Boeing’s 787 Dreamliner was originally scheduled to fly in September 2007. Just a few days before the maiden flight, management announced what would be the beginning of a 2+ year delay. That’s long even by airline standards. In its five or six announcements—it’s hard to keep count—management blamed everything from a shortage of fasteners to incomplete software to a labor strike.
The latest delay was announced on June 23, 2009. Management said, “first flight of the 787 Dreamliner will be postponed due to a need to reinforce an area within the side-of-body section of the aircraft.” I’m not an aerospace engineer, so I won’t say how I really feel about that. Regarding first flight and aircraft deliveries, they said, “It will be several weeks before the new schedule is available.”
Several weeks later on July 22, 2009, Boeing announced their Q2 financial results. Regarding the 787, they said “The company expects to complete its assessment of the schedule and financial implications during the third quarter.” Not only have they delayed first flight, they have also delayed the new schedule for first flight. They also added that they recently completed “low-speed taxi tests on the first flight test aircraft.” I guess you learn to walk before you run…or fly. Again, I’m not an aerospace engineer.
At this point, I have lost confidence in management and I am only 99% sure that the Dreamliner will eventually get off the ground. While I think it would be risky to bet against BA stock at current levels, I would not recommend you buy it either. If that 1% disaster comes true, shares will take a Black Swan-style swan dive.
Friday, July 24, 2009
Thursday, July 16, 2009
S&P 500's Stealth Earnings Growth
How can analysts expect S&P 500 earnings to grow from $49 in 2008, to $55 in 2009, and $74 in 2010? One explanation is turnover on the index.
Let's consider the impact of General Motors. According to data compiled by S&P's Howard Silverblatt on June 2, Q2 consumer discretionary sector earnings were expected to fall 75.6% year-over-year. This was due to the massive loss estimated for GM. But now that GM has been removed from the S&P 500, Q2 consumer discretionary earnings are expected to jump 36.6% year-over-year. It's clear how changing a constituent can have a material impact on the index's earnings estimates and valuations.
And GM isn't the only money loser that got booted from the index in the last year or so. Lehman Brothers, Freddie Mac, and Fannie Mae bled money for the S&P 500 in 2008, but they're not in the index today. This could at least partially explain the expectation for 300% year-over-year earnings growth in the S&P 500's financials sector in Q2.
Let's consider the impact of General Motors. According to data compiled by S&P's Howard Silverblatt on June 2, Q2 consumer discretionary sector earnings were expected to fall 75.6% year-over-year. This was due to the massive loss estimated for GM. But now that GM has been removed from the S&P 500, Q2 consumer discretionary earnings are expected to jump 36.6% year-over-year. It's clear how changing a constituent can have a material impact on the index's earnings estimates and valuations.
And GM isn't the only money loser that got booted from the index in the last year or so. Lehman Brothers, Freddie Mac, and Fannie Mae bled money for the S&P 500 in 2008, but they're not in the index today. This could at least partially explain the expectation for 300% year-over-year earnings growth in the S&P 500's financials sector in Q2.
Monday, July 13, 2009
Morgan Stanley and the Future of Research
The Financial Times recently reported Morgan Stanley tapped a 15 year old summer intern for some insight into "How Teenagers Consume Media." The introduction reads, "Without claiming representation or statistical accuracy, his piece provides one of the clearest and most thought provoking insights we have seen."
So, as the requirement to provide independent third party research expires in the next few weeks (Global Research Analyst Settlement), is this a preview of research to come? It's cheap (Hello, cost savings!), it has no statistical basis (Nassim Taleb would be proud), and it's independent (How corrupt could a teenager be?).
Of course, I don't really expect research departments to be taken over by high school kids. However, I do expect to see an increasing use of unconventional research. Surely, statistical study will reveal that conventional research made you very little, if any, money in recent years.
So, as the requirement to provide independent third party research expires in the next few weeks (Global Research Analyst Settlement), is this a preview of research to come? It's cheap (Hello, cost savings!), it has no statistical basis (Nassim Taleb would be proud), and it's independent (How corrupt could a teenager be?).
Of course, I don't really expect research departments to be taken over by high school kids. However, I do expect to see an increasing use of unconventional research. Surely, statistical study will reveal that conventional research made you very little, if any, money in recent years.
Tuesday, July 7, 2009
Religionomics
Here's a conversation topic you might not want to bring to the dinner table. (and I can't take credit for coining the term.)
On Tuesday, the Vatican published Caritas in Veritate (Charity in Truth), an encyclical of Pope Benedict XVI. Among other things, there is a need "To manage the global economy; to revive economies hit by the crisis; to avoid any deterioration of the present crisis and the greater imbalances that would result...," proclaimed the Holy Father. "For all this, there is an urgent need of a true world political authority...regulated by law, to observe consistently the principles of susidiarity and solidarity..." et cetera. And only a month ago, we were arguing that President Obama's financial reform plan would give too much power to the Fed.
As I see it, in order to establish a "world political authority", you need world agreement, which is another way of saying world peace. At the very least, world peace is a long ways off.
The Pope isn't the only renown religious figure to dabble in economic commentary. Famed ultra-conservative televangelist, Pat Robertson, annually makes a set of predictions for the year. On January 2, 2008, he claimed God told him that oil would rise to $150/barrel, the stock market would crash, and the world would enter a recession. But before you run to your nearest church, you should know that he doesn't have stellar track record of annual forecasts: Robertson predicted there would be a major terrorist attack on U.S. soil in 2007.
Obviously, the Pope and Pat Robertson are very different indeed. But despite the Protestant Reformation, the two spiritual leaders share some similar beliefs. For one, they are both opponents of abortion and contraception. And here's where our conversation gets freaknomic (to borrow a term from Stephen Levitt and Stephen Dubner).
Set aside your stance on abortion and contraception for a moment. In Irrational Exuberance, Robert Shiller notes:
"Advances in birth control technology (the pill was invented in 1959 and became widely available by the mid-1960s in the United States and many other countries) and social changes that accepted the legality of contraception and abortion were instrumental in lowering the rate of population growth, as were growing urbanization and advances in education and economic aspiration levels. Now the Baby Boom and the subsequent Baby Bust have created a looming social security crisis in many countries of the world: when the Boomers grow old and finally retire, the number of young working people available to support the elderly population will decline worldwide."
In other words, contraception and abortion are taking taxable individuals out of our future workforce.
But Shiller's point may be an oversimplification. More people could mean more unemployed. Also, anyone who read Freakonomics could tell you that Stephen Levitt has long argued falling crime rates can be traced back to the legalization of abortion due to Roe v. Wade in 1973.
I won't try to get to the bottom of any of the issues mentioned above. The point I'm trying to make is that economics, religion, sociology, et cetera, are not mutually exclusive. Social and religious choices are not without economic consequences. It's popular for young people to claim that they are social liberals/economic conservatives. But even that distinction doesn't get rid of the highly contentious political gray area.
On Tuesday, the Vatican published Caritas in Veritate (Charity in Truth), an encyclical of Pope Benedict XVI. Among other things, there is a need "To manage the global economy; to revive economies hit by the crisis; to avoid any deterioration of the present crisis and the greater imbalances that would result...," proclaimed the Holy Father. "For all this, there is an urgent need of a true world political authority...regulated by law, to observe consistently the principles of susidiarity and solidarity..." et cetera. And only a month ago, we were arguing that President Obama's financial reform plan would give too much power to the Fed.
As I see it, in order to establish a "world political authority", you need world agreement, which is another way of saying world peace. At the very least, world peace is a long ways off.
The Pope isn't the only renown religious figure to dabble in economic commentary. Famed ultra-conservative televangelist, Pat Robertson, annually makes a set of predictions for the year. On January 2, 2008, he claimed God told him that oil would rise to $150/barrel, the stock market would crash, and the world would enter a recession. But before you run to your nearest church, you should know that he doesn't have stellar track record of annual forecasts: Robertson predicted there would be a major terrorist attack on U.S. soil in 2007.
Obviously, the Pope and Pat Robertson are very different indeed. But despite the Protestant Reformation, the two spiritual leaders share some similar beliefs. For one, they are both opponents of abortion and contraception. And here's where our conversation gets freaknomic (to borrow a term from Stephen Levitt and Stephen Dubner).
Set aside your stance on abortion and contraception for a moment. In Irrational Exuberance, Robert Shiller notes:
"Advances in birth control technology (the pill was invented in 1959 and became widely available by the mid-1960s in the United States and many other countries) and social changes that accepted the legality of contraception and abortion were instrumental in lowering the rate of population growth, as were growing urbanization and advances in education and economic aspiration levels. Now the Baby Boom and the subsequent Baby Bust have created a looming social security crisis in many countries of the world: when the Boomers grow old and finally retire, the number of young working people available to support the elderly population will decline worldwide."
In other words, contraception and abortion are taking taxable individuals out of our future workforce.
But Shiller's point may be an oversimplification. More people could mean more unemployed. Also, anyone who read Freakonomics could tell you that Stephen Levitt has long argued falling crime rates can be traced back to the legalization of abortion due to Roe v. Wade in 1973.
I won't try to get to the bottom of any of the issues mentioned above. The point I'm trying to make is that economics, religion, sociology, et cetera, are not mutually exclusive. Social and religious choices are not without economic consequences. It's popular for young people to claim that they are social liberals/economic conservatives. But even that distinction doesn't get rid of the highly contentious political gray area.
Sam Ro Now on MoneyMasters
I'm now a regular contributor to the blog, MoneyMasters with Vahan Janjigian. Check it out for a variety of good commentary and opinions on the markets and the economy.
I will also continue posting to the Educated Guesser.
I will also continue posting to the Educated Guesser.
Tuesday, June 30, 2009
Rolling Stone on Goldman Sachs
Rolling Stone's Matt Taibbi recently published a colorful and slightly biased history of Goldman Sachs. (Read it here for free.) It gets good at the end when the author suggests Barack Obama and Al Gore are puppets in Goldman’s plan to rip off America through cap-and-trade.
Monday, June 15, 2009
Stocks Could Fall in the Near Term
As expected, stocks have climbed significantly since March lows. However, I'm getting nervous that stocks have rebounded too much too fast. Here's a report I helped author and publish Thursday, June 11 for Forbes Special Situation Survey subscribers.
Special Report
Although the Federal government now owns large chunks of formerly blue-chip companies, it seems investors have overcome their fear that capitalism is about to end. In fact, they now seem to believe that the worst of our financial and economic crisis is over. As a result, they are once again willing to put money at risk as evidenced by a number of factors. Spreads between yields on corporate bonds and Treasury securities have shrunk, the CBOE Volatility Index has declined significantly, and stock prices are up 40% from their March 9 lows. Yet despite this increased appetite for risk, we remain concerned that stocks will see another pullback. While there is plenty of evidence that the economy is deteriorating at a slower rate, we see nothing to suggest it is getting better.
First quarter earnings provided one catalyst for the stock market’s rally. Earnings were down from a year ago, but for the most part, they were better than expected. Many of the positive surprises were due to lower raw material and energy costs as well as layoffs and other aggressive cost cutting activities. More recently, however, commodity prices have been on an upswing. The Goldman Sachs Commodity Index, a composite of energy, metals, and agricultural goods, is up 41% from its recent low. The Energy Information Administration, which in January had forecasted an average price of $43.25 for a barrel of crude oil for 2009, recently upped its forecast to $58.70. With oil currently selling for more than $70 per barrel, it may have to revise its forecast again. This rapid rise in commodity prices will squeeze gross profit margins for many companies.
Furthermore, corporate layoffs have pushed the unemployment rate to 9.4%, its highest level since 1983. Yet those fortunate to remain employed are getting squeezed. A recent survey conducted by Challenger, Gray & Christmas indicates that 52% of companies have cut or frozen salaries. Many have eliminated benefits such as contributions to 401(k) plans. On top of this, the national average price of gasoline is up almost 60% since the start of the year. Less income and higher gasoline prices will reduce consumer spending, the most important component of GDP.
In addition, housing, where all the problems began, remains troubled. Sales may be stabilizing, but prices are still plunging. The government tried to help by forcing mortgage rates to below 5%. However, the long-end of the Treasury yield curve has suddenly jumped and so have mortgage rates. Higher mortgage rates will only prolong the housing crisis.
In short, the economy is still deteriorating. Yes, things may be getting worse at a slower rate, but they are still getting worse. We agree that a rally off the March 9 lows was fully justified. We also agree that even at current prices stocks are attractive from a long-term perspective. However, we also believe stocks have climbed too far too fast and a retest of the lows is inevitable. We are not suggesting you sell and get out of the market. Instead, take advantage of a pullback if it occurs to put more money into your favorite stocks.
Special Report
Although the Federal government now owns large chunks of formerly blue-chip companies, it seems investors have overcome their fear that capitalism is about to end. In fact, they now seem to believe that the worst of our financial and economic crisis is over. As a result, they are once again willing to put money at risk as evidenced by a number of factors. Spreads between yields on corporate bonds and Treasury securities have shrunk, the CBOE Volatility Index has declined significantly, and stock prices are up 40% from their March 9 lows. Yet despite this increased appetite for risk, we remain concerned that stocks will see another pullback. While there is plenty of evidence that the economy is deteriorating at a slower rate, we see nothing to suggest it is getting better.
First quarter earnings provided one catalyst for the stock market’s rally. Earnings were down from a year ago, but for the most part, they were better than expected. Many of the positive surprises were due to lower raw material and energy costs as well as layoffs and other aggressive cost cutting activities. More recently, however, commodity prices have been on an upswing. The Goldman Sachs Commodity Index, a composite of energy, metals, and agricultural goods, is up 41% from its recent low. The Energy Information Administration, which in January had forecasted an average price of $43.25 for a barrel of crude oil for 2009, recently upped its forecast to $58.70. With oil currently selling for more than $70 per barrel, it may have to revise its forecast again. This rapid rise in commodity prices will squeeze gross profit margins for many companies.
Furthermore, corporate layoffs have pushed the unemployment rate to 9.4%, its highest level since 1983. Yet those fortunate to remain employed are getting squeezed. A recent survey conducted by Challenger, Gray & Christmas indicates that 52% of companies have cut or frozen salaries. Many have eliminated benefits such as contributions to 401(k) plans. On top of this, the national average price of gasoline is up almost 60% since the start of the year. Less income and higher gasoline prices will reduce consumer spending, the most important component of GDP.
In addition, housing, where all the problems began, remains troubled. Sales may be stabilizing, but prices are still plunging. The government tried to help by forcing mortgage rates to below 5%. However, the long-end of the Treasury yield curve has suddenly jumped and so have mortgage rates. Higher mortgage rates will only prolong the housing crisis.
In short, the economy is still deteriorating. Yes, things may be getting worse at a slower rate, but they are still getting worse. We agree that a rally off the March 9 lows was fully justified. We also agree that even at current prices stocks are attractive from a long-term perspective. However, we also believe stocks have climbed too far too fast and a retest of the lows is inevitable. We are not suggesting you sell and get out of the market. Instead, take advantage of a pullback if it occurs to put more money into your favorite stocks.
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