I’ve been quiet. Somewhat intentionally, because I don’t really want to talk about politics and everything these days is politics and that is no fun. Somewhat unintentionally, because things are changing so quickly the written word and publishing the next morning seems hopelessly outdated. But I need to get back on the horse. Apologies in advance that no matter which side you support, I likely will look biased against you in my assessment. It is not intentional. You’d never know it, but I actually really like you.

Not long ago I saw an interview involving two aging rock stars. I’ll leave the names out of it because that is not important. But the discussion turned to LSD, and how to survive and enjoy an acid trip. They were talking about running around New York City on acid. One line stood out to me…

“A lot of stuff you see is not real. But for God’s sake assume the cars are real. If you don’t, you could be f—-ed.”

Honestly, my wife didn’t find that line nearly as remarkable as I did. Much to her chagrin, I’ve been changing the word “cars” to other things and applying it to life lessons left and right.

Which brings us to the current market environment. It has been a rough few weeks, Friday’s gains notwithstanding. And a lot of it has been due to what is going on in Washington. I can’t predict the future. I don’t know if we are at the start of the next great American century or the next great depression. (I’d bet on “neither.”) But there are two general thoughts that I am trying to keep front of mind as we go through this period. I think anyone invested right now would do well to do the same.

1. We’re not screwed yet.

You might not know it from the political rhetoric, but we entered 2025 with the economy in pretty ok shape. The economy looks a little tired and the gap between the “haves” and “have nots” is widening in ways that might indicate we are closer to the end than to the beginning, but things were… fine. Earnings season provided no reason to suggest they are becoming un-fine any time soon, at least in terms of results. The economic realities on the ground do not suggest this selloff was inevitable, and, if anything, I’d argue that the markets (stocks) have oversold the fundamentals (economic data).

Which isn’t to say it is all rocketship emojis from here. It could end up that the economic data will eventually catch up to the markets and even push things further in the wrong direction. Certainly, confidence and spending numbers are not trending in the right direction. But we are not screwed yet.

Guidance suggested more uncertainty than doom. For the most part, the story of earnings season was a backwards beat (the actual numbers were strong!) and troubling guidance (the projections about the quarter to come were not!). A lot of that appeared more tied to uncertainty and CEOs unwilling to put their neck out and make bold predictions at a time when tariffs are coming and going, and government employees are shaken, and all sorts of other chaos is going on.

Chaos might be good long-term. Change might be needed. It might be bad. That’s a political argument for another website. But in the near-term markets (and businesses) hate uncertainty. The bull case for here is economic activity has only frozen, and not declined, and if and when the dust settles and there is more clarity, we will see things pick up again quickly.

If we can get stability, I still think there is a decent possibility of a positive 2025 for the markets.

2. For God’s sake, assume the tariffs are real.

The playbook from the first Trump presidency was to use tariffs as a negotiating ploy, to quickly be pulled back. There has been some sign of this in Trump 2.0 (Colombia, for example), and markets went into this ready to ignore, or minimize, tariffs as noise and not signal.

I am not ready to say definitely that is true or false. But just as with our friends on LSD running through Manhattan seeing cars everywhere, there is much greater risk involved with not taking these tariffs seriously.

Generally speaking, the world is rapidly moving towards self-reliance and away from the multinational model that has ruled over the last few decades. The pandemic really spooked us all and showed the fragility of far-flung supply chains. In-shoring makes sense in that regard. And the appeal of regaining lost jobs is always a political winner. There are cases to be made in either direction (I still by in large favor multinationalism), but I think it is pretty clear the current administration favors self-reliance. So much so that the president is now talking about short-term “disruption” or “disturbance” as the nation goes through the “detox period.”

I really don’t want to debate the merits of this policy. But I do think as investors we should reflect on what short-term might mean. It is a word that politicians on either side of the aisle would favor, because it is both vague and not all that threatening. I certainly don’t blame the president for using it. But I think as investors we need to at least consider scenarios that stretch the definition of short-term.

If the goal is self-reliance, it will take quarters if not years to rebuild the domestic manufacturing base. Even using Elon Musk-speed factory building techniques. Perhaps tariffs can be lowered once businesses have put shovel to ground and are committed to building, but even in that case we are talking about close to a year to get the momentum going. We can’t snap a finger and change the world. “Short-term” as measured by an economic cycle is different than “short-term” as perceived as a couple of weeks of red markets. For planning purposes, at least, I believe an investor should consider the very real possibility of this lasting a lot longer than one might think.

So here we are, in a moment where both our fate (and the fate of the markets) is far from certain, but also in a moment where Pollyanna predictions of a quick turnaround seem potentially very naive. I have no doubt that, over the long-term, it will all work out. The dust will eventually settle, and good management teams can navigate through whatever is in front of them as long as they are certain about what is in front of them. The Era of Self Reliance could usher in great economic gains over time.

But it will take time, if that is where we are going. For investors, the best advice out there is more relevant than ever. I’m keeping any and all money I don’t need over the next five years in equities, excited about the long-term future. And I’m keeping every penny I might need in the next few years out of the markets, conservative about the road ahead.

The only way to survive through chaos is to assume the perceived threats are real.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

I’ve tried to be clear that nothing written here should be construed as individual investing advice. It is merely me journaling my thoughts at any given moment. And my thoughts are often wrong, or at least incomplete. Use this for educational, and if I am lucky, entertainment purposes. Don’t run out and buy or sell stocks after reading this.

Any regular reader knows I have complicated feelings on Palantir. The company’s software is uniquely powerful and has a definite use case for both government and commercial customers. Yet the stock tends to do silly things. And if Palantir manages to get the government/commercial balance correct they will be in rare company.

Palantir shares are up 345% over the past 12 months, as of this writing, and up 38% in the first seven weeks of 2025. But in the last few days the shares have lost about 20% of their value. Part of it was CEO Alex Karp announcing a new share sale plan (which I’ll admit does feel like trying to take advantage of the gains, but also, he still has plenty of stock and should have every reason to keep working to get the share price higher).

The other big thing pressuring the stock is the White House’s efficiency effort has turned its attention to the Pentagon, pushing for 8% annual defense spending cuts over the next five years.

We’ll get to Palantir in a second, but first a few quick thoughts about this so-called Pentagon cutting plan. At face value, it would mean reducing the DoD budget from $850 billion last year to about $624 billion in five years. That’s huge. And after the last few weeks, I refuse to say it is impossible. But there are some reasons for defense investors not to freak out. Consider:

• The president and vice president have both said the U.S. needs to spend more, not less, on defense. In fact, President Trump has signaled he would like NATO to increase defense spending to 5% of GDP. The U.S. GDP in 2023 was $27.7 trillion. 5% of that would be $1.3 trillion, significantly more than $850 billion. I don’t expect spending to go anywhere near $1.3 trillion, but at times of competing rhetoric it is best not to take any one statement as gospel.

• Procurement is only about 20% of defense spending. The rest of it is salaries, fixed costs, real estate, etc.

• We’ve depleted an estimated one-third of our weapons stockpile in the last five years. Which means the U.S. needs to spend just to remain flat from five years ago. There are no overages right now in key weapons systems.

Specific to Palantir: To any extent that the recent selloff is tied to the Pentagon headlines, it is stupid. Period.

Palantir posted government revenue of $343 million in the most recent quarter. Annualized, that is still less than 1% of the government’s budget. Even in a world where there is an across-the-board 8% haircut everywhere (which won’t happen) you still only need less than $30 million in commercial growth to offset.

By definition, the markets believe commercial will grow by much more than $30 million each quarter for the foreseeable future. And that brings us to the bigger issue.

I and other skeptics of Palantir’s valuation have been pretty consistent over the years: Government business cannot and will not justify that valuation. Valuation metrics are terrible and these are particularly bad but they make the point: Palantir a few weeks ago traded for 75 times expected 2025 sales, now about 65 times. 160 times expected earnings (adjusted for debt), down from about 175 times. The entire U.S. government grows at a couple of percentage points annually, and for as good as Palantir’s software is it isn’t a replacement for nuclear submarines, missiles, and soldiers. The Pentagon won’t just substitute out carriers to buy more software. Marketshare gains inside the Pentagon are limited.

There is no bull out there who can honestly argue that Palantir can grow its defense business into the valuation that the market has given it.

It has to be about commercial. It is the only way Palantir could ever possibly make sense. And given the elevated valuation, it is going to take substantial growth on commercial. Something probably beyond the 40% annualized rate management was talking about a few years ago during the IPO road show.

Here’s the truth: For Palantir bulls to be correct, defense has to become irrelevant. The only way Palantir grows into its current valuation would require commercial sales to dwarf government sooner rather than later. And in that world, an 8% haircut to that much smaller defense business would not move the needle on overall sales or profitability.

So, I have good news for Palantir longs who are worried about the potential impact of Pentagon cuts to the long-term business outlook. There is no need to worry. Whether Palantir shareholders realize it or not, they have been betting that defense is an afterthought as they have bid the stock up over the last year. And therefore, yes, this Pentagon-related selloff is overdone.

Can the commercial side do it? We’ll have to see. The software is impressive and could evolve into a lot of useful things for a lot of different customers. If so, today’s $250 billion market cap might look cheap.

Or, potentially, the valuation hasn’t been tied to any reasonable expectation for reality for some time now.

We’ll see.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

Given my focus on years or even decades, I don’t tend to get too caught up in earnings season. Very little happens over a three-month span that really changes a long-term thesis. So, I spend earnings season mostly listening for vibes and making sure nothing has happened to take a company off of its long-term path.

By my standards, this has been an eventual earnings season. Not in terms of companies unexpectedly getting thrown off course, but in terms of vibes. And I’m sorry to report the vibes are not great.

I spend a lot of time looking at the transports. It’s an area of knowledge for me, but also, I think a pretty good harbinger of what is to come. For all the talk of AI most of the economy still requires moving things from point A to point B. The volume and velocity of that movement can provide hints about what is going on.

2024 was a lousy year for the transports. For a lot of reasons. Some of it is the natural ebb and flow of a cyclical industry. The pandemic and post-pandemic “stuff” boom was bound to fade, reducing volumes. On top of that, recall that the talk this time last year was whether we could achieve a “soft” landing or instead fall into a recession. In times like that, the playbook calls for reducing inventories, not adding to them. Reduced inventories mean less need for transportation.

I expected to see improvements coming out of the sector this earnings season. The recession fears are a lot quieter now than they were 12 months ago. The conventional wisdom has shifted away from any talk of a hard landing. Corporate confidence signals have surged higher. Add to it the implications of tariff talk. I’m not here to discuss good/bad or real/not real with tariffs. I’d only say that the legitimate near-term threat of tariffs should be enough for companies to at least consider stocking up inventories ahead of potential tariffs. Which would mean activity in the fourth quarter.

Alas my gut was very wrong. All across the transport landscape this earnings season, we’ve seen more of the same. Just a few examples: UPS made headlines mostly for its (long overdue) divorce from Amazon, but the company reported flat 2024 revenue (down 10% from 2022) and predicted no growth in 2025. This isn’t just a matter of having to backfill Amazon since a lot of that transition won’t happen until 2026. This is a statement on volume expectations.

Elsewhere, Union Pacific told a compelling story about cost cuts but also guided for anemic growth in 2025. And brokerage companies C.H. Robinson and RXO both reported strong quarterly results but traded down on 2025 guidance. (I think brokerage is particularly interesting to watch because it is asset-light, meaning we can strip out a lot of the cost noise and get a real feel for demand trends.)

Simply put, if there is a rebound on the horizon none of these companies are seeing evidence of it yet. And these are the companies who should see it first.

You’ve seen this outside of transports as well. The theme for this quarter, if there is a theme, is better-than-expected results but worse-than-expected guidance. From big tech to retail there has been a real effort by management teams to temper expectations about the quarters to come.

This is not an attempt to predict a near-term stock crash or a recession. These CEOs can’t predict the future any better than you or I can. And I respect cautiousness in a CEO. The most likely explanation is rather benign: Management teams are seeing the same chaos and volatility everyone else is seeing and are setting a low bar. I can’t imagine anyone out there in corporate land is running around like Chicken Little. They are being cautious and trying not to overpromise.

But even a lack of clarity is notable.

As investors, we need to take that sentiment to heart. A downturn is coming. It could be today; it could be two years from now. But at some point, it is coming.

The best thing we can do to prepare is acknowledge the inevitability.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

I’ve been asked a lot for thoughts about the new “Department of Government Efficiency,” and specifically what it might mean for defense and government IT stocks. The real answer is: “I don’t know.” There isn’t a lot to go on right now, other than one-liner promises and tweets. It’s hard to analyze something that doesn’t yet exist in a concrete real form.

But that’s not to say it should be ignored. As Howard Marks notes above, although it is stupid to try to predict the future it is even more stupid to not take stock of the present.

Quick disclaimer: It is hard to go here without getting a little political. I’m going to do my best to avoid it but almost certainly I will say something here that offends someone’s political sensibilities. Perhaps everyone’s. That’s not my intention. I don’t care who you voted for, and you shouldn’t care who I voted for. Good/bad/whatever the best we can do is assess the realities of the moment.

Back in the 1980s, a time so long ago I had hair, economist Ed Yardeni coined the term “bond vigilantes” to describe the bond market’s oversized impact on keeping federal spending (at least a bit) in check. To (greatly) oversimplify, the government is constantly rolling over its debt and so constantly needs the market to be receptive to new issuances. When the market dries up, or becomes prohibitively expensive, bad things quickly happen to the economy.

Bad things also happen to those in charge of those economies. George H.W. Bush famously said “read my lips: no new taxes” at the 1988 convention on his way to becoming president. He lost his bid for reelection four years later in no small part because, despite what his lips said, he raised taxes once in office. He wasn’t intentionally being dishonest. He wasn’t tricked by those sneaky Democrats. Rather, (again oversimplifying) the bond markets made him do it. And he paid the price.

More recently, Liz Truss is now a footnote in history and the target of a lot of jokes thanks to her 44-day term as Prime Minister of the United Kingdom back in 2022. Many words have been written on the reasons for her short tenure. But for our purposes, and again admittedly oversimplified, Truss’ plan to cut U.K. taxes sparked a revolt in the bond markets, leading to a revolt against her.

Fast forward to today. The incoming administration, like all incoming administrations, has big plans. They want to extend the original Trump tax cuts but also spend billions on new initiatives like AI and missile defense. Both tax cuts and spending, by themselves, lead to higher deficits.

To be clear, there is nothing (really) stopping the White House from adding new debt. Sure, there are checks and balances and debt ceilings and all of that theater, but those things tend to get worked out eventually. And they should be pretty straightforward right now with the same party in control of both the White House and Congress. If so, the only thing really standing in the way is those dreaded bond vigilantes.

Since the end of the first Trump term, U.S. government interest payments have surged from less than 2.5% of total GDP to nearly 4%. That’s a combination of increased debt and higher rates, of course, but whatever the reason the net impact is the same. For reference, that is still far below the nearly 5% of GDP range of the first Bush term. So, we are not in the danger zone yet. But it is trending in the wrong direction.

With all this mind, keeping the bond markets calm should be one of the top priorities of the Trump Administration. Again, there are no (insurmountable) political limits to the amount of debt the nation can take on. Debt can continue to soar higher with very little (near-term) consequence, as long as the bond markets don’t revolt.

Which brings us back to DOGE. If I was an adviser to the new Administration (disclosure: I am not) my number one priority would be to communicate discipline to the bond markets. To show them government efficiency is a priority. To perhaps even make grandiose gestures like offering (vague) buyouts to government employees. And to make war with government contractors.

The important thing to remember here is that, in many scenarios, this will end up being more bark than bite. Again, it doesn’t really matter how much you cut as long as bond investors believe you are aware of the risk and cutting is a priority. You are buying yourself time or kicking the can down the road (depending on your political point of view).

This is all just a fancy way of saying that I expect a lot more rhetoric than action, and I expect things to calm down and get into a flow sooner rather than later. And assuming bond markets cooperate. This is not an administration that looks likely to risk looking weak on defense, and government IT firms could actually end up beneficiaries if work is outsourced.

Defense investors should be aware of some smaller risks. For example, it is possible the administration follows through on its talk of shifting more work to fixed payment (you get what you agreed to, regardless of what your costs are) instead of cost-plus (the government agrees to cover your expenses plus provide a small margin). That adds more uncertainty for the contractors, but for well-run companies operating in areas they know well and who have the ability to control costs it also creates opportunities for margin expansion.

Back to the broader point, the biggest uncertainty surrounds questions about whether the rhetoric will work. One could argue trading $100 billion worth of tax cuts (definitely happening) for $100 billion worth of potential government efficiency savings (uncertain) is not a great trade. If bond markets do not cooperate, tough choices will have to be made about whether to pursue tax cuts or spending priorities or to cut back in both areas. The most important thing to watch, therefore, is the temperament of the bond markets. Until I see panic there, I don’t expect panic elsewhere.

My best guess is that defense IT will do fine in the long run, though near-term volatility is almost certain. And bond investors interested in intermediate lengths are likely going to look back fondly on this moment.

But who knows. As Howard notes we have no idea what the future will bring, or how quickly it will arrive. The best we can do is try to figure out what is going on in the present.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

We all have heard about the butterfly effect, the idea that a butterfly flapping its wings can set of a chain of events that leads to a rainstorm half the way around the world. We experienced the investor version of this phenomenon as the market moved down on Friday.

The monthly jobs report came in far better than expectations, which implies that the economy is running hotter than some have feared, which implies that the Federal Reserve should not be in a rush to lower rates, which implies that borrowing rates will remain higher. And so, despite the economy doing well being almost undeniably good news, the indexes were down more than 1% on Friday and sectors that rely heavy on borrowing, including private equity, had stocks down 4% to 5%.

As an aside, the rate scare should not come as a surprise. The era of free money is over. It is fine to debate the margins and exactly what normalized rates will look like from here, but these market temper tantrums because we are not going back to near-zero rates need to stop. Thousands of companies can adapt and thrive in an environment where money actually has value. The ones who can’t were destined for the dust bin eventually.

But as the market reaction shows, clearly this was not all baked in. I think part of the reason for the volatility is the democratization of knowledge: Too many people are hyperaware of the butterfly effect.

Worth noting that the logic driving the selloff is 100% understandable. I’ve been talking down rate cut expectations for a year now, so I definitely don’t see a rush for the Fed to overcommit. The jobs data indeed was strong and indeed should send a signal that we are not in panic mode. Given how few tools the Fed has at its disposal there is no reason for it to move to aggressively to deploy the tools it has.

But nowadays we all think we are smart. The knowledge once limited to ivory towers and New York skyscrapers has spread to us all. We all can see how a strong jobs number might impact lending rates six months from now. We can all make the “smart trade” that back in the day only the masters of the universe knew to make.

The net result is the “smart trade” has become crowded. And for that reason, the alpha for being smart has diminished. Which is a fancy way of saying that even if the moves are directionally correct, they still tend to be overdone.

So, if the “smart trade” is crowded, is the contrarian move to take the “dumb trade” instead? I doubt it. The takeaway is to not rush into the trade at all.

What has really changed is the speed at which knowledge is spread. More people not only know about the jobs number sooner but also know what it means, causing the crowding. The contrarian move, and I believe the move that can generate alpha, is to fade the rush. Trade stocks with the next five to ten years in mind, not the immediate reaction.

To go back to the example of Friday, yes, the jobs number absolutely looks like it will raise borrowing costs for private equity in 2025. Or at least keep borrowing costs from falling the way one might have hoped they would a few months ago. But they should do little to keep a well-run firm from succeeding over time. Selling on Friday might be a good move if your time horizon is short. But makes no sense at all of you are invested in good companies and your time horizon is more than just the current cycle.

Not to sound like a broken record, but the biggest advantage we have is a long time horizon. Squander that advantage at your own peril.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

Markets rarely ever have years as good as 2024. Yet 2024 was a near carbon copy of 2023. What a time to be alive!

We ended the year up 23%, which is actually slightly worse than a year ago. It is the best two-year performance since 1997 and 1998. The S&P 500 is up 53% since Dec. 31, 2022. The Nasdaq Composite is up 84%. Most of us are much richer than we were a few years ago. Some of the smartest among us are those who just bought index funds and found better things to do with their lives.

It is easy to say nobody saw this coming. And indeed, the market is almost always giving you plenty of reasons to worry things will get worse from here. But dear reader, at the risk of sounding immodest, the market prediction I made a year ago at this time was spot on. Honestly, I challenge you to find me anyone who got it more right.

A lot of good it did me. I spent the year missing out on some of the fun. Which I am at least telling myself is by design. I’m of an age where income is beginning to matter. I spent most of 2024 selling partial stakes in big winners, especially those without a dividend, and reinvesting the proceeds in stocks often yielding 5% or more. I’m curious how history looks back on this time. I think we’ll look back on it and say the market was so focused on a small handful of companies that it ignored screaming buys for an extended period of time. But of course it is possible it will look back and say the market had correctly realized that some dividend players were headed for ruin, and I’m poorer for falling for it.

Either way, I do have predictions for 2025. I am going on the record as saying the S&P 500 will not close 2025 at 5,881.63. It might be higher; it might be lower. It might be much higher. It might be much lower. But I believe with great certainty that it is unlikely to finish 2025 at the exact same level as 2024.

Beyond that, I don’t know what to think. The consensus seems to be the market will be up 6% to 7% in 2025. At the risk of being contrarian by not being contrarian and hating on the consensus, that seems… about right?

While anything is possible, it is hard to see another 20%-plus gain after two straight years of such results. Priced relative to earnings, the market appears, um, not undervalued, to say the least. And the ingredients don’t seem to be in place for a major fall. (More on that in a second.)

I do think we will see an uptick in drama in 2025. This past year was the calmest for markets this decade in terms of volatility. Yes, we saw a few ugly days. But we always see ugly days. By comparison to most years, 2024 had fewer of those days. I think the law of large numbers, volatility in Washington, and the significant expectations priced into closely-watched stocks will lead to more mini-panics in 2025. Just not a real, prolonged crash.

I do worry some about the economy. But things are good enough for the “haves” that I don’t see a recession. It is terrible social policy to have such a divide, but it isn’t necessarily the cause of economic ruin, at least not in the short term (societal ruin is another story). And whatever else you think about the incoming administration, there is reason to believe it will be hyper-sensitive and proactive to anything that smells of an economic slowdown.

I tend to agree with the conventional wisdom that the rest of the pack will catch up with big tech in 2025. Mind you, that might mean that big tech is still the better performer. But just not by the same margin. As I said before, my theory is the market has been asleep to some great companies with stable earnings, creating real value. The market won’t stay asleep forever. And a combination of a new administration, strong cash balances built up when we all feared a hard landing, and lower borrowing rates should mean a strong year for M&A.

But what about the reckless prediction?

I checked the terms and conditions, and you can’t write on January 1 about the year to come without saying at least one thing that will look really stupid in the months to come. It is the law.

So here goes nothing: Warren Buffett will step down at this year’s Berkshire annual meeting, and soon after (at the same time?) the company will initiate a dividend. This is something I genuinely believe will happen. All of this subtle portfolio reshaping and cash hoarding is happening for a reason. Warren is setting up the next generation, and preparing a way to sweeten the blow of him leaving.

I expect Buffett to go relatively silent once he steps down, at least in terms of Berkshire. He will not be Howard Schultz. But they will invite him to the annual meetings for as long as he wants to come to opine on markets, soda pop, and whatever else is on his mind.

If that actually happens, you damn better believe I will remind you I said it come May.

Happy New Year.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

I try not to get too deep into any individual company around here, but GXO is one I am closely associated with and with it down 13% this morning I am getting a lot of pings on Twitter. So here goes nothing…

GXO, for those who don’t know, is a contract logistics company. To keep it simple, that just means they manage supply chains, warehouses, deliveries, and returns for big corporate customers. The company was spun out of XPO Logistics a few years ago, and is part of the Brad Jacobs wealth creating machine.

I’m very fond of this stock as a way to “play” e-commerce without investing in the cutthroat retail sector. But the stock hasn’t done much at all since it became independent. Part of the reason for that is GXO is very reliant on Europe, a region of the globe that has struggled in recent years. GXO is also caught up in a broader pull back in transport names due to customer concerns about the health of the economy.

Today’s drop is due to the surprise departure of CEO Malcolm Wilson. There doesn’t appear to be anything nefarious going on: Wilson will remain in his post during the search for his successor, with no quick timeline to find the replacement. And he is around the typical retirement age. But Wilson had given no previous indication that he was ready to hang it up, and indeed the company had been talking up the stability of management during investor road shows.

My impression is Wilson’s decision was a surprise to many within the company as well.

The backstory here likely has to do with October reports that GXO had hired bankers to explore a sale. As I said before, the stock has not done much as an independent. It is hard to really compare GXO to any other public company, but the stock trades at a multiple to earnings well below other asset-light logistics companies including C.H. Robinson and Expeditors International despite forecasting significantly better growth up ahead than either of those companies. As a believer in the stock myself, it was pretty easy for me to believe that some private equity or strategic buyer would also see value here and make an offer.

The speculation today is that Wilson’s departure is related to those acquisition discussions and might imply that a deal is off. If so, the stock reaction is a combination of the company losing a respected leader, and the stock losing whatever takeover premium was baked in due to the reports. The stock as I type is at $51.65. That’s about $1 above where it was in early October prior to the acquisition rumors. So, we’ve just come full circle.

A few quick thoughts:

• I think the world of Wilson and I am sorry to see him go. That said, I do believe GXO is a stable company and an attractive opportunity for a new leader and this was never a “bet the jockey” story for me. (As much as I like Wilson, for the reasons mentioned above I believe the reaction is much more due to the implied implications for a sale, and not the CEO himself.)

• Although in the short-term a nice big premium would be welcomed, if GXO ends up being what I think it can be a sale today would cost investors in the long term. I’m willing to be patient with this one.

• I’m not shocked that they couldn’t get a deal done. The board is likely to share my views on the long-term potential of this company. Otherwise, they wouldn’t be on the board. A buyer was likely trying to take advantage of an asset priced at a discount. It isn’t hard to believe that those two sides would have a hard time agreeing on a number that both provides some of that upside to shareholders while also still giving the buyer a bargain.

• I’ve been wrong on this one since the start, and I don’t advise anyone to take my advice here. GXO has been a stinker of a stock, trailing the S&P 500 by 35 percentage points since it began trading. And to be clear, the headwinds that have held it back so far are likely to continue into 2025. One of the reasons that a sale likely looked so attractive to some inside the company. Things could easily go south from here even if they do eventually improve over time. Given the stock is only where it was in early October, this fall is no insane buying opportunity.

Keeping on script, my plan is to do nothing. GXO as of yesterday was (I believe) a top five individual holding. It likely isn’t top 5 right now. I will not be buying or selling or doing anything.

It is shaping up as a pretty good day not to check too close on my portfolio.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

Dear reader, it has been a while. I named this thing “Fits and Starts” knowing myself all too well, but I had no intention of taking such a long multi-month break. The explanation is a long story involving me doing a little moonlighting and having to watch what I say publicly. But that’s not for today. My apologies; and I do hope you missed me.

Ironic that in my last post before the break I said, “In times of uncertainty, the best choice can be to do nothing at all.” (I didn’t mean it so literally, and in fact had no idea it would be the last post before a sabbatical.) 

On that day, the sky was falling. The Nasdaq was down 5%, Japan had exploded, and CNBC was using its crisis graphics package.

The Nasdaq is up 18.5% since.

In fact, I am struck my how many things have happened during my silence and how little it has mattered for long-term focused investors. The election. Further chaos abroad. New inflation talk. A sedated holiday outlook. On a day-to-day basis, a lot of reasons to go hide your cash under a mattress. And yet, the market is up double-digits in just the last few months. Given the anxiety and headlines that surround an election this was probably the perfect time for a buy and hold investor to just walk away and do nothing. I’d love to say that was my brilliant plan all along. But I’ll settle for being lucky.

It has been a pretty remarkable market. The subscription-only deep value portfolio I put together over at Savvy Trader that has only been going since May has four +40 positions already. That’s weird. These are situations that are distressed enough that it could take years to resolve.

So what now? Even more panicky headlines heading into the new administration. Likely some more wobbles from big tech as the AI revolution continues to show great promise but inevitably will be unable to grow at ludicrous speed indefinitely. Who knows, we might even have a recession in 2025. Or new all-time highs. Or both. My guess it both.

My one prediction: Those who buy low-cost index-tracking investments in 2025 will be glad they did so in 2030.

I’m planning (considering?) a pretty big overhaul of my personal portfolio and will be hashing that out in real time best I can here. And I have lots of thoughts on Elon’s Department of Government Efficiency and what it means for defense stocks. Spoiler: I’m drooling. We’ll get to that soon.

But mostly, I’m just going to try to resume the cadence from before the hiatus. Knowing full-well actually writing is likely to reduce my subscriber count significantly. It’s a good thing I have priced this thing accordingly.

I should preface this by saying I don’t own a crystal ball. And my time machine has been in the shop for weeks. My ability to predict the future is lousy. Which by the way makes it equal to everybody who will be appearing on CNBC today.

There is a lot of dark red on my screen this morning. S&P futures are down more than 3% as I type. Nasdaq 5%. Japan cratered. Friday was a lousy day and Uncle Warren didn’t do bulls any favor over the weekend with his (seemingly… really tough to read into so be careful) flight to cash.

The open looks like it is going to be ugly. Really ugly. CNBC is going to have lots of logos on the screen.

I don’t want to sugarcoat things… This could be the opening days of the next Great Depression. The Fed and central banks all over the world have been f**king around for years now, and perhaps today is when they find out. Keeping rates artificially low definitely did encourage a rush towards debt that can be viewed as bubbly. Perhaps the air is about to come out of the balloon.

That said, this could be done by the afternoon. Looking at volatility (VIX for the cool kids), there is clearly an algo-driven trade rapidly unwinding. There is a stampede towards the exit, and the proverbial door is too small for an orderly procession. That work, that unwind, will likely be done today. Probably by midday even. VIX will ease at that point. At that point it is possible there will be a bounce upward. It isn’t completely out of the question we close green today.

More likely, this could be one million points in between. Even after the algos are done midday everyone else is in such a frenzy they continue the selloff into the close and perhaps for days or weeks to come. It isn’t the 1930s again, but it is ugly for an extended period.

It will probably be none of those three things exactly and could be something my little mind hasn’t even considered. I don’t know. We don’t know. Nobody knows.

What I do know for sure is that I believe in this chart:

Obviously, I could go back further. But you know the narrative. There is a lot of ugly there. The dot com crash is there. 2008 is there. COVID is there. And for those who just kept their cool through all of it, there is a lot of wealth created in there. The Great Recession is now so long ago it hardly bends the line on the 120-year Dow chart.

You should have no money in the markets you need for the next few years. If you do, get it out ASAP (perhaps not at the open, but ASAP). Today could end up being a generational buying opportunity. It could end up being the last chance to sell. Or it could be just another trading day you hardly remember two months from now.

You can’t control the direction of the market. You can’t control the market’s reaction to the direction of the market. All you can control is yourself.

Today would be a great day to see a movie. To drive to the mountains for a long hike. To start a 1,000-piece puzzle. Definitely do something.

But when it comes to investments, my plan for today is to do nothing. It is ok to just sit on the sidelines.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

We talk a lot around here about the value in playing a different game.

Wall Street and the talking heads on CNBC are focused on the quarter. Or the next few quarters. They get paid to tell you what happens next. Not how the story ends. Their price targets are for one year out. Not the long-term value creation possible.

They upgrade and downgrade based on the most likely path for the next few months. Not on the long-term potential of a company.

We don’t have to be hemmed in by the next few months. We have the ability to think well beyond the current business cycle. It is the reason we can beat the pros.

Last October, when reflecting on some of those calls from the pros, I wrote:

I don’t provide stock advice here. I don’t tell you what to buy. If you want some ideas from me on what to buy, there is a Savvy Trader portfolio of unloved, bruised stocks with potential to turn into something that you can check out.

But it might be interesting to look at an example in hindsight.

I’m pretty sure I wasn’t referring to Live Oak Bancshares when I wrote those words last October, but I was certainly thinking a lot about Live Oak in 2023. And buying Live Oak shares. Especially earlier in the year. Live Oak is a wonderful little small-business focused bank with just one location in Wilmington, N.C., and a national online footprint. (Disclosure: I’ve visited Live Oak, I’ve chatted with management in the past, and Live Oak was and continues to be a significant holding. Which, for the record, doesn’t mean you should buy it today or ever.)

In early 2023, interest rates were jumping and (poorly run) banks were failing. There was some panic selling, but also good, rational calls predicting tough times up ahead for banks. Live Oak lost more than 40% of its value between mid-February and the end of May.

In hindsight that was obviously an overreaction. But certainly, business was tougher for Live Oak in 2023 than it was in 2021 or 2022. The company had some less amazing earnings. The stock was downgraded and price targets were cut. Wall Street analysts, focused as they should be on the quarters ahead, were accurately assessing the current climate for banks like Live Oak. They were doing their jobs.

But that didn’t mean we who are more interested in time periods much longer than the next few quarters needed to listen to them. They weren’t talking to us, and we would have been wrong to listen to them.

You know where this story is going: Live Oak announced a strong quarter this week. The stock has more than doubled from its May 2023 low and is up something like 65% since I wrote those words back in October. There have been a lot of price target boosts and positive analyst calls along the way.

To be clear, they don’t all go like this. And certainly not this quickly. For one, it is best you stick with quality companies you are reasonably sure can ride out the storm. And even with quality, there is no guarantee that the storm won’t be so severe that it is able to capsize even the most stable vessel.

But it is also true that there are opportunities like this out there all the time. Something is always out of favor, and often for good (short-term) reasons. The two stocks I believe I was thinking of when I wrote those words back in October are both up from there, but both are still surrounded by significant near-term doubts. Obviously, I could still end up being wrong on them. But I added to my position in one just the other day.

The lesson here is to weed out the noise. Understand that the people paid to do this for a living are not talking to you, the long-term investor. Therefore, you don’t need to listen to them.

Your advantage is your time horizon. Don’t forget that.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

I’ve been a Vanguard customer since the 1980s. Which means I’ve been generally happy with the service. Sure, I like to complain. And nothing is perfect. But you don’t stay with a company for going on four decades if you aren’t at least pretty satisfied with their product.

I’m also a big fan of Jack Bogle, and a believer in the “less is more philosophy” of investing. For most of us, in most instances, set it and forget it is enough.

That’s probably not going far enough. For most of us, set it and forget it in the form of some good low-cost index funds and ETFs is superior to trying to beat the market. It is hard to do, and with enough time it is not necessary to even try.

Which is all to say I’m generally of a mindset to defend Vanguard as a protector of the common investor in an industry that makes a good bit of its money overcomplicating things and force-feeding products that are unnecessary.

But at the end of the day, each of us has to make our own choices. And a brokerage that restricts our opportunity to make individual choices is skating on thin ice.

Take, for example, the message you see if you try to buy a Bitcoin ETF on Vanguard. For this example, I used the Grayscale Bitcoin Trust ETF, but the same message pops up for any Bitcoin ETF. (Vanguard does not have crypto ETFs, so this isn’t just a case of them pushing money into their own products.)

Least you think this is some “regulatory restriction,” here’s what Vanguard has to say about crypto on its blog:

I’m probably the last person in the world you’d describe as a Bitcoin champion. I don’t get it. And I’m probably closer to Vanguard’s line of reasoning than the average investor.

But I also realize that sometimes I am wrong, or at least late to see what others see. I can see a scenario where I might want to allocate say 5% of my investment portfolio to crypto as a hedge against my potential ignorance.

Vanguard is trying to be morally superior here, but this is the same company that freely allowed us to trade AppHarvest to $38 per share (it is now bankrupt) and who would freely allow us to buy into Virgin Galactic in 2021 when the market valued the business at more than $12 billion (its market cap is less than $200 million today). As it should, by the way.

By Vanguard’s logic, buying those stocks (or any other in hindsight mispriced equity) did have enduring investment merit and has more of a place in a long-term portfolio than crypto. Vanguard is looking into the future and is calling Bitcoin a dud. No matter what becomes of Bitcoin (similar to no matter what becomes of Virgin Galactic), that is a disservice to Vanguard customers.

Another example. As stated, I’ve had a relationship with Vanguard for going on four decades. They have a better snapshot into my investment habits and the size of my investment portfolio than almost anyone.

Yet, as of the last few months (and only the last few months), when I deposit new funds I am restricted from buying equities with those funds for seven days.

Some context: The account in question is an IRA, so not a quick money in and out account, and it has been open for years. The amount in question is a few thousand dollars, or a small fraction of the overall value of the account or my holdings with Vanguard. The account being used to fund the deposit electronically has been open for decades and has been linked to Vanguard and has been a source of funds headed to Vanguard for more than 10 years.

There’s no way this is being done “to help detect and prevent fraud.” If this is necessary to prevent me fraudulently funding a retirement account, Vanguard’s computer systems are from the 1960s.

My cynical guess was this is an attempt to funnel funds into Vanguard products instead of non-Vanguard products. Note the more generous terms if you buy mutual funds instead of stocks. But a friend who closely monitors the company (NOTE: Not a spokesperson, and not official word) believes it isn’t a marketing initiative. Rather, their guess it is one part a tech issue (sigh) and one part Vanguard’s attempt to limit “fast money” and impromptu trading. Think of that week as a cooling off period.

I have no idea the reasons. But at best it is a reflection of outdated technology, and at worst another example of Vanguard claiming it knows best when it comes to what I should do with my money.

Ultimately, these are Vanguard’s decisions to make. And the customer’s only recourse is to go elsewhere. I’ve opened a brokerage account somewhere other than Vanguard. It is small, at least for now. I’m not buying crypto or Bitcoin ETFs, at least for now. I’m not making impulsive trades or resorting to day trading.

I don’t think I am leaving Vanguard. It is a pain to transfer accounts. But it is hard to completely rule out Vanguard deciding (just to be argumentative) that since small caps have underperformed large-cap tech over the last decade, they are not appropriate for a long-term portfolio. Or any of a million other what ifs.

Ideally, Vanguard will evolve and do better by its customers. If not, at least I’ll have a plan B.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

QXO. Again.

Yes, I know you are probably tired of reading about this. To be honest I’m tired of thinking about it. But the reality to fiction spread here continues to be really high. People could end up losing a lot of money. And due to the (perceived) market cap and lack of volume a lot of outlets don’t have it on their radar screen. So, there isn’t a lot of information out there.

As we said last time, Brad Jacobs’ planned building products rollup is now a thing on public markets and can be invested in. But the whole thing remains a mess. As I type, the shares are trading for $150 apiece and Yahoo (and many others) say the market cap is below $100 million.

Thursday night, QXO issued a release announcing a $3.5 billion capital raise from a group of investors. It is an interesting release. It appears to be the largest ever equity offering in the building products industry. It also appears to be the largest ever investment ever made into an industrial company. Public or private. The investors have not all been disclosed, but the names being whispered are an impressive list of who’s whos. Many of them have done very well with Jacobs in the past. They know what they are buying into.

The news also should expose how ridiculous that sub-$100 million market cap is. (And is likely responsible for the selloff.)

So, what’s going on? The issue appears to be that certain data providers don’t count preferred stock when calculating market cap until those preferreds are converted. There is some logic there. And perhaps it works in more instances than it doesn’t. But in this case, where more than 90% of the potential float is in unconverted preferred (which admittedly is rare), it is not very helpful.

The real thing for investors to note in the release is the breakdown of share count and the price per share being paid. You can read the release here. I copied the key section below.

All in, with the latest raise and everything converted to common, the company would have 821.6 million shares of common stock. Not the 664,130 shares that Yahoo is reporting. That would imply a market cap of $123.24 billion at the price above. Not $99.6 million. The investors are buying in at $9.14 apiece. That’s a heck of a discount to that $150 per share price.

What should QXO be worth? No single person can tell you. We are talking about a holding company run by some really smart people with excellent track records who have upwards of $4.5 billion in the bank but nothing more right now. Add in the potential to use debt, and there is easily $5.5 billion in dry powder to put to work. FWIW, Jacobs has said he hopes to grow QXO into a $50 billion revenue company over the next decade. The market likes to be forward looking and pay for potential. Jacobs has a lot of credibility with the market.

As has been made clear, I’m a huge fan of this team and this story. I like it enough that I’d be willing to accept a valuation above $10 billion here. But even $10 billion would imply a share price in the $12 to $13 range when using that 821.6 million share number.

Two things can be true at once.

1. QXO is an intriguing opportunity that I can’t wait to add to my portfolio.

2. QXO shares today are, to me, untouchable.

I am not here to tell anyone when to buy or sell a stock. That’s your call. But I do fear that anyone buying or holding today, perhaps based on the market cap they see on their screen (or perhaps seeing “value” in a stock down big from where it was earlier in the week), will end up losing a lot of money.

The relevant information is all there if you look. Please understand what you are buying before you pull the trigger.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

It used to be that Southwest Airlines was a one-of-a-kind investment. In an industry more prone to bankruptcies than profits, Southwest was both an amazing stock and an even better operator.

Investors who bought in at the dawn of deregulation were up 20,230% as of year-end 2015. Up 3,990% from 1990 to 2015. Or 10x the S&P 500.

For an airline stock.

Herb Kelleher became a legend off the back of that performance. And the praise was justified.

Which is why it is so strange to fast forward to today. Southwest is in the dumps, badly trailing the other major airlines. And activist Elliott Management is coming for blood, building a substantial stake and calling for the company to overhaul the board, fire management, and get rid of a lot of the things like free bags and no segregated cabins that made Southwest famous.

Consumers are going to hate to hear this, but Elliott is right about almost everything. My only quibble is Elliott’s belief that the stock can jump almost 80% within a year if fixes are made. While the fixes are needed, I don’t think the payoff will be quick or is guaranteed to happen. Southwest is caught in a tight spot and while there are obvious moves, there are no easy solutions.

A few thoughts:

1.) This has not happened overnight

A lot of the narrative around Southwest from outsiders involves “wow, when did that happen?” Truth is it has been brewing for nearly 15 years. Southwest made its money in part by being the only smart person in the room for decades. The legacy airlines lived in a pre-deregulation, limited competition world where share was everything and for years chased marketshare blindly and with no regard for profitability. And surprise, surprise, that didn’t work.

To understand the U.S. aviation market, it is helpful to think about the world before and after September 15, 2005. That’s the date Delta filed for bankruptcy. and the beginning of the evolution of the industry. The filing, and the other filings that followed, sparked a round of consolidation (Delta/Northwest, United/Continental, American/US Airways, Southwest/AirTran) that reshaped the industry and left four airlines in control of more than 80% of the domestic market.

It also was the beginning of Delta’s rethink of how to do business, with a focus on profitability over marketshare. It is a model that has been successfully copied by others in the years since. This was the beginning of all of those fees you find so annoying but which are so damn impactful, and the beginning of using technology to better price the product based on demand. The technology also allowed the airlines to carve economy seating into subsections based on specific customer demands, extracting extra revenue from those who wanted extra legroom or priority boarding but also allowing for profitable price matching against discounters for those who didn’t.

In short, the competition caught up and Southwest stayed put. Absent the low-cost and pricing power advantages it once had, Southwest instead focused on differentiation. That meant not tacking on the fees for bags and early boarding. Consumers did appreciate it but were not willing to pay extra for it.

That might have worked if Southwest still had a real cost advantage. But time and size had caught up with it. Labor groups (understandably) felt that given Southwest was the largest U.S. airline in terms of marketshare, they should be paid accordingly. Southwest for a while succeeded on winning loyalty, but it didn’t translate into strong margins.

2.) This is not Boeing’s fault

Southwest is famously an all Boeing 737 operator, so it has been hit harder than most by Boeing’s issues with the plane. Southwest had to rejigger growth plans because deliveries have slowed. That hasn’t helped, but as said in point #1 there is a lot more going on here.

Yes, Southwest has underperformed this year. But shares of Southwest have underperformed Delta significantly over the past five- and ten-year periods. That’s even if you include dividends. This patient was sick long before Boeing started sneezing.

3.) The cure is going to hurt as much as the illness

So, what is Southwest to do? Elliott would like to see a board and management overhaul (makes sense), they want to see technology modernized (an absolute must. The current tech is prone to failure and does not allow for the nimble pricing others enjoy). And they would like Southwest to take a hard look at the fees that it has so far refused to embrace.

It all makes sense on paper. Most of it are things management should consider with or without Elliott. But as noted before, Southwest no longer enjoys the structural cost advantage it once did. At best it is largely on par with the likes of Delta or United, and airlines like Frontier and Spirit can easily undercut them. Its point-to-point route network is ideal for quick hops but it means more connections for those traveling cross country, putting it at a competitive disadvantage when prices are equal.

Southwest’s strongest asset is its brand loyalty. But if a big part of the turnaround means going back on all of the (sometimes bombastic, always adamant) promises made in advertisements about bags flying free and Southwest being the alternative to airlines who nickel and dime them, how strong will that brand loyalty be a year from now?

The current plan is not working for Southwest. Change is needed. But part of that change (the tech upgrade) requires more spending. The revenue part of it risks alienating its most loyal customers, or at least commoditizing the product. It represents the final crumbling of the “Southwest is different” narrative and will likely make this just another airline. There isn’t really a strong, compelling reason to invest in just another airline.

There is nothing wrong with what Elliott is suggesting. But the activist’s involvement doesn’t make me want to buy Southwest shares.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

We’ve talked a lot around here about the advantage we have in playing our own game instead of getting caught up in the game that plays out on CNBC.

To summarize… The best way to create long-term wealth from the stock market is to find good companies and then have patience and try not to do much. But that makes for terrible television, especially with a 24-hour news cycle. So, by necessity, the networks gravitate towards those who are willing to overreact to the normal ebbs and flows.

Way back when during a time of my life when I had to take media training, I was told the number one rule of live television is to keep talking. Even if what you are saying doesn’t make a lot of sense. Most viewers aren’t processing word by word and will assume they misheard if something is really off. But if there is a pause, if there is silence, everyone looks up from what they are doing and focuses on you. And may the gods help you when that happens.

Oddly, the same is true when talking to a reporter. You keep talking. You say something that sounds smart. And you move on.

At the risk of picking on just one example when examples are everywhere, I give you this quote from a Reuters story on why some firms are selling Tesla shares…

We should do some quick disclosures: I don’t know who John is, but I know some of his colleagues at Gabelli and I think the world of them. If you are someone who wants to be in the business, or wants a good option for managed funds, Gabelli would be top of the list for me.

I realize I am making a lot of assumptions here, and I don’t mean to single out John. But the quote makes no sense. Some context: Since the beginning of 2022 (a time when they were buying Tesla shares)…

• Tesla’s revenue is up 76%

• Tesla’s EBITDA is up 43%

• Tesla’s stock has lost half of its value

You put all of that together, and (use these metrics at your own peril) Tesla’s price to earnings has fallen from 240x to 44x, and its price to sales has fallen from 23x to 6x.

And yet, in John’s own words, from point A to point B Tesla’s fundamentals were becoming detached from realty. Implying, I think, in his mind the fundamentals were attached to reality when the numbers were a whole lot rosier. Or were more attached to reality, at least?

I don’t want to even get into the second part of that quote. I am not sure of a time over the past 10 years where I found Tesla’s stock price was justified by “auto company fundamentals.” So, I’ll sit that argument out.

Just a guess, but I’d say the more honest answer is his job as a growth equities stock picker is to ride the momentum. To ride the wave. And Tesla without doubt had a lot more momentum 2.5 years ago than it did now. It would have been weird for him not to have Tesla in his portfolio back then. It is less clear now. So, he did his job and added and subtracted as appropriate.

In the growth-focused market we’ve had, this momentum-based strategy likely generated much better short-term returns than a simpleton like me could produce.

But, of course, you’d want to avoid saying that to a reporter. So instead, you talk about fundamentals and move on to the next question.

Nothing wrong with it. Nothing sinister, nothing that doesn’t happen every day. But important for us, the consumer, to be aware and keep the filter on instead of acting on every word said.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

Quick weekend thoughts on developments from a company, and a future company, that I spend way too much time thinking about around here…

TransDigm done did it again

We last discussed TransDigm back in February. This super-boring market-crushing stock continues to plod along out of the spotlight delivering software-like margins from old-school industrial aerospace businesses and generating piles of cash. As has always been the case over the past decade or so, I continue to hear talk of how the laws of big numbers are catching up with them. And the best days are over. You can’t roll up small companies with gems contained within forever.

Meanwhile, TransDigm stock is up more than 30% year to date.

As always, past performance is not a predictor of future returns. But the playbook — a private equity-style rollup and operations shop — continues to hum along. Earlier this May, CEO Kevin Stein said the M&A pipeline was unusually strong. The company has about $10 billion in capacity to do deals, and a real appetite.

Last week, TransDigm agreed to acquire Raptor Labs Holdco from private equity for $655 million in cash. This is vintage TransDigm. Raptor makes complex test and measurement gear used by aerospace and defense companies. Nearly all of its revenue is generated from proprietary products (criteria 1 in the TransDigm M&A book). Their issue has been how to scale and meet demand. Hello, TransDigm.

There’s an interesting side angle here as well. Stein is increasingly getting peppered about moving into new verticals, away from aerospace. One recent acquisition target, the Electron Device business of Communications & Power Industries, generates about 20% of its revenue from the medical industry. There is a lot of overlap between medicine and aerospace when it comes to electronics, sensors, and testing capabilities. Heico, the nearest public company comparison to TransDigm, has a growing healthcare business that helped the company offset sales declines in aerospace due to COVID.

Stein insists that TransDigm has no need to venture outside of aerospace. I believe he believes that. But there is a next big thing brewing here.

Who knows, perhaps this ride can’t go on forever. But I have no intention of disembarking any time soon.

“The Man” found his right-hand man

XPO Logistics, and specifically the man behind it, Brad Jacobs, has a big role in the origin story of this newsletter and of this investor. He’s part of the reason I spend time these days searching for other potential big winners hidden in plain sight.

Back in December, we talked about Jacobs’ next big thing. He even talked to me about it. QXO, as the company will be called (admittedly Jacobs’ Achilles heel could be naming things), will be built as a rollup of building products distributors, including construction materials, plumbing supplies, and HVAC equipment. He and a group are putting up $1 billion for growth and has a list of about 20,000 potential targets spread over North America and western Europe.

We have two developments to report:

First, shareholders of the company that Jacobs is merging with/acquiring to gain a public listing, Silversun Technologies, have approved the transaction. We’re still a ways away from the deal closing and QXO getting that listing, but this was a big step forward.

I’ve said before, don’t buy Silversun. Unless you really like the shell of a consulting business it is now prior to the merger. When the deal closes current Silversun holders will get a tiny bit of cash, a stake in the consulting business as it is spun out on its own, and a fraction of a share of QXO. If QXO is what you want, just wait and buy it when it becomes available on public markets.

The second update is really fascinating. Jacobs has found his right-hand-man to make the M&A machine work. QXO has hired long-time investment banker Ihsan Essaid as chief financial officer. Essaid is currently the head of global M&A at Barclays and has previously worked at Credit Suisse and BofA. He also spent time at a shop that is near and dear to my heart, Perella Wienberg Partners.

Rollup stories are risky because acquisitions are risky. I’m not sure it is true that most deals end in failure, as the popular adage on Wall Street goes. But I am pretty sure a good number of them underwhelm. The best way to offset that risk is to make dealmaking a core competency. To have a collection of people who know how to make deals.

Jacobs is one of those people, at least for me, and his track record supports my opinion. Bringing in Essaid is another plus.

I expect to hear about QXO’s first acquisition perhaps before the Silversun deal closes and we have a stock to talk about. There are no guarantees in life. QXO could fail to deliver. But I continue to find this story intriguing.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

I’ve been thinking a lot about small caps these days.

This isn’t a fashion statement (I have a freakishly huge head). But rather, obviously, stocks with smallish market capitalizations. There is no shortage of click bait headlines that attempt to set the definition of what constitutes a small cap (I’ve probably written a few of them), but generally speaking we are talking about companies with market caps below $2 billion or even $5 billion. I might be tempted to push it a little past $5 billion.

It is a part of the market full of promise, and full of train wrecks. I’ve been focused on them as part of the collection of stocks I’ve been working to put together (the collection I talked about here). The idea is to find stocks that are either misunderstood, or just not widely discovered, in hopes of going on a wild ride. Not all of those rides are upward, but one or two hits go a long way towards a bunch of misses.

We hear it discussed often, but it is still amazing to stop and realize how little attention we pay to most of the market.

Consider the stats, from my friends over at GAMCO (I stand by everything I’ve ever said about the perils of managed financial advice, but I’ll still argue Mario Gabelli is the best. Be well, Dr. Love.) The numbers:

As of year-end 2023, the total stock market capitalization of the US stood at $50.8 trillion. The top 10 largest companies combined market cap was $15 trillion. That’s 29% of the entire U.S. market cap — and 31% of the S&P 500’s market cap — tied up in just 10 stocks.

The S&P 500 covers about $44.3 trillion of that total market capitalization, or 87%. Arguably, if you have an index fund you are covered there.

It is no wonder that the other $6.5 trillion or so gets ignored. Who has the time? And for that exact reason, that’s where the hunt is most interesting. (Full disclosure: Misfit Alpha has been screaming about this for as long as I have known him!)

Alas, there are a lot of losers in that mix. And few businesses with the credentials of the Magnificent Seven. Most of us are just fine buying in the index and moving on to something more important. Probably better off.

And yet, finding winners among the masses is fun! And in theory, could be very profitable. If you find them.

Which brings us back to this collection of stocks I’m compiling. I’m going to do my best to hold myself accountable, for the benefit of you and, I think, the benefit of myself as well.

In the last few weeks, I’ve picked eight companies that are down and out, and some for very good reasons. There’s a case to be made they all have a lot of potential to go up, but they are all also candidates to be forgotten about in a few years’ time. I’ve got about a dozen other stocks that I am trying to narrow down to add.

As I type, five positions are green and three are red. But one of the reds is really red. The S&P 500 is up 0.97% since the first stock was entered into the system. The collection is down 0.65%. This is obviously a long game; it is a collection of stocks that need time to prove themselves. How long is an interesting question, but I would love to see some validation from at least a couple of these companies in the quarters to come.

Is it worth it? In a world where it is so easy to just track the S&P 500 for a fraction of a penny on the dollar and gain exposure to 87% of the total market, is there really a reason to do more and beat it? The answer is, and always has been, it is when it works!

Time will tell, but I’m excited about the experiment and curious what I might be able to learn.

If you’d like to join me in this adventure, Savvy Trader has a good community section. You can find me there.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

My father used to say the biggest difference between New Orleans, where he grew up, and Washington, D.C., was that if you meet someone in New Orleans, they ask you where you went to high school. If you meet someone in Washington, they ask you where you grew up.

In Atlanta, where I am now, the question would be, “what do you do?”

I get asked that a lot. And it is definitely the hardest of the three questions to answer. To be honest I sometimes just say “I’m unemployed,” especially if my read on the person asking is they are not someone who I’d enjoy talking markets with. And definitely that’s what I say to anyone driving a Tesla. Technically I don’t have a full-time employer, so it works.

Of course, the real answer is more complicated. I think my bio says I am a 30-year finance professional with a series of jobs working on M&A, venture capital, and equities research. But really, I’m just a markets dork. I wake up each morning to see what the markets are doing and go about my day buying or selling or researching or writing about some stock or another. My honorable mention job title is “dog walker.”

The most frequent questions I get, be it on Twitter or from readers on here, are about stocks. Either opinions on individual stocks, or questions about what stock to buy. I’ve done my best on this forum not to answer those questions. It seems like a sure path to people being angry at best, and litigation at worst. And to be clear, I don’t know you well enough to make that decision for you.

But it does create a bit of a conundrum. Here I am spending an unhealthy amount of the time looking at markets and thinking about markets and forming opinions on markets and individual stocks, with little to show for it and no real way to engage in good discussions on a level that would be interesting.

As I’ve mentioned before, I don’t often act on what I am thinking. But I do act more than I probably let on around here. I think of my portfolio as a barbell. The top dozen or so positions are in strong, established companies that I believe will stand the test of time. Barring any real black swan across multiples of those companies there should be enough there to make sure I don’t go hungry. Coupled with mutual funds it should be enough to cover getting old and what I hope to be a long, drawn-out fade.

It is the other half of the barbell that is, though less consequential (at least today), a lot more interesting. A lot of my time and energy goes towards trying to find under-the-radar or misunderstood stocks that I think at least have the potential to do great things. When the stars align and all goes right these stocks have the potential to transform themselves into creatures living in the other part of the barbell. I shared the story of XPO, a little nothing of a logistics company that returned 4,000% over just more than ten years, when I started this. Those opportunities aren’t common, and more of them fall apart than succeed, but it only takes one winner to offset a lot of blahs.

So here I am, with all sorts of ideas (likely good and bad), plenty of people asking about them, and no real way I’m comfortable with in sharing them.

All of this is just to say I’ve decided to join the Savvy Trader platform. For those unfamiliar, Savvy Trader is a subscription service with real-time portfolio tracking, narratives about the reasons behind portfolio moves, and a community chat feature.

My presence there, as “Lou Whiteman’s Island of Misfit Stocks,” is a collection of companies I either own or am watching (mostly owned) that are beaten down or dismissed. Or both. Most for good reason. But I believe they at least have the potential to rebound nicely. For reasons provided within. I’m building an initial collection of ten from a few dozen tickers that I spend a lot of time thinking about. I intend to adjust and add over time as appropriate. And hopefully chat and learn about these and other tickers with anyone who would like to talk stocks.

It is the long game. These sorts of things do not tend to happen overnight. Patience is required but only some patience. The plan is to sniff out bad ideas before they go to zero and redeploy into new ideas or winners who still have potential for more. Even if you are not there from day one, you can assume if it is still in the portfolio, I still consider the stock capable of going higher from here.

Hopefully it goes without saying, but there might not be another XPO in this bunch. These are definitely stocks that belong in the second part of a barbell portfolio, and not the bedrock. I buy into these sorts of companies fully-aware I could lose everything on any of them. Even all of them. And size my positions accordingly.

Learning is a lifelong journey without a destination. This portfolio is part of my journey. If you are interested in joining me, the link is below. I’d love to have you along for the ride.

Savvy Trader

Savvy Trader - Discover, Create, Share and Trade Virtual Paper Portfolios

savvytrader.com/lou_whiteman/lou-whitemans-island-of-misfit-stocks?s=MjQ2OTg6NTU2OQ==

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

GameStop is a thing again.

For those on some peaceful island away from markets Monday (and boy am I jealous if you were!), shares of GameStop (and AMC, and…) are once again going to the moon based on a single, wordless tweet from Roaring Kitty, aka Keith Gill, one of the architects of the COVID-era YOLO nothing matters shitco rally.

We really don’t have much to go on than that. My personal hope is that Nicholas Rossolillo’s idea that Roaring Kitty’s account was simply hacked turns out being correct. Because who doesn’t love theater of the absurd?

But assuming it is real, I am probably partial to John Authers’ argument that the mania won’t get quite as stupid, or quite as frothy, as last time. It is hard to do sequels, and people have a lot more free time/things to do this time around. There is a case to be made that it could get more frothy this time around because tourists and even professionals will attempt to ride the wave along with the Reddit crowd this time around, bidding shares up even more, at least temporarily. But all in, I tend to think everyone has better things to do.

I do want to object to one line in Authers’ column. This one…

This is false. There is zero downside to ignoring the memestock craze and all of the stupidity that surrounds it. In fact, the danger is in not ignoring it. In getting caught up in it and being left holding the bag if/when the gang moves on.

This goes back to one of the basic arguments we’re trying to make here. In investing, you don’t have to fight every battle. You don’t have to play in every game. There are thousands of investment choices. No one punishes you for missing a craze or not getting in on every successful stock.

In reality, there are some games worth playing and some best avoiding. If you want to buy a lottery ticket, buy a lottery ticket. If you want to try to get rich off of GameStop, go for it. Just understand the risks and the odds for both. But if you’d like to get rich in a way that allow you to enjoy your free time and not constantly worry about every move on a ticker chart, sit this one out.

Sorry John, but it just isn’t dangerous to ignore Roaring Kitty.

Roaring Kitty

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

Hugh Hendry is… something.

In the last 24 hours alone, I have mockingly (lovingly) referred to him as “Stock Bono,” “Richard Branson on speed,” and “Charlie Methhead.” If Trainspotting was about hedge funds he’d play the lead.

He calls himself an Acid Capitalist. He’s just wired different. Warren Buffett made billions and didn’t sell his house in Omaha. Hugh made billions and moved from Castlemilk to St. Barts. His cornerstone investing principles are (1.) God is dead, (2.) Life is absurd, (3.) Rules don’t matter. He dresses like he is on his way to a Sex Pistols show. Hugh is… something.

Not the usual hedge fund manager outfit.

But here’s the thing: Much of it is an act. And Hugh Hendry, in addition to being weird and at times a bit drugged out, is really really smart. Whether it is the acid or the way his brain works, he sees things that others don’t. Forex is a graveyard. You should not trade forex. But it strikes me as interesting that a lot of the people who made loads of money off of the 2008 financial crisis (The Big Short) were former forex traders. Successful forex trading is the art of seeing and interpreting far more than what your eyes are reporting back. That’s a rare and useful gift. It also tends to make you either really weird or terribly ornery.

Which is all to say you really should take the 40 minutes to listen to Hugh’s latest appearance on Odd Lots. I don’t agree with everything he says. I just babbled about the soft landing; I certainly don’t expect another rate Armageddon in the next 18 months. But his wider thoughts on China deserve reflection.

Hugh’s a product of the Reagan generation (to him, the Thatcher generation?). I am too, so perhaps I can’t help but have a similar worldview. But the concept of the difference between growing GDP and growing wealth is profound and explains a lot of what is going on right now around the world. (And his solution to the Russia problem is probably a little too spot-on).

Hear many voices. I certainly don’t mean to imply you should follow Hugh (or anyone else, me included) as gospel. But as an investor who chooses not to study charts while on acid, it is interesting to hear the world from the perspective of someone who has a different view of the world.

Disclaimer: If you don’t get any of the cultural references here, SHAME ON YOU. Fix that.

 Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.