripping on Moderna’s (MRNA) strong COVID vaccine results. Many view this news as uber-bullish, with the prospects for defeating the virus now at hand.

From my perch, however, the time to buy equities was back in March, when confidence in scientific and health innovation was low.

Now, with confidence and valuations high, the pivot from growth to value can intensify.

It is important to recognize the damage that’s been done to small businesses as well as a number of larger businesses that have taken on huge amounts of debt to traverse the pre-vaccine terrain.

Most Americans won’t receive the vaccine until late in the first quarter of next year and our normal routines will not return until the first half of 2022.

Both the Pfizer (PFE) and Moderna vaccines will produce only a limited impact relative to consensus expectations in 2021, and will only pull forward expectations by about eight weeks.

As recently as two months ago, only about 36,000 Americans were being diagnosed with COVID-19 every day. Over the past week, that number has soared to over 150,000. And while morbidity is less than in April, daily deaths are now in line with the spike during the summer months.

As a result, lockdowns are being imposed, schools closed, quarantines escalated, public and private gatherings limited, etc.

Despite the grave consequences of the virus, bullish investor exuberance has been rising in anticipation of a therapeutic and vaccine resolution – but I view the Moderna news as a possible peak.

The pivot from growth to value may be hastened now as investors begin to worry about how much sales and profits have been pushed forward since early 2020.

The best way to play this is my favorite group, banks, which could finally break out to the upside from their recent trading range.

The Financial Select Sector SPDR Fund (XLF), for the second time in a month, is my “Trade of the Week” today.

Thank you, Doug!

2) After the close yesterday, Berkshire Hathaway (BRK-B) disclosed the stocks it had bought and sold during the third quarter in its quarterly 13-F regulatory filing.

The biggest move was a $6 billion big bet in the pharmaceutical sector, with new positions in AbbVie (ABBV), Merck (MRK), Bristol-Myers Squibb (BMY), and Pfizer (PFE). Other changes included:

  • Trimming No. 1 holding Apple (AAPL) by 3%
  • Increasing No. 2 holding Bank of America (BAC) by 9%
  • Continuing to dump other financials: JPMorgan Chase (JPM) (-95%), PNC Financial Services (PNC) (-64%), Wells Fargo (WFC) (-46%), and M&T Bank (MTB) (-35%)
  • Selling the entire $1.6 billion stake in discount retailer Costco Wholesale (COST)
  • Adding a bit to automaker General Motors (GM) and supermarket Kroger (KR)
  • Selling 42% of second-quarter addition Barrick Gold (GOLD)

It feels strange to be on the other side of a trade from Berkshire’s legendary CEO Warren Buffett by being bullish on bank stocks, but I’m not deterred. Here’s what I wrote about this in my August 17 e-mail after Berkshire released its second quarter 13-F, which showed sales of $7 billion of bank stocks:

I do think this reflects Buffett’s cautiousness about the current state – and future prospects – of the U.S. economy. But, again, I wouldn’t read too much into it.

First, Berkshire’s portfolio was seriously overweight financials. Including American Express (AXP), the sector accounted for roughly 25% of Berkshire’s $270 billion stock portfolio before the recent sales, far above the 10% weighing in the S&P 500 Index (not that Buffett cares one iota about tracking any index!). And this was hardly a fire sale – rather, it was some light trimming, equal to only a bit more than 10% of Berkshire’s total exposure to financial stocks.

Second, trimming Well Fargo was probably due to company-specific issues. As my friend Doug Kass of Seabreeze Partners wrote this morning:

I am a bit surprised about his large sale of Wells Fargo but I can understand, given the Sisyphus-like and continuing company specific problems (further exacerbated by COVID)… Remember Warren’s disdain for bad corporate behavior (Salomon?) – well he might simply have had enough with WFC management – that bridge too far might transcend the issue of being a bank.

Lastly, Buffett has recently bought more than $2 billion of Bank of America stock since July 20, and now owns roughly 12% of the company.

In summary, Berkshire’s recent disclosures don’t change my bullishness on either bank stocks (for reasons I discussed in my May 20 and July 14 e-mails) or Berkshire Hathaway (see my July 16 and August 12 e-mails).

3) Here’s an interesting story on the front page of today’s Wall Street Journal about how Southwest Airlines (LUV) is taking advantage of its rivals’ weakness during the pandemic to enter many new cities: ‘Predatory and Opportunistic’: Southwest Airlines Seizes the Moment as Rivals Struggle. Excerpt:

The pandemic is forcing many airlines to defend their turf. Southwest is using it to invade.

Even as air travel languished in this fall, Southwest Airlines Co. executives fanned out to cities from Palm Springs, Calif., to Sarasota, Fla., to scope out potential new markets. The airline is adding four more cities to its network this year and announced plans for another six in 2021. And it’s looking for more. It hasn’t added airports this quickly since integrating with AirTran Holdings, which it bought in 2011.

“It sounds risky to go open a bunch of new cities, but the alternative is worse,” says Andrew Watterson, Southwest’s chief commercial officer. “You could wait til COVID is over. But that’s far too long.”

Through its history, Southwest has leapt at opportunities to encroach on rivals’ territory when they were struggling. If successful this time, it would be a prime example how some U.S. companies, taking advantage of the carnage around them, can come out of crises stronger.

Southwest’s bet this time is particularly striking, as the Covid-19 pandemic is leaving no airline unscathed. United Airlines Holdings Inc., American Airlines Group Inc. and Delta Air Lines Inc. have together lost $23.5 billion this year through September. Southwest has lost $2.2 billion in the period, on track to break a 47-year profitability streak, and has told unions that furloughs – the first in its history – are inevitable early next year without pay cuts or government stimulus.

4) Two weeks ago, my 24-year-old daughter Alison got a rapid COVID-19 test before going to visit her boyfriend and stay with his family in Baltimore. And last week, my 18-year-old daughter Katharine also got a rapid test. Since other folks may want or need one, I asked Kathrine to write up her experience:

One of my coworkers just tested positive for COVID, so even though I had barely been in contact with her last Saturday, my boss asked me to get a test before I returned to work as a precaution.

Like Alison, I went to the CityMD on 96th and Lexington, which is offering free COVID tests (rapid, PCR, or blood) for anyone who walks in.

Based on Alison’s experience, I expected a long line – and, sure enough, it was around the block when I got there around 1:30 p.m., so I had to wait for two-and-a-half hours! Once I was inside, however, the process was simple and efficient and only took 20 minutes.

All you need is your driver’s license (Alison and I both brought our insurance cards, but they didn’t ask for them). You check in on an iPad and then wait to be called.

I got the rapid test, in which they stick a swab up your nose, but not nearly as far as with the PCR test, so it’s not as uncomfortable.

And, unlike the PCR test, where results can take days, they e-mailed me my negative report within 15 minutes.

Just remember to bring a fully charged phone or something else to do in line!

After I sent this around, a couple of doctor friends commented that the rapid test isn’t as reliable as the PCR test. One recommended the following:

If you have no known high-risk exposures and need an answer quickly (for example, a university screening a large number of asymptomatic students), the rapid test is probably OK. If someone gets a positive result, you can then order the PCR test for confirmation.

But if you are symptomatic, you should always get a PCR test. You can always try a rapid test first (if it’s positive, you have your answer), but I would absolutely not trust a negative rapid test.

If you have a known high-risk/close exposure (not wearing masks and within six feet for prolonged period of time), the CDC recommends quarantining for 14 days, regardless of test results. This is admittedly hard to enforce/follow, and I don’t think many people are doing this.

In summary, if the test gives you the answer you’re expecting (i.e., asymptomatic comes back negative or symptomatic comes back positive), you can probably trust it; if not, you should verify with a PCR test.

Best regards,


Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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