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Daily Intelligence Briefing
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Identifying Change-Driven Investment Themes – Five sections, explained here.
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| We bring you our Daily Intelligence Briefing courtesy of McAlinden Research Partners. The report is provided to Hedge Connection members for free. Below is snapshot, login to view the full report. Not a member? Join today. McAlinden Research Partners is currently offering a complimentary full month subscription of the DIB. Activate yours today by contacting hugh@mcalindenresearch.com |
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I. Today’s Thematic Investment Idea
A deep dive into a market driver with alpha generating potential.
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Aircraft Leasing Companies are the Winners in Boeing Crisis →
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While the grounding of Boeing’s 737 Max fleet is causing major headaches and revenue losses for airlines, it is providing an unexpected boon to the aircraft leasing industry which has seen demand and leasing rates shoot up as a result. Read more +
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II. Updates of Themes on MRP’s Radar
Follow-up analysis of key market drivers monitored by MRP.
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Cryptocurrencies: Cryptocurrency Winners Are Starting to Emerge
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Stocks: Value stocks are trading at the deepest discount in history
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Inflation: Inflation’s Here? Five Below Isn’t Alone Hiking Prices
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Housing: Home flipping rate hits 9-year high — and that could foretell troubles in the housing market
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Streaming: Wall Street analysts forecast a major power shift in the streaming TV market, with Hulu and YouTube surging while others falter
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Waste Management: As more developing countries reject plastic waste exports, wealthy nations seek solutions at home
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5G: China Grants 5G Commercial Licenses to Its Biggest Wireless Carriers
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5G: The tech cold war just got a lot more intense after Russia signed a deal to build 5G internet with Huawei
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Autos: Automakers Tell Trump His Pollution Rules Could Mean ‘Untenable’ Instability and Lower Profits
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Electric Vehicles: India orders Uber and rival Ola to electrify 40% of fleets by 2026
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Electric Vehicles: New Law Requires Electric Vehicles To Make Noise At Slow Speeds
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Metals: Nickel Surges on Electric-Vehicle Hopes
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CRISPR: ‘Jumping genes’ could help CRISPR replace disease-causing DNA, study finds
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Pharma: What the Numbers Tell Us About the U.S. Drug Crisis
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IV. Active Thematic Ideas
MRP’s active long and short themes, with an archive of follow-up reports.
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See Them Here →
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V. Macroeconomic Indicators
Key data releases relevant to MRP’s Active Thematic Ideas.
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See Them Here →
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THEME ALERT: AN ACTIVE MRP THEME
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Aircraft Leasing Companies are the Winners in Boeing Crisis
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While the grounding of Boeing’s 737 Max fleet is causing major headaches and revenue losses for airlines, it is providing an unexpected boon to the aircraft leasing industry which has seen demand and leasing rates shoot up as a result.
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Last week, MRP wrote about the ripple effects of the Boeing 737 MAX scandal, which prompted us to add SHORT Aviation and SHORT Airlines to our list of investment themes. Today’s report highlights the one segment of the industry that’s benefitting from the MAX planes being grounded.
The $330 billion aircraft leasing segment of the aviation industry is often overlooked because of its lack of commercial presence and limited coverage in the mainstream media. Companies in this line of business essentially buy aircraft and then lease them out to commercial airliners or other operators, including the military.
The ability to borrow cheaply and/or to raise unsecured debt to purchase fleets of aircraft is integral to their success, which is why aircraft leasing has been a booming business in the low interest rate environment of the past decade. Accordingly, a rising interest rate environment means higher borrowing costs, which is why the Fed rate hike cycle initiated by Janet Yellen and continued for a while by Jerome Powell was a source of concern for the sector.
Most lessors seek to hedge their interest rate risk by borrowing at fixed rates or passing interest rate risk onto the airline through a floating rate lease. Nevertheless, Chairman Powell’s shift to a more dovish policy is a welcome reprieve for the industry.
Aircraft leasing can be very lucrative in the right macro environment. Most planes will last 20-30 years if handled well and lease terms for new aircraft typically last 8-12 years. Subsequent lease terms often decrease in length as the aircraft ages.
Airlines, meanwhile, will opt to lease aircraft over buying them for two main reasons: to enable a temporary increase in passenger capacity, and to operate aircrafts without the fiscal responsibility of ownership. Over one-third of the world’s 29,000-strong commercial airline fleet is leased nowadays, versus less then 5% in 1980.
The worldwide grounding of Boeing’s 737 MAX planes since mid-March has provided yet another reason. Almost overnight, airlines parked more than 370 planes. While Boeing says it has completed software changes to correct the issues and hopes to see the MAX aircraft flying by year-end, the Federal Aviation Administration and its international counterparts haven’t signed off on the fixes nor said when those planes will be allowed to fly again.
In the meantime, carriers are turning to leasing companies to help fill the gap. In addition to renting other narrow-body planes, some also have opted to rent larger jetliners. Air Canada, whose 24 MAX jets have been grounded, is just one of many airlines that has commissioned planes from the leasing unit of Air Transport Services Group. And AerCap holdings, the world’s largest independent plane lessor, has reported increased demand for its services as has Air Lease Corp., another leasing giant.
Demand to find replacement capacity has pushed leasing rates higher this year. Just prior to the MAX crisis, plane rentals were going for a monthly rate of around $225,000 for five years. Once the MAX was idled, the rental terms rose to $290,000 for a two-year contract. Some airlines are now paying more than $300,000 a month for short-term narrow-body rentals.
This is not to say that aircraft lessors have no negative exposure to Boeing. In fact, the opposite is true. These companies mostly buy their planes from Boeing and Airbus, and more than a fifth of Boeing’s 2,700 orders for the Max came from the aircraft leasing industry. However, they do have better revenue visibility throughout this ordeal because initial leases can stretch out to 12 years and airlines will still be making lease payments while seeking compensation from Boeing. AerCap, for example, had an average term of 7.4 years remaining on its leases as of the first quarter of 2019.
Publicly-Listed Aircraft Lessors
The decades-old aircraft leasing sector was long dominated by a few specialists, but the circle has widened recently. Here are some publicly-traded companies in that space:
- AerCap Holdings (AER) founded in 1995, headquartered in the Netherlands
- Air Lease Corp. (AL) founded in 2010, headquartered in the United States
- FLY Leasing Limited (FLY) founded in 2007, headquartered in Ireland
- Aircastle Limited (AYR) founded in 2004, headquartered in the United States
- Air Transport Services Group (ATSG) founded in 1980, headquartered in the United States (formerly known as ABX Holdings)
- Atlas Air Worldwide Holdings (AAWW) founded in 1992, headquartered in the United States
The job of quickly patching disrupted flight schedules has also fallen on privately-owned operations like EuroAtlantic Airways (in Portugal); SmartLynx Airlines (in Latvia); andAvion Express (in Lithuania). These companies often rent out planes with almost everything needed to fly, including pilots, cabin staff and insurance coverage.
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Aircraft Leasing vs Airlines vs S&P 500
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Source material for today’s market insight…
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Aviation
Boeing’s MAX Grounding Lifts Firms That Rent Out Airplanes
The global grounding of Boeing’s 737 MAX jetliners has upended air travel, but one little-noticed corner of the aviation industry is benefiting from the problems: companies that rent out planes and staff.
Regulators in March stopped MAX planes from flying. Almost overnight, airlines parked more than 370 planes and Boeing was forced to stop delivering the MAX, which it had been producing at a rate of around 50 each month. Boeing’s European rival Airbus SE couldn’t supply the planes as its production lines are booked for several years.
The MAX grounding has been a short-term boon for lessors that typically provide empty planes to carriers on multiyear deals. Some airlines that had single-aisle planes coming to the end of rental periods quickly extended. Most wanted is the plane the MAX replaces, the 737-800.
IBA Aero CEO Phil Seymour said that before the MAX grounding his company was marketing a 737-800 for rental at a monthly rate of around $225,000 for five years. Once the MAX was idled, the rental terms rose to $290,000 for a two-year contract. Some airlines are now paying more than $300,000 a month for short-term narrow-body rentals, he said.
Leasing planes on short notice is costly for airlines. European tour operator TUI AG , the region’s biggest MAX operator, has been renting planes to fill its fleet gap. TUI said the shift could cost it as much as €300 million ($337 million) and depress third-quarter profits by roughly 25% compared with last year.
Read the full article from WSJ +
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Aviation
American Airlines extends cancellations from grounded Boeing 737 Max to Sept. 3
American Airlines said Sunday that it is removing the Boeing 737 Max from its schedules through Sept. 3, a sign that the planes’ grounding will disrupt travel longer than expected. A total of about 115 flights per day will be canceled through Sept. 3. Other carriers, like United Airlines and Southwest Airlines have also extended cancellations during the busy summer season, when carriers need the planes the most.
Boeing has completed software changes for the planes but the Federal Aviation Administration and its international counterparts haven’t signed off on the fixes. The FAA has not said when it would allow the planes to fly again. Boeing’s CEO Dennis Muilenburg last week said he expects the planes to be flying by the end of the year.
Read the full article from CNBC +
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Aviation
Whole Superjet 100 Fleet To Be Checked Following Fatal Aeroflot Crash
The Sukhoi Superjet 100 has hit yet another bump in the road. Following the May 5th deadly crash of Aeroflot flight AU1492, the aircraft has come under global scrutiny as investigators attempt to find out what caused the crash, and whether the plane is safe to fly.
Russian aviation authority, Rosaviatsiya, has ordered inspections of the entire fleet. All 147 thought to be in service will need to be checked for safety by 25th June.
Most notably affected by this order will be Aeroflot, by far the oldest and largest operator of the SSJ100. They have 50 in service, with 100 more on order and have been part of their fleet since 2011. The only other major operators are Mexican Interjet with 22, and Russia’s Yamal Airlines with 15, Gazpromavia with 10 and IrAero with 9.
Read the full article from SimplyFlying +
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Select a theme to see when and why we added it. Also included is a link to all recent Market Insight reports we’ve written about that theme, allowing you to track its progress.
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US Economy Adds Fewer Jobs than Expected
Exports from China rose unexpectedly by 1.1% year-on-year to USD 213.85 billion in May, recovering from a 2.7% decline in April and defying market expectations of a 3.8% fall. The rebound in overseas sales came in amid efforts from companies to rush out shipments to avoid higher US tariffs that US President Donald Trump is threatening to impose in a rapidly escalating trade conflict.
Click here to access the data +
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China Exports Rebound Unexpectedly
Exports from China rose unexpectedly by 1.1% year-on-year to USD 213.85 billion in May, recovering from a 2.7% decline in April and defying market expectations of a 3.8% fall. The rebound in overseas sales came in amid efforts from companies to rush out shipments to avoid higher US tariffs that US President Donald Trump is threatening to impose in a rapidly escalating trade conflict.
Click here to access the data +
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UK Industrial Output Falls the Most in 6-1/2 Years
Industrial production in the UK plunged 2.7 percent from a month earlier in April 2019, the largest decrease since September 2012 and compared to market expectations of a 0.7 percent fall. The manufacturing sector provided the largest downward contribution, falling by 3.9 percent, its largest drop since June 2002. Transport equipment fell by 13.4 percent, the most since January 1974, providing the largest downward contribution to the monthly decrease in manufacturing; within this subsector, motor vehicles, trailers and semi-trailers fell by a record 24 percent.
Click here to access the data +
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Greece, Portugal, Spain 10Y Bond Yields Hit All-time Low
Greece 10 Year Government Bond Yield decreased to an all-time low of 2.839%. Portugal 10 Year Government Bond Yield decreased to an all-time low of 0.619% Spain 10 Year Government Bond Yield decreased to an all-time low of 0.552% Italy 10 Year Government Bond Yield decreased to a 54-week low of 2.35%
Click here to access the data +
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Gold Rallies to Over 1-Year High
Gold prices went up to the highest since April 2018 on Friday, extending gains from the previous session, after the US job growth slowed sharply in May, increasing the possibility of a cut in Fed funds rate. Prices were already rising on the back of a weak dollar. Gold prices rose as much as 1% to $1347 an ounce around 11:00 AM New York time.
Click here to access the data +
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MARKET INSIGHT UPDATES: SUMMARIES
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Cryptocurrencies
Cryptocurrency Winners Are Starting to Emerge
The value of all cryptocurrencies in circulation is about $275 billion, which is around the same level as late November 2017. A lot has happened in between, but five currencies, representing 53% of market capitalization in November 2017, have demonstrated strong price action in good times and bad.
The five are Bitcoin, EOS, Binance Coin, Basic Attention Coin and Freicoin. The last two are too small to discuss, although both are interesting ideas. Bitcoin is familiar. EOS is a distributed computer and Binance is a coin associated with a crypto exchange.
The most exciting place to look for new investment is coins introduced to the public after the peak. Bitcoin SV, Tezos, Ontology, MakerDAO and Crypto.com Chain are the five biggest of 1,072 coins.
Bitcoin SV is a controversial coin promoted by a guy who claims to be Satoshi Nakamoto, the inventor of bitcoin. Tezos is similar to Ethereum. Ontology connects blockchains. MakerDAO is a combination of two coins that provides a decentralized stablecoin for transactions. Crypto.com Chain integrates digital transactions with Visa and other traditional payment systems.
Read the full article from Bloomberg +
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Stocks
Value stocks are trading at the steepest discount in history
There’s never been a worse time in history to be a value investor, according to an analysis by J.P. Morgan’s chief U.S. equity strategist who wrote in a Thursday note to clients that “value is currently trading at the biggest discount ever and offers the largest premium over the last 30 years.”
After a decade when growth stocks have outperformed their cheaper rivals, the median forward price-to-earnings ratio of the cheapest portfolio of S&P 500 stocks is now trading at 7 times less than the broader to the S&P 500. Similarly the relative price-to-book spread of the cheapest vs. the most expensive portfolio is at 9 times.
“For Value to make a sustained comeback,” he Lakos-Bujas wrote, “the following developments are likely needed”regulations that foster competition; a stabilization of active manager’s assets under management, relative to passive investing; less policy uncertainty; Either a reaccelerating of global growth, or a full-blow recession that forces a repricing of growth stocks.
Read the full article from MarketWatch +
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Inflation
Inflation’s Here? Five Below Isn’t Alone Hiking Prices
Looking for real-life signs of inflation — despite what official statistics say? Five Below (FIVE) this week said it will start selling select items for more than five bucks. Meanwhile, Dollar Tree (DLTR)and Dollar General (DG) executives recently said higher prices are likely coming to combat the hike of tariffs from 10% to 25% on Chinese goods. Even 99 Cents Only Stores, a market pioneer despite being privately held, is now selling products priced $1.99 or higher.
Disney (DIS) theme park ticket prices rose every year this decade and pushed well past the $100 a ticket per day barrier. At rival park operator Six Flags Entertainment (SIX), the company is using dynamic, real-time testing online to see how much it can raise prices further. Restaurant chains, too, are seeing opportunities to raise prices. Mexican chain El Pollo Loco (LOCO) is facing higher avocado prices due to the proposed Mexican tariffs.
Prices are rising in many places, but not all. Official measures of inflation still show muted price growth in most consumer categories. Some retailers, like home decor seller At Home (HOME), don’t think they can keep raising prices.
Read the full article from Investor’s Business Daily +
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Construction & Real Estate
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US Housing
Home flipping rate hits 9-year high — and that could foretell troubles in the housing market
Just over 49,000 single-family homes and condos were flipped in the first quarter of 2019. These homes comprised 7.2% of all home sales nationwide during that time period, representing the highest home-flipping rate since the first quarter of 2010.
Homes flipped sold for a median price of $215,000. With the median purchase price standing at $155,000, the gross flipping profit was just $60,000, down $8,000 from a year earlier to a three-year low. In the first quarter, the home-flipping rate was up year-over-year in 62% of markets nationwide, suggesting that this sentiment could be widespread and not just concentrated in overheated housing markets across the West Coast.
Researchers previously described home-flipping activity as a “canary in the coal mine” that could presage a cooling housing market. Despite the seemingly turning tides in the home-flipping market, one bright spot is the renewed interest that so-called ‘iBuyers,” tech firms that use algorithms to make instant home offers, have taken in the businesses. Zillow Z, -1.27% in particular, has said it is investing more money into its home-buying and flipping operation, Zillow Offers, which launched last year.
Read the full article from MarketWatch +
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Streaming
Wall Street analysts forecast a major power shift in the streaming TV market, with Hulu and YouTube surging while others falter
AT&T, Dish Network, Hulu, YouTube, and Sony are all battling it out over cord-cutters who are ditching traditional-TV services, and looking for cheaper alternatives online. By 2022, two services could grab enough US market share to emerge as the clear leaders in streaming TV.
Based on a UBS report, Hulu Live is forecasted to become the largest streaming-TV service in the US with 35% of the market share by 2022, up from 25% during the first quarter of this year. YouTube TV is estimated to capture 21% of the market share by 2022. Currently, Dish’s Sling TV has the biggest market share with 28%, which UBS estimated will shrink to 14% by 2022.
Hulu Live and YouTube TV arrived somewhat late to the internet-TV war. They both launched in 2017, following the debuts of Sling TV and Sony’s PlayStation Vue in 2015, and AT&T’s DirecTV Now in 2016. Subscriber growth stalled last quarter at two of the biggest players, DirecTV Now and Sling TV. But Hulu Live and YouTube TV kept growing steadily.
By the end of the year, Credit Suisse forecasted that Hulu will be the largest virtual bundle by subscriber base, with 3.36 million subscribers — 851,000 more than its next largest competitor, Sling TV. YouTube TV is also expected to reach 1.9 million subscribers, putting it in third place.
Read the full article from Business Insider +
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Waste Management
As more developing countries reject plastic waste exports, wealthy nations seek solutions at home
Less than two years after China banned most imports of scrap material from abroad, its neighbors are following suit. Malaysia, Thailand and Vietnam are all halting flows of plastics that once went to China but were diverted elsewhere after China started refusing it.
Trends in the United States illustrate these wrenching shifts. Plastic scrap exports to China plummeted from around 250,000 tons in the spring of 2017 to near zero in the spring of 2019. Overall, U.S. exports of plastic waste to all countries fell from 750,000 tons to 375,000 tons over the same period.
Most U.S. waste and recycling policies are made at the local level, and the past year has been a transformative period. Without ready markets abroad for scrap, recyclers are raising prices, which in turn is leading some municipalities to reduce or eliminate curbside recycling programs. Many plastic products in groups 3-7, the least recyclable types, are being sent to landfills.
More positively, investment in recycling infrastructure is on the rise. There is palpable energy at trade meetings around improving options for plastics recycling. Chinese companies are investing in U.S. pulp and paper recycling plants, and may extend into plastics.
The greatest immediate pressure is on international scrap dealers, who are also under stress from the U.S.-China tariff wars, which could make it difficult for them to send even clean, commercially valuable scrap to China.
Read the full article from The Conversation +
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5G
China Grants 5G Commercial Licenses to Its Biggest Wireless Carriers
China is granting 5G licenses for commercial use to its biggest wireless carriers: the country’s three state-owned carriers, China Mobile Communications Group, China Telecommunications Group, and China United Network Communications Group. Cable-network giant China Broadcasting Network Corp. will also receive a license. Chinese regulations bar foreign companies from owning and operating telecommunications networks.
U.S. and South Korean carriers have already launched 5G service in limited areas in their countries. But while American carriers are using a piecemeal approach, introducing 5G to one city at a time, China’s goal is nationwide coverage in 2020.
Carriers in the two countries are dealing with different conditions. Focused on profit, U.S. wireless providers initially build cellular towers—many more of which are required for 5G—in urban areas so they can sell as many subscriptions as possible. China’s government-controlled carriers don’t face those pressures but are obliged to roll out services in remote areas as well.
Countries getting the jump on 5G installation could have a bigger say in setting standards for how the technology is integrated into other industries, giving domestic companies a leg up in the race for patents and royalties. China has prioritized 5G after lagging behind Western countries in developing previous generations of mobile networks. The U.S. controlled 4G standards, after Europeans dominated 3G.
World-wide sales of cellular equipment have been in a slump but with the rollout of 5G, the global cellular-equipment market is expected to grow 2% annually, reaching $160 billion by 2023. The major beneficiaries will be the world’s biggest telecom-equipment manufacturers: Huawei, Nokia Corp. of Finland and Ericsson AB of Sweden.
Read the full article from WSJ +
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5G
The tech cold war just got a lot more intense after Russia signed a deal to build 5G internet with Huawei
Russia’s largest mobile network provider, MTS, has signed a deal with the Chinese telcom giant Huawei to build 5G internet in Russia. The move is creating a further divide in the tech cold war between the US and China, which has already seen the US bar American tech firms from working with their Chinese counterparts.
The agreement, signed Wednesday between Russia’s MTS and Huawei, will “promote 5G technology and launch pilot 5G networks in Russia in 2019-2020,” Huawei said in a statement sent to Business Insider.
The deal came on the first day of Chinese President Xi Jinping’s three-day trip to Russia to meet with Russian President Vladimir Putin. It is a prominent escalation of the cold war between Washington and Beijing, which has seen the US bar American tech firms from working with their Chinese counterparts.
Read the full article from Business Insider +
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Aviation
Boeing’s MAX Grounding Lifts Firms That Rent Out Airplanes
The global grounding of Boeing’s 737 MAX jetliners has upended air travel, but one little-noticed corner of the aviation industry is benefiting from the problems: companies that rent out planes and staff.
Regulators in March stopped MAX planes from flying. Almost overnight, airlines parked more than 370 planes and Boeing was forced to stop delivering the MAX, which it had been producing at a rate of around 50 each month. Boeing’s European rival Airbus SE couldn’t supply the planes as its production lines are booked for several years.
The MAX grounding has been a short-term boon for lessors that typically provide empty planes to carriers on multiyear deals. Some airlines that had single-aisle planes coming to the end of rental periods quickly extended. Most wanted is the plane the MAX replaces, the 737-800.
IBA Aero CEO Phil Seymour said that before the MAX grounding his company was marketing a 737-800 for rental at a monthly rate of around $225,000 for five years. Once the MAX was idled, the rental terms rose to $290,000 for a two-year contract. Some airlines are now paying more than $300,000 a month for short-term narrow-body rentals, he said.
Leasing planes on short notice is costly for airlines. European tour operator TUI AG , the region’s biggest MAX operator, has been renting planes to fill its fleet gap. TUI said the shift could cost it as much as €300 million ($337 million) and depress third-quarter profits by roughly 25% compared with last year.
Read the full article from WSJ +
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Aviation
Whole Superjet 100 Fleet To Be Checked Following Fatal Aeroflot Crash
The Sukhoi Superjet 100 has hit yet another bump in the road. Following the May 5th deadly crash of Aeroflot flight AU1492, the aircraft has come under global scrutiny as investigators attempt to find out what caused the crash, and whether the plane is safe to fly.
Russian aviation authority, Rosaviatsiya, have ordered inspections of the entire fleet. All 147 thought to be in service will need to be checked for safety by 25th June.
Most notably affected by this order will be Aeroflot, by far the oldest and largest operator of the SSJ100. They have 50 in service, with 100 more on order and have been part of their fleet since 2011. The only other major operators are Mexican Interjet with 22, and Russia’s Yamal Airlines with 15, Gazpromavia with 10 and IrAero with 9.
Read the full article from Simply Flying +
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Aviation
American Airlines extends cancellations from grounded Boeing 737 Max to Sept. 3
American Airlines said Sunday that it is removing the Boeing 737 Max from its schedules through Sept. 3, a sign that the planes’ grounding will disrupt travel longer than expected. A total of about 115 flights per day will be canceled through Sept. 3. Other carriers, like United Airlines and Southwest Airlines have also extended cancellations during the busy summer season, when carriers need the planes the most.
Boeing has completed software changes for the planes but the Federal Aviation Administration and its international counterparts haven’t signed off on the fixes. The FAA has not said when it would allow the planes to fly again. Boeing’s CEO Dennis Muilenburg last week said he expects the planes to be flying by the end of the year.
Read the full article from CNBC +
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| There is much more to this report! McAlinden Research Partners offers Hedge Connection members weekly access to the Daily Intelligence Briefing research for free – click here to view. (You must be logged in first). Not a member? Join today. McAlinden Research Partners is currently offering a complimentary full month subscription of the DIB. Activate yours today by contacting hugh@mcalindenresearch.com |
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