C.M.O. 11.25.2009
Credit Market Overview
November 25, 2009
To say that the world is a different place than it was yesterday is a bit cliché; to say it is a different place than it was on Thanksgiving Day 2007 is the grossest of understatements.
Having hopefully been through the worst of the back side of the most recent bubble and not wanting to raise why we might not be on the eve of a holiday that for people in the States and Americans the world over is a time of thanks giving I would like to wish every one reading this a good holiday if you celebrate it and a think that even if you don’t, taking a moment to be grateful that we’re still here (to lament and bemoan for some) is not a bad thing today, tomorrow and everyday.
So, with all that squishy stuff out of the way and some good memories and maybe a few extra pounds what is it that a good number of people will be doing this coming Sunday? That’s right, flying back to wherever they came from to go home for Thanksgiving. It is, I believe, still the highest volume travel day in these United States and what better to discuss on such an occasion than Boeing’s (BA) attempt to put a couple of hundred thousand pounds of technology in the air in the form of its 787 Dreamliner.
Sunday, for many, will include the word “glitch”. Lost bags, missed connections, a cell phone or net book left behind. BA has had its share of glitches too in trying to blend the latest technology with the age old challenges trying to force a heavier than air vehicle into the atmosphere and the latest glitch comes from what is known as “delamination”.
This is not the phenomenon that occurs when college kids come back home for holiday breaks and get together at the local bars and restaurants (although it is a pretty good description) it is what happens when you try to join composite materials like carbon fiber and graphite to metal like aluminum using steel fasteners. The flexing and vibration of flight cause the composite materials to deconstruct or delaminate.
A work order written by one of BA’s engineers, the text of which was published in the WSJ recently read” “GROUND TESTING ONLY. NO FLIGHT TEST ALLOWED”. Not hard to figure out from that that BA has a few things to figure out before folks get to dream on the Dreamliner. No doubt the smart folks at Boeing will eventually figure out how to keep it all together at 30,000 feet.
Being successful in business is all about pushing on and towards that end BA has selected South Carolina as the site for its second final assembly plant for the 787. Why SC when the company has its origins in the Northwest and its corporate headquarters in Chi-town? The answer to that is an effort by the company to jettison the aircraft machinists union which is ingrained in the firm’s Seattle area factories. Not to say that tax incentives, help with the issuance of a new bond to finance construction and the waiving of sales tax on fuel used for test flights didn’t hurt.
There are currently orders for 840 of the planes as soon as BA can start moving them out of the factory so the demand part of the equation looks intact. Now all BA has to do is figure out the supply glitches.
If you’re traveling this weekend I wish you a few less glitches than Boeing’s had with the 787 but then, that’s still a lot of glitches.
The CDS/equity combo for BA shows a relatively smooth decrease in credit spreads from early March through early August and a fairly flat trajectory since. The stock bottomed in March right around the time the CDS peaked ($29.36 on 3/3) and then gained altitude quickly reaching $52.83 by 6/8. A dip to $39.04 on 7/7 was followed by a new high for the year of $54.62 on 9/29. The latest dip was to $47.22 so there are those that would interpret this as a series of higher highs and higher lows which the technical analysis textbooks tell us is the definition of a positively sloped trend.
With CDS levels close to their lows it would appear the next high will be reached when the delamination ceases. Not being an engineer myself I’m keeping an eye on the CDS and equity to figure out when that happens.
Happy Thanksgiving.
Jim Delaney
