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Daily Intelligence Briefing
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Wednesday, September 4, 2019
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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 offering a complimentary one-month subscription to receive the Daily Intelligence Briefing – to Hedge Connection clients/friends. Activate yours by contacting Rob@mcalindenresearch.com and mentioning “Sent by Hedge Connection”
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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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737 MAX Mess Shatters Holiday Season for Airlines →
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Summary: Major airlines have once again extended cancellations of flights aboard Boeing 737 MAX jets, anticipating a grounding that will now stretch through the Holiday season, constraining capacity that is already being stretched to the limit. Now that deliveries of the 737 MAX have collapsed and no timetable yet exists for a return to the air, airlines that are still selling tickets for future flights on the jet are running out of options regarding their pending orders. That uncertainty is magnified for Boeing, whose stock price fell more than 2.5% on Tuesday, as they’ve repeatedly downplayed the severity of the MAX jet’s issues, while simultaneously backpedaling on dates for certification flights and other FAA approval processes. With order cancellations and legal troubles mounting, things look to get worse before they get better at the American aviation giant. 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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Trade War: U.S.-China Trade War Takes Toll on South Korea and Japan
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Cannabis: Cannabis stock investors should pay attention to this potential threat to share prices
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Vietnam LONG: Vietnam startups gain on Indonesia and Singapore with new funding
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EVs: EVs Temporarily Stumble in Biggest Market But Respite Seen
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Robotics & Automation LONG: The Bots Are Here―and They’re Protecting Our Crops
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Metals: Nickel is surging after Indonesia said it will ban exports of the metal from January
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Oil: Oil Production Growth In U.S. Grinds To A Halt
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Solar LONG: Average U.S. construction costs for solar generation continue to decrease
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Chart: Factories From Europe to Asia Reel Under U.S.-China Trade War
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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: ACTIVE MRP THEMES
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737 MAX Mess Shatters Holiday Season for Airlines
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Major airlines have once again extended cancellations of flights aboard Boeing 737 MAX jets, anticipating a grounding that will now stretch through the Holiday season, constraining capacity that is already being stretched to the limit. Now that deliveries of the 737 MAX have collapsed and no timetable yet exists for a return to the air, airlines that are still selling tickets for future flights on the jet are running out of options regarding their pending orders. That uncertainty is magnified for Boeing, whose stock price fell more than 2.5% on Tuesday, as they’ve repeatedly downplayed the severity of the MAX jet’s issues, while simultaneously backpedaling on dates for certification flights and other FAA approval processes. With order cancellations and legal troubles mounting, things look to get worse before they get better at the American aviation giant.
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American Airlines Group Inc. and United Airlines Holdings Inc. removed Boeing Co.’s grounded 737 Max from their schedules into December, following a similar schedule of cancellations by Southwest Airlines earlier this summer. The 737 MAX has been grounded around the world since March after two deadly crashes in October 2018 and March 2019, which killed a total of 346 people. Since then, additional issues with Boeing’s MAX jet, as well as other models, have been uncovered by regulators.
For American, the extension means the cancellation of 140 daily flights through December 3. While United pulled the Max from its flight plans until Dec. 19, Bloomberg reports Norwegian Air Shuttle ASA is among the major Max customers that isn’t counting on a return to service until 2020. Southwest and Air Canada have already pulled previously scheduled flights on the 737 MAX through early January. Last month, MRP noted that a total of more than 5.1 million seats had already been removed from flight schedules since the March 13 grounding of Boeing’s problematic jet, according to aviation travel company OAG.
The situation is now becoming dire for airlines as the constrained capacity they had to deal with all Summer will only tighten as we head into the Holiday season. Boeing delivered 38% fewer planes in the first seven months of 2019 than the same period a year earlier, following company-wide cuts to production, leading to slower delivery or no delivery whatsoever on planes that had already been worked into the flight schedules. Ryanair, for example, expected 58 MAX jets to fill out their fleet by the summer of 2020, but according to CEO Michael O’Leary, speaking on the company’s latest earnings call, “It may well move to 20, it could move to 10, and it could well move to zero if Boeing don’t get their s— together pretty quickly with the regulator”.
Boeing has not received any new orders for the 737 Max in four months. While Boeing made headlines by signing a letter of intent with International Airlines Group for 200 737 MAX jets, that order has yet to be finalized. The company currently retains a backlog of about 4,550 unfulfilled orders.
July was a particularly painful month for the aviation sector as a whole. ADS, the British aerospace lobby group, said only 88 aircraft were delivered in the month, down 24% on the same month a year ago. The ADS dramatically slashed its forecast for 2019 global aircraft deliveries by 17%, from 1,789 to 1,489.
In spite of the uncertainty surrounding the 737 MAX, several airlines continue to sell tickets for thousands of future flights on the plane.
While some headlines had recently begun turning optimistic for Boeing, led by a report that The Federal Aviation Administration (FAA) would likely conduct its certification flight for the 737 MAX in October, cold water has once again been thrown on the jet’s future.
According to the Wall Street Journal, friction between Boeing and international air-safety authorities threatens a new delay in bringing the grounded 737 MAX fleet back into service, according to government and pilot union officials briefed on the matter. The latest complication in the long-running saga, these officials said, stems from a Boeing briefing in August that was cut short by regulators from the U.S., Europe, Brazil and elsewhere, who complained that the plane maker had failed to provide technical details and answer specific questions about modifications in the operation of MAX flight-control computers.
As MRP noted back in July, Europe’s aviation regulator has said it will not authorize the 737 MAX for their airlines until it completes its own independent review, separate from the FAA, and approves design changes. Some industry officials say they are increasingly convinced the bulk of the planes on that side of the Atlantic aren’t likely to resume carrying passengers until January at the earliest. European regulators have signaled they might need the extra time to examine anticipated changes to the MAX’s flight-control computers and the automated stall-prevention system dubbed MCAS.
Even when technical issues are eventually resolved, legal challenges will remain.
MRP highlighted a class action lawsuit filed against Boeing when 400 pilots had joined the suit against the aviation giant in June. Now, 3,000 pilots from 12 international airlines are onboard and seeking “compensatory and punitive damages” from Boeing for losses stemming from design issues and failures to warn pilots in the lead up to two major disasters. The first pilot to file the suit, referred to as “Pilot X,” claimed that the plane’s automated anti-stall MCAS software gave the plane “inherently dangerous aerodynamic handling defects.” Pilot X also criticized Boeing for designing the MCAS system to rely on just one sensor, claiming that the “effective design causes the MCAS to activate based on the single input of a failed [angle of attack] sensor without cross-checking its data with another properly functioning AOA sensor.”
Last week, Avia Capital Services (ACS), a Russian aircraft leasing company filed the first US lawsuit to cancel an order for Boeing 737 MAX jets, according to Business Insider. Avia ordered 35 of the 737 Max 8 jets before the grounding. It’s seeking $115 million in compensatory damages ― a refund of the $35 million deposit it placed, with interest, and $75 million in lost profits ― and several times that in punitive damages. This suit could open Boeing up to many similar suits from other airline and airline leasing firms who’ve been hamstrung by the 737 MAX scandal.
On top of the civil cases Boeing faces, the Department of Justice is continuing their probe into the company. In July, the FBI subpoenaed records related to Boeing’s 787 Dreamliner. Federal prosecutors are seeking records linked to the 787’s assembly in a ten-year-old South Carolina plant, which a New York Times report from earlier this spring alleged had been “plagued by shoddy production” and “weak oversight”. The New York Times report said Boeing pressured employees into working more quickly to avoid production delays while “at times ignoring issues raised” by those closest to the Dreamliner’s assembly. Boeing reportedly admits that some documents regarding a Dreamliner sold to Air Canada had been falsified, according to a statement to CBC News. That same plane experienced an oil leak and a subsequent emergency landing, after ten months of service.
Costs associated with the global grounding of 737 MAX jets, which has lasted almost 6 months now, has already wiped hundreds of millions off multiple quarterly earnings reports for major airlines. In Q2, Boeing acknolwedged a post-tax hit of nearly $5 billion; the company estimated total charges related to the MAX’s troubles will reach $8 billion when all is said and done. However, that figure is likely to climb as there is still no clear timeline for the jets to get clearance from regulatory authorities around the world.
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THEME ALERT
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MRP believes these figures will grow substantially in the coming months. Therefore, we are reaffirming our Short Aviation and Short Airlines themes. MRP added Short Aviation to our list of themes on June 4, 2019. Since launch, the iShares U.S. Aerospace & Defense ETF (ITA) has gained about 6%, slightly outperforming the S&P 500’s return of 4%. However, the U.S. Global Jets ETF (JETS) has declined 2% over the same period.
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Aviation (ITA) vs Airlines (JETS) vs S&P 500 (SPY)
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Source material for today’s market insight…
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Airlines
Latest Boeing Max Delays Imperil Return of Jet by Christmas
American Airlines Group Inc. and United Airlines Holdings Inc. removed Boeing Co.’s grounded 737 Max from their schedules into December, while other carriers are giving up on getting the narrow-body back in time for the Christmas and New Year holidays. American, the world’s biggest airline, said it’s confident software updates and a new training regime devised by Boeing will lead to re-certification of the 737 this year.
Among other major Max buyers, tour operator TUI AG said it sees no operational problems if the plane remains absent this winter, the low season for European vacations, without saying when it expects the model to return.
Norwegian blamed the grounding of the Max, as well as issues with Rolls-Royce Holdings Plc engines on its Boeing 787 Dreamliners, for a 1.5 billion kroner ($165 million) hit to working capital. It said Monday it needs to push back maturities on some debt.
Read the full article from Bloomberg +
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Airlines
Flight Cancellations Mount as Dorian Lashes U.S. Southeast Coast
Hurricane Dorian upended Labor Day travel plans for hundreds of thousands of people in the Southeastern U.S. Monday, as fierce winds and torrential rains forced widespread cancellation of rail service and airline traffic.
According to FlightAware, a flight-tracking website, airlines canceled 1,152 flights on Monday. The hardest-hit airport was Fort Lauderdale International in Florida, which closed at noon Monday and where 543 flights were canceled, three-quarters of the airport’s total scheduled for the day. Daytona Beach International Airport and both Orlando International Airport and Orlando Melbourne International Airport also closed Monday.
At least three airlines –- American Airlines Group Inc., Frontier Airlines Inc., and Southwest Airlines Co. — announced that they were waiving cancellation and change fees for flights involving storm-impacted airports in Florida and the Bahamas. Southwest also waived pet fees for travelers trying to evacuate their dogs and cats from Florida and South Carolina.
Read the full article from Bloomberg +
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Aviation
New Delays Could Keep Boeing 737 MAX Grounded Into Holiday Travel Season
Friction between Boeing Co. and international air-safety authorities threatens a new delay in bringing the grounded 737 MAX fleet back into service, according to government and pilot union officials briefed on the matter.
The latest complication in the long-running saga, these officials said, stems from a Boeing briefing in August that was cut short by regulators from the U.S., Europe, Brazil and elsewhere, who complained that the plane maker had failed to provide technical details and answer specific questions about modifications in the operation of MAX flight-control computers.
In Europe, some industry officials say they are increasingly convinced the bulk of the planes on that side of the Atlantic aren’t likely to resume carrying passengers until January at the earliest. European regulators have signaled they might need the extra time to examine anticipated changes to the MAX’s flight-control computers and the automated stall-prevention system dubbed MCAS.
Boeing since late last year has either submitted, or been on the verge of submitting, three earlier versions of the software fixes, only to be delayed by various technical challenges and questions requiring more analysis and simulator testing.
Read the full article from WSJ +
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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 Factory Activity Contracts for 1st Time since 2016
The ISM Manufacturing PMI in the US fell to 49.1 in August 2019 from 51.2 in the previous month, missing market expectations of 51.1. The latest reading pointed to the first month of contraction in the manufacturing sector since January 2016 as new orders and employment declined.
The new order index plunged 3.6 points from a month earlier to 47.2, and the employment index dropped 4.3 points to 47.4. In addition, the production index fell 1.3 points to 49.5, and the supplier deliveries index declined 1.9 points to 51.4.
Click here to access the data +
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United States Construction Spending Recovers in July
US construction spending increased 0.1 percent from a month earlier at a seasonally adjusted annual rate of USD 1.29 trillion in July of 2019, recovering from a downwardly revised 0.7 percent fall in the previous month and missing market expectations of a 0.3 percent gain. Investment in public construction rose 0.4 percent, after a 3.1 percent slump in June, as spending on state and local government construction projects rebounded 0.6 percent. Meantime, spending on private construction decreased 0.1 percent, down from a 0.1 percent gain.
Click here to access the data +
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Australia Holds Cash Rate Steady at 1%
The Reserve Bank of Australia left the cash rate unchanged at a record low of 1 percent during its September meeting, as widely expected. Policymakers said that it is reasonable to expect that an extended period of low interest rates will be required to make progress in reducing unemployment and achieve progress towards the inflation target. The Committee added that they will continue to monitor the effects of the two consecutive rate cuts in June and July and developments in the labour market.
Click here to access the data +
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Turkish Inflation Rate Eases to 15-Month Low
Turkey’s annual inflation rate fell to 15.01 percent in August of 2019 from 16.65 percent in the previous month and below market expectations of 15.51 percent. It was the lowest rate since May 2018.
Annual core inflation rate, which excludes energy, food and non-alcoholic beverages, alcoholic beverages, tobacco and gold, eased to 13.60 percent in August from 16.20 percent in the July.
Click here to access the data +
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South Africa Economy Returns to Growth in Q2
The South African GDP grew 3.1 percent on quarter in the three months to June of 2019, following a downwardly revised 3.1 percent contraction in the previous period and beating market expectations of a 2.4 percent expansion. It was the strongest growth rate since the last quarter of 2017, partly due to low base effects and the positive impact of reduced power cuts in mining and manufacturing.
The electricity, gas and water sector recorded the largest gain since Q4 2017 (3.2 percent from -7.4 percent in Q1), largely due to an increase in electricity distributed as state power utility Eskom somehow managed to keep electricity supply.
Click here to access the data +
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Canada Manufacturing PMI In Contraction Territory
The IHS Markit Canada Manufacturing PMI fell to 49.1 in August 2019 from 50.2 in the previous month. The latest reading pointed to a contraction in factory activity, as new orders dropped for the sixth consecutive month and at the steepest pace since December 2015. In addition, export orders declined mostly due to softer economic growth in the US and worsening automotive sector business conditions.
Also, the job creation rate slowed due to less upbeat growth expectations and lower levels of purchasing activity have been recorded in five of the past six months, reflecting falling production and efforts to streamline inventories. On the price front, input cost inflation eased to an over seven-year low mainly due to raw materials prices in particular steel and output cost inflation rose at the slowest rate since October 2016.
Click here to access the data +
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MARKET INSIGHT UPDATES: SUMMARIES
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Trade War
U.S.-China Trade War Takes Toll on South Korea and Japan
South Korea said Sunday that its exports to China fell 21.3% in August compared with the same month a year earlier, driving an overall 13.6% decline in exports. South Korea’s industry minister, Sung Yun-mo, cited the rising tariffs as a warning sign alongside other regional tensions including Japan’s tighter restrictions on exports to South Korea. The country’s central bank in July made the first cut to its benchmark interest rate in three years, and some economists expect another cut by the end of the year.
Japan said Monday that capital spending by the country’s manufacturers fell 6.9% in the April-June quarter, the first decline in two years, as companies grappled with a nearly double-digit decline in exports to China. Kobe Steel Ltd. in August cut its profit forecast for the year ending March 2020 by 60% to about $95 million. It said tech companies were expected to buy less aluminum and copper, and that sales of hydraulic excavators were likely to drop in China.
Both Japan and South Korea have said the effect is particularly pronounced in high-tech parts and materials purchased by factories in China, such as Japanese auto parts and South Korean semiconductors. The Chinese factories use those products to manufacture finished goods, some of which are exported to the U.S.
Read the full article from WSJ +
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Cannabis
Cannabis stock investors should pay attention to this potential threat to share prices
The cannabis industry, like any other rapidly growing industry, is no stranger to litigation. Many of the claims filed against public cannabis companies will take years to determine what happened, and who, if anyone, will be on the hook for a payout. Despite the long tail on a potential cash settlement, due to accounting rules, lawsuits can find their way onto the financial statements and directly impact a company’s earnings and share price long before they are settled.
Cannabis stocks listed in Canada report their financial statements under International Financial Reporting Standards (IFRS). If a company that uses IFRS has a claim or legal action initiated against it, the way a company must treat these events for financial reporting purposes is covered by IAS 37 ― Provisions, Contingent Liabilities and Contingent Assets. Under this framework, companies are provided with rules and guidelines that determine whether the event will be recorded on to the financial statements, relegated to the footnotes, or in some cases, given no mention whatsoever. If IFRS rules warrant that a legal action should be recorded directly onto a company’s financial statements, it will be classified as a provision, and the result is an appreciable negative impact on the company’s financial results.
The effect of this classification will not only directly impact the company’s net income and its corresponding ratios (e.g. earnings per share) that many investors have come to rely on; but the increase in the company’s liabilities can also make it more difficult, if not more expensive, to secure additional financing. For cannabis companies that have managed to secure debt financing, this may also compromise the financial covenants they are required to maintain in order to remain in good standing with their lenders.
Read the full article from MarketWatch +
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Vietnam
Vietnam startups gain on Indonesia and Singapore with new funding
According to joint research by Ho Chi Minh City-based venture capital ESP Capital and Singapore’s Cento Ventures, startup investment in Vietnam hit $246 million this year through June on 56 deals. Investment is expected to top $800 million by the end of the year, which would represent a rise of at least 80% over last year’s $444 million.
A total of about $5.9 billion was invested in Southeast Asian startups in the first half of 2019. When it comes to the investments that can be tracked to a destination country, Vietnam accounted for 17% of startup investments in the region, up from 5% for all of 2018, behind Indonesia at 48% and Singapore at 25%.
Backed by a large population of some 96 million and a healthy economic growth rate of 6.7% in the April-June quarter, more overseas investors are looking at Vietnam. Vietnam also has a highly educated workforce — the country’s pupils ranked eighth globally in the PISA international science test, higher than Hong Kong’s and South Korea’s. Homegrown tech-driven services — in sectors such as e-payments, ride-hailing, e-commerce and logistics — are booming.
Read the full article from Nikkei Asian Review +
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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 offering a complimentary one-month subscription to receive the Daily Intelligence Briefing – to Hedge Connection clients/friends. Activate yours by contacting Rob@mcalindenresearch.com and mentioning “Sent by Hedge Connection” |
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