— Point/Counterpoint from Brian Kelly (inflation hedge) and Coin Desk’s Emily Parker (safe haven).
— A third possible answer … maybe neither.
— Revisiting an old friend, AerCap Holdings N.V. (AER), not a safe haven short term but a store of value and inflation hedge long term.
The Great Bitcoin Debate
In the clips I’ve attached “Fast Money” contributor, Brian Kelly asserts, I believe quite correctly, that Bitcoin is NOT a safe haven. Hard to imagine that an instrument that closed near $66,000.00 on November 7, 2021 and currently trades at $39564.00 (3/5/2022) would be considered a safe haven. Kelly does argue that it is a hedge against inflation (you may need to be a member of CNBC Pro to view).
I’m not certain that I understand his reasoning in light of the steep drop that Bitcoin has taken since last November in the face of accelerating inflation. However, if you had been lucky enough or smart enough to buy this scarcity asset at $6,000.00 back in the spring of 2020, I think your inflation problem is covered, at least for now. I call it a scarcity asset because I can see no other reason for owning it accept secrecy. It is not secure because accounts have been hacked and, I guess, it is really not secret because the FBI has be able to recover sizable amounts from hackers. Maybe it is not even scarce because there are new cyber-currencies being minted every day. Someone might invent a better cyber-mousetrap.
One last comment on Mr Kelly’s bone fides comes from his past predictive history. We were there when he said with great confidence and authority, “I went to cash today,” almost the exact bottom of a 6-month decline in the market(S&P 500 close–1903.63–1/27/16)… not exactly reliable source.
I don’t have any knowledge of CoinDesk’s Emily Parker’s credibility but she was offered to the audience at CNBC as a contrary point of view. She reckons bitcoin is a safe haven. Like Kelly, she speaks with great authority and she talks very fast (you may need a subscription to CNBC Pro).
I would point out that Bitcoin hit its recent low on February 22, under $35000. It bounced up to $44,000 (the purported “safe haven trade”) after the start of the war on the 24th but is currently trading below $40,000. At this point it does not look to be much of a safe haven as the war and uncertainty drag on.
Maybe I’m just your run-of-the-mill Luddite, but I struggle to get my arms around how to value cyber-currency.
The questions remain unanswered. Is it a safe haven, inflation hedge or a tulip bulb?
Revisiting An Old Friend
The ‘old friend’ is AerCap Holdings, N.V.. This is a stock I have held for the past 15 years. Here is a excerpt from a post I made at the bottom of the Covid Crash, March 19,2020:
AerCap Holdings NV (AER $15.14)
(buyer beware, I own this stock)
AerCap is the worlds largest aircraft leasing company. As of December 31, 2019, the value of all their aircraft assets, net of all their debts, was $72 per share. On top of that the company has a long term record of selling depreciated aircraft at a profit. They’ve been conservative at accounting. I would agree if they tried to sell those airplanes today, they might not find a bidder.
I believe that air travel is a secular growth Industry and will come back strong after we get through this viral speed bump. The current $12.48 price (11:27 CDT, 3/18) on the stock seems like a surreal value. However, I was saying that when the stock was $25.00. Subsequent to this quote AER traded as low as $10.42. As you can see there was a somewhat happy ending for AerCap today. It closed at $15.14, up about $5 from the low but still down $2.32 from the previous close. This is Crazy!
November 10, 2021 AER made an all-time high at $71.38.
AerCap stock closed at $47.66 Friday March 4, down nearly $15 in two days of trading because, according to Reuters, 5% of their 3Q 2021 net book value ($77.00/share) could evaporate due to the fact that that 5% are leases with Russian carriers. If my calculations are correct this would amount to $3.85 if AER found every aircraft unrecoverable. This, in fact, may be the case. This would take tangible net book value to about $73.00.
Why the huge mis-match between the actual amount of the decline in net book value $3.85 and a $15 drop in market value?
Obviously the market was very weak the last two days of last week. However, I think misinformation in the media was also a culprit. One service I subscribe to carried an article where certain commenters on the subject matter erroneously insisted that total debt be included in the net book calculation. The company has $34 billion in debt attached to its aircraft portfolio. 5% of that would overstate the potential loss by $1.7 or almost $7.00 a share.
“AerCap, the largest lessor, said Monday that as of year-end 2021 “approximately 5% of AerCap’s fleet by net book value was on lease to Russian airlines. Net book value is a little different than the number of planes, but it’s a good way to think about the risk to the aircraft lessor.” This part from the article is essentially correct. The following quote from the article is not.
“What’ s more, AerCap reports about $34 billion in equipment-related assets (actually debt on the portfolio)on its books. So 5% of that number is $1.7 billion ” This number is equal to 5% of AER debt not AER net book value which subtracts the debt. To read the whole article click on the link above. You may need a Barron’s or WSJ subscription to view.
Their conclusion, however, is positive. They think that the stock is worth our attention since the (incorrect) $1.7 billion is still much less than the $3.5 billion taken off the price of the stock after the news broke
Again the media proves itself not to be your friend in the investment process!
Like my post from the bunker, I think this price/book mis-match is crazy!
AER–A secular growth opportunity and inflation hedge
According to Finances Online 80% of the world’s 7.5 billion people have never flown. In the U.S. the number is only 13%. Growth in demand for air travel has a (pardon the pun) long runway. This should equate to a secular opportunity for AerCap, the world’s largest provider of aircraft leasing services. My sense is that the cost of manufacturing state-of-the-art commercial aircraft will not be going down, ergo the existing AerCap portfolio should perform as a hedge against inflation. (see disclaimer below)
What’s your take?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.