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Daily Intelligence Briefing

Tuesday, January 28, 2020

Identifying Change-Driven Investment Themes – Five sections, explained here.

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 and mentioning “Sent by Hedge Connection”

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Coronavirus and 737 MAX Costs Already Denting Airlines in 2020 →

Summary: As the Boeing 737 MAX grounding grinds on and pushes more and more costs onto airlines, the recent breakout of Coronavirus marks another major blow to the industry in the early going of 2020. Capacity costs continue to rise, particularly higher energy costs associated with older 737s brought in to replace the MAX, and the timeline for a potential re-launch of the beleaguered jet could be as far out as next fall. Read more +

II. Updates of Themes on MRP’s Radar

Follow-up analysis of key market drivers monitored by MRP.

Plant-Based: Beyond Meat, Impossible Foods Heat Up Rivalry With These Moves

Smartphones: India is now a larger smartphone market than the US

Metals: Copper in longest losing streak for six years on China virus fears

Coal: Cheap Natural Gas Is About to Kick More Coal Out of Europe

CRISPR: CRISPR Could Fry All Cancer Using Newly Found T-Cell

III. Joe Mac’s Viewpoint

Founder Joe McAlinden’s big-picture analyses of macro issues. More about him here.

December 23, 2019: A Review of MRP’s Change-Driven Themes →

November 27, 2019: Emergence of Divergence →

October 31, 2019: Receding Recession Fears →

September 30, 2019: Verbal Intervention →

August 30, 2019: The Booming Buck →

IV. Active Thematic Ideas

MRP’s active long and short themes, with an archive of follow-up reports.

See Them Here →

V. Macroeconomic Indicators

Key data releases relevant to MRP’s Active Thematic Ideas.

See Them Here →



Coronavirus and 737 MAX Costs Already Denting Airlines in 2020

As the Boeing 737 MAX grounding grinds on and pushes more and more costs onto airlines, the recent breakout of Coronavirus marks another major blow to the industry in the early going of 2020. Capacity costs continue to rise, particularly higher energy costs associated with older 737s brought in to replace the MAX, and the timeline for a potential re-launch of the beleaguered jet could be as far out as next fall.

Boeing has now told airlines and suppliers that it doesn’t expect regulators to sign off on the 737 MAX until the middle of 2020, months later than the manufacturer previously expected. In March 2019, following 2 fatal crashes that killed 346 passengers and crew within a 5-month span, the MAX jet model was grounded worldwide for inspection and repair of the plane’s faulty MCAS software. The recertification process, which was expected to last just a few months, has gone on for the better part of 10 months now. The updated timeline reportedly reflects a new, recently discovered software flaw connected to how the MAX’s flight computers power up and verify they’re receiving valid data, the need to correct vulnerabilities in certain wiring bundles, and the need for new pilot simulator training. Boeing said it’s also accounting for “further developments that may arise in connection with the certification process.”


This is a radical departure from company statements from less than 3 months ago, when the company believed a MAX certification by the FAA could come as soon as the end of last November. Boeing’s overoptimistic, and seemingly baseless predictions for certification dates has been a constant since the very beginning of the MAX grounding when the company originally asserted that they’d have FAA clearance by the end of May 2019. MRP was skeptical then and we continue to be skeptical of any timeline the company lays out.


Southwest, United, and American Airlines, increasingly hard hit by the 737 MAX grounding, have already cancelled all previously scheduled flights aboard the jet into June. United Airlines is the most pessimistic of major US airlines carrying a 737 MAX fleet, not expecting the jet back until the fall, at the earliest.


However, even if one assumes the MAX does receive regulatory approval, has the entire existing fleet maintenanced and inspected, and sees a return to service by mid-year, the next 2 quarters and of the year will still undoubtedly to be messy ones for airlines.


Costs Continue to Dampen Airline Earnings


A year ago, American Airlines’ management predicted that the company’s adjusted earnings per share would rise to between $5.50 and $7.50 in 2019; an aggressive forecast, considering that adjusted EPS totaled just $4.55 in 2018. Unfortunately, the 737 MAX’s troubles dashed all hope of achieving the 2019 earnings target, as adjusted EPS rose to just $4.90 and the total lost operating income from the MAX grounding was approximately $550 million on the year.


In the wake of tens of millions of global cancellations, American Airlines added another 10,000 flights to the pile in the fourth quarter: Expect that to continue on, especially as summer travel season approaches.


Southwest’s earnings fell short of Wall Street’s expectations, coming in at only 98 cents a share in the fourth quarter of 2019 versus analyst expectations of $1.09 in per share earnings. The airline’s net income fell 21% to $514 million on revenue of $5.73 billion, while the grounding reduced operating income by $828 million for all of 2019, the airline said. Costs were driven up by tightened capacity, reimbursement payments to 737 MAX pilots, and fuel; the 737 MAX consumes 15% less gas than other 737 models.


As MRP has previously noted, capacity crunches are only getting worse as new planes that airlines expected to be in service by now are indefinitely grounded. The grounding of the 34 MAX planes already in Southwest’s possession, along with Max planes that Boeing was supposed to deliver to Southwest through 2019, meant that the equivalent of 75 airplanes were grounded. Lacking those aircraft, Southwest’s seat capacity declined 1.6% instead of growing almost 5% as planned, according to a company earnings statement. Capacity will fall about 2% this quarter, well below earlier plans for 8% growth. The flying ban has stymied growth plans at Southwest, which, according to CEO Gary Kelly, has missed out on serving as many as 7 million customers and, if Southwest had the MAX during the fourth quarter, its net earnings would have been about 28% higher.


While Southwest President Tom Nealon told reporters on Thursday that “at this point, there’s no notion of discounting Max flights”, given his belief that the “vast majority” of flyers don’t plan to change how they fly, most surveys have indicated that flyers would indeed be hesitant to board a 737 MAX. One of the most recent, conducted last month by Bank of America Merrill Lynch, found that nearly two-thirds of surveyed flyers said they would wait at least six months before flying or never fly it, while most respondents said they would switch to another aircraft if they had the opportunity.


The longer the grounding goes on, the more uncertainty is thrown into just how much work will need to be done on the MAX jets to get them back in the air, as well as how the asset value of the jets will have to be adjusted on airline balance sheets.


Wuhan Coronavirus Threatens International Demand


The newest threat to airlines, though, comes in the form of the 2019-nCoV (colloquially known as Coronavirus) breakout in Central China. Officials with China’s National Health Commission said there were 2,744 confirmed domestic cases, as of Monday, and 461 are considered severe. Officials are also investigating 5,794 suspected cases and tracking over 32,000 who had close contact with the infected patients. The death toll thus far stands at 80 (all in China), but that number is expected to grow in coming weeks. The equivalent of 50 million are now quarantined in the country. The virus has also emerged in small numbers across several other countries, including the US where 5 cases are now confirmed, infecting travelers who had recently been in Wuhan or other affected areas of China.


Airline stocks have plunged in the wake of the virus. While global economies and headline stock indexes historically recover from epidemic diseases after a few months’ time, companies in the travel and tourism industry, the earnings of which are directly impacted by travel bans and disruptions, usually bear the brunt of the hit. The Wall Street Journal Writes that European airlines in particular are getting punished, given that they are a key gateway into and out of China. Shares in British Airways -owner IAG and Lufthansa are down 13% and 9%, respectively, since the start of last week.


In the case of both the Ebola and swine-flu panics, travel stocks underperformed broader cyclical stocks―those that are particularly affected by economic busts―by almost 4 percentage points over the following three months.


By last Thursday, more than half of the 566 of the day’s previously flights scheduled from China’s Wuhan international airport were canceled. Cathay Pacific Airways Ltd. and China Airlines Ltd. are going as far as canceling flights in and out of Wuhan until the end of February. Refunds for cancelled flights to China can be redeemed up to January 31 for American Airlines and Delta Air Lines, and up to February 7 for United Airlines. If travel is to Wuhan, American and United extend the waiver through late March. This is a key period for flights to and within China, as it is usually time to celebrate the country’s lunar new year – the largest annual movement of people in the world. The Chinese government has postponed or cancelled celebrations across the country this year.


The combined effects of Coronavirus and the dragging on of the 737 MAX grounding pave a very treacherous path for airlines in the early stages of 2020. As such, MRP is re-affirming out Short Airlines theme, launched on June 4, 2019. Since then, the U.S. Global Jets ETF (JETS) has returned just 4%, diverging from the S&P 500 return of 15% over that same period. We believe that divergence is set to continue, pushing JETS into the red.

Airlines (JETS) vs Boeing (BA) vs S&P 500 (SPY)

Source material for today’s market insight…


Southwest is so confident that flyers will trust the Boeing 737 Max when it returns that it’s not considering any discounts on flights


Southwest Airlines is so confident that flyers will trust the Boeing 737 Max when it returns to service that it’s not considering any discounts on flights using the plane. Southwest had more Max planes in its fleet than any other airline in the world before the planes were grounded.


According to a June 2019 poll by UBS, 41% of Americans said they wouldn’t consider flying on a Max plane until it had been back in service for six months.


Helio Fred Garcia, president of the crisis-management firm Logos Consulting, previously told Business Insider that many passengers don’t check what type of plane they are on or realize the significance of any model numbers ― but there could be chaos if people realize its significance and panic after booking.


Read the full article from Business Insider +


American Airlines faces challenges on multiple fronts – and alternative data signals a change


Job postings at American Airlines are down 39% over the last 12 months as American remains in limbo, and on multiple fronts. The analysts also point out – rightly – that American Airlines recently stated it aimed to have 737 MAXs back in action in June, but that “US airlines will need to extend MAX cancellations a few months beyond June,” which could also factor into declining hiring.


Credit Suisse are marking its stock an “underperform,” according to a research note dated Friday, January 24, saying the potential for lingering challenges thanks to Boeing’s 737 MAX snafu could hurt the stock.


Read the full article from Thinknum +


United Airlines does not expect Boeing 737 MAX to fly this summer


United Airlines said that it does not expect its 737 MAXes to fly again until at least the fall. That new guidance came in its quarterly investor call Wednesday. “At this time we are assessing the schedule, but we do not anticipate flying the MAX this summer,” Andrew Nocella, United’s chief commercial officer, said Wednesday during the carrier’s fourth-quarter earnings call.


United has a relatively small number of MAXes in its fleet, but executives said on the call that the airline’s inability to utilize those planes has slowed its strategy of growing its mid-continent hubs in Chicago, Denver and Houston. More broadly, executives said the grounding of the MAX has hampered United’s ability to use optimally sized planes to serve markets across its network.


If the MAX fleet was not grounded, United would have some 737 MAX-10s flying now for example, which would have replaced smaller aircraft.


Read the full article from The Points Guy +


Boeing’s Max Ruined Christmas. Next Up, Summer.


Boeing said Tuesday that its “best estimate” for when regulators will lift a flying ban on its Max jet is now mid-2020.


The major U.S. airlines have all pulled the Max from their schedules through June in what they thought would be a conservative call. The logistical challenges of bringing jets out of storage and putting pilots through the simulator training that Boeing has now decided to recommend means that the airlines will likely have to go without their Max fleets for yet another peak travel season.


The biggest pain will be felt by Boeing’s suppliers. A three-month production shutdown is one thing; a six-month halt is something else, entirely. With a legitimate debate about the sustainability of air traffic growth at the levels needed to maintain demand, it’s not out of the question that the company might not ever reach its target of producing 57 Max jets per month.


Read the full article from Bloomberg +


MRP added LONG Refiners to our list of themes on July 3, 2019, citing higher gasoline prices, combined with OPEC’s latest production cuts and the possibility of a widening in the crack spread.


While refiners did enjoy higher gas prices and strong performance through autumn, but the recent breakout of the Wuhan Coronavirus could cause chaos in the refining business.


Not only will the virus disrupt fuel consumption by travelers, but a slowdown in economic growth could drive down demand for shipping fuels.


With the entire market looking down the barrel of a Chinese epidemic, we feel now is the time to call an end to this theme. Since the launch of the theme, the VanEck Vectors Oil Refiners ETF (CRAK) has declined 5%, while the S&P 500 has risen 8%.


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.








Silver Miners


U.S. Banks


China Healthcare


Electric Utilities


Robotics & Automation




Vietnam Equities



2019 US New Home Sales Highest Since 2006 


Sales of new single-family homes in the United States fell 0.4 percent from the previous month to a seasonally adjusted annual rate of 694 thousand in December 2019, following a revised 1.1 percent drop in November and missing market expectations of 1.5 percent growth. It was the third straight monthly decline in new home sales.


Considering 2019 full year, sales increased 10.3 percent to 681 thousand, the highest level since 2006.


Click here to access the data +


Turkey Business Confidence on the Rise


The manufacturing confidence index in Turkey increased to 104.1 in January 2020, the highest since April 2019, from 103.6 in the previous month.


By contrast, the gauge measuring fixed investment expenditure dropped to 103.4 from 110.8 in November.


Click here to access the data +


Germany Ifo Business Climate Index Down Slightly


The Ifo Business Climate Index in Germany fell to 95.9 in January 2020 from 96.3 in the previous month and missing market expectations of 97.


The business expectations sub-index dropped to 92.9 from 93.9 in December; while the gauge of current conditions rose to 99.1 from 98.8 in the prior month.


Click here to access the data +


UK Finance Mortgage Approvals Best Since August 2015


British banks approved 46,815 mortgages for new house purchase in December 2019, the most since August 2015, compared to a revised 44,058 in November, data from trade association UK Finance showed.


Click here to access the data +


Mexico Retail Sales Stronger YoY


Retail Sales in Mexico increased 2.1 percent year-on-year in November 2019, following a 2.1 percent gain in the previous month and slightly below market forecasts of a 2.2 percent rise.


On a monthly basis, retail trade went up 1.7 percent, rebounding from a 2.3 percent fall in the prior month and beating consensus of a 0.1 percent decline.


Click here to access the data +


Brazil Foreign Direct Investment Highest in 4 Months


Foreign Direct Investment in Brazil increased by 9433.66 USD Million in December of 2019. That is the highest figure since July.


Click here to access the data +




Beyond Meat, Impossible Foods Heat Up Rivalry With These Moves


Sit-down restaurant chain Denny’s on Monday said it would serve more of Beyond Meat’s plant-based burgers in more of its restaurants, while fast-casual burger chain Habit Restaurants said it planned to start selling a plant-based burger from rival Impossible Foods.


Denny’s said it would offer a plant-based patty from Beyond Meat in more than 1,700 restaurants in the U.S. and Canada.


Habit has more than 270 restaurants in 13 states and internationally. Habit, which agreed to be bought by Yum Brands earlier this month, tested the Impossible Burger at nine locations in 2018.


Read the full article from Investor’s Business Daily +



India is now a larger smartphone market than the US


China eclipsed the US as the largest smartphone market on Earth years ago, but now Americans can’t even claim second place. Counterpoint Research estimates that India overtook the US to become the second-largest market, with 158 million phones shipping to the country in 2019.


That’s largely due to the surge of Chinese manufacturers offering aggressively-priced devices, analysts said. A whopping 72 percent of phones shipped to India came from brands like Xiaomi, Vivo, Realme and Oppo.


Read the full article from Engadget +



Copper in longest losing streak for six years on China virus fears


Copper fell for a ninth consecutive session on Monday, the longest losing streak in six years.The metal tumbled to its weakest in three months, with other industrial metals also sliding as investors took flight.


Copper, regarded as a bellwether of the global economy, has given up all of its gains since early December when a rally pushed prices up nearly 10% to eight-month highs as investors welcomed the first phase of a U.S.-China trade deal and hoped for a rebound in economic growth.


“Chinese demand accounts for about 50% of the majority of base metals,” said BMO Capital analyst Timothy Wood-Dow, noting the spread of the virus.


Read the full article from Reuters +

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 and mentioning “Sent by Hedge Connection”

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