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from Counterparties:

MORNING BID – He’s an importer-exporter

The stock market has, over time, gotten somewhat more used to the idea that U.S. federal government activities add to market consternation and volatility, not reduce it. In the 1990s, there used to be a catchphrase that “gridlock was good for equities,” but that came during a long period of economic growth and on the back of policies that Wall Street generally supported – financial services reform, welfare reform, and not much else. That’s no longer the case. We’ve already seen the detrimental effects on the markets of the U.S. debt ceiling fiasco that led to the first-ever downgrade of the U.S. credit rating in 2010 and subsequent fights about the debt ceiling (though that has abated somewhat).

The talk about “uncertainty” coming out of Washington is a somewhat overstated game – be it tax policy and the like, there’s always uncertainty in life – but the latest cause for volatility has been specifically related to the renewal of the Export-Import Bank, currently being batted around in Washington with the idea that Congress will end up renewing its charter for a few months (right now mid-2015 looks like the best bet) before invariably taking up the issue again.

It’s not unprecedented for this to be a political football (votes have been close in the past and it has been used as a poster child for Washington-related excess), but this year’s battle is more heated than most in its past. Ex-Im head Fred Hochberg, who spoke at a Reuters summit Wednesday, said the bank was at par with what others were doing and eliminating it would tilt the balance against U.S. exporters, threatening 205,000 jobs.

About one-fifth of its $37 billion in annual loans are for small businesses, but many in the GOP are unmoved. With the idea of an on-again, off-again situation emerging similar to the now-annual debt ceiling extension back-and-forth, some investors believe companies using the Ex-Im bank may head elsewhere for more secure sources of funding that are sure to be around for more than a few months before having to face another annoying fight about its future.

from Counterparties:

MORNING BID – Oil and trouble

Riskiest markets saw their first hiccup in a while in the last couple of days, with a 100-point loss in the Dow Thursday that has raised a bit of concern for the first time in ages, it seems. Of course, 100-point drops in the Dow aren't really what they used to be, but that doesn't mean this nascent selloff should be ignored. Worldwide issues - the sudden rise in oil prices on the growing insurgency in Iraq - have investors backing away from equities and shifting a bit into safer assets like the Treasury market. The indirect bidders in Thursday's auction of 30-year notes took the highest amount of the auction since 2006, perhaps as a way to offset worries about weak growth worldwide and the uncertainty in the Middle East.

The declines translated directly to the transportation stocks, where a confluence of factors have conspired to knock down the likes of airlines (just when they stopped seeming so horrible as investments). Lufthansa's warning earlier in the week brought some fresh worries about discretionary spending, while the rise in oil prices translated directly to a falloff in the airlines.

from Stories I’d like to see:

Picking government contractors, high-flying Dubai, and a dubious drug on the market

1. Who picks the contractors?

In the wake of the failed launch of Healthcare.gov there has been some spectacular insider coverage, particularly by the Washington Post and New York Times, of the failure of the private contractors to deliver what they promised when they won the assignments to build the federal insurance exchange. But while there has been some mention of problems with the contract procurement process itself (focusing on the notion that in Washington the IT providers who win the contracts are better at winning IT contracts than at doing cutting-edge IT), one piece of the story has so far been missing: Who actually decided to award the Healthcare.gov contract to CGI and the others who shared the work? And on exactly what basis?

We know the winners had invested heavily over the years to get on a list of pre-qualified companies who could bid on contracts like this one, a tortuous process that the best and brightest technology companies outside the Beltway typically don’t bother with because they have too much more rewarding work to do in the private sector, where the bidding process is more straightforward. But we still haven’t gotten a good picture of who in the government runs these processes.

from Global Investing:

Emerging markets to fuel airline spending trajectory

Emerging markets may not have all the technological know-how in civil aerospace, but from China across the world to Brazil, they do have the cash.

The civil aerospace sector performed well in 2013, according to Societe Generale data, trading at a 4 percent premium over the MSCI world index, while the defence sector has steadied, and in the medium to long term civil aerospace should be supported by strong orderbooks from emerging economies.

from Alison Frankel:

Robbins Geller faces sanctions in Boeing witness controversy: Posner

Robbins Geller Rudman & Dowd has had more than its share of problems with recanting confidential witnesses in securities class actions, but an 18-page ruling Tuesday from the 7th Circuit Court of Appeals is the worst news yet for the plaintiffs' firm. Judge Richard Posner, writing for a panel that also included Judges William Bauer and Diane Sykes, said the firm had ignored red flag warnings that its lone informant in a securities class action against Boeing was unreliable. No lawyer from the prolific plaintiffs' firm took the trouble of checking out the informant's allegations, Posner said, yet the firm didn't hesitate to repeat his claims in an amended complaint against the aerospace company. The appeals court, not surprisingly, refused to revive the class action claiming Boeing misled investors about its Dreamliner planes, but remanded the case to U.S. District Judge Ruben Castillo to determine whether Robbins Geller should be sanctioned under Rule 11, and, if so, for how much money.

"The plaintiffs' lawyers had made confident assurances in their complaints about a confidential source - their only barrier to dismissal of their suit - even though none of the lawyers had spoken to the source and their investigator had acknowledged that she couldn't verify what (according to her) he had told her," Posner wrote. "Their failure to inquire further puts one in mind of ostrich tactics - of failing to inquire for fear that the inquiry might reveal stronger evidence of their scienter regarding the authenticity of the confidential source than the flimsy evidence of scienter they were able to marshal against Boeing."

from Stories I’d like to see:

A working legislature, post informant life and Wal-Mart’s guns

A legislature that works:

Maybe it’s because I live in New York and have to read all the time about what may be the world’s two most dysfunctional legislative bodies – in Albany and Washington. But I wish a reporter for a national news organization would try to find the country’s best state legislature. A place where Democrats and Republicans actually work together. A place where money isn’t everything, and where everything isn’t done at the 11th hour, or later, followed by an orgy of self-congratulation.

We’ve got 50 states. They can’t all be governed by lawmakers who embarrass their constituents. Which ones function well, and why? What conflict-of-interest, campaign-spending or other rules do they have that help keep things in line? What makes them different, and how can we export their success to the rest of our capitals?

from Reuters Investigates:

Boeing’s extreme outsourcing

Today's special report from Kyle Peterson takes an in-depth look at the development of Boeing's 787 Dreamliner. Boeing went further than ever before in outsourcing much of the work on the plane, upsetting its unionized workers in the Seattle area. This graphic shows why.

So what's the result?

A revolutionary, light-weight aircraft that is nearly three years behind its delivery schedule.

from DealZone:

Deal wrap: Talking defense

Israeli Air Force F-15 fighter jets fly in formation with a Boeing 707–320 aerial refueling tanker during a ceremony for newly graduated pilots at the Hatzerim Air Base, June 28, 2010.  REUTERS/Baz Ratner Boeing defense chief Dennis Muilenburg startled many this week when he told the Reuters Aerospace and Defense Summit he would not rule out the possibility of a large-scale merger. Is he sending up a trial balloon to gauge the Pentagon's reaction? *View article *Read more at the Aerospace and Defense Summit

Two of the world's biggest private equity firms, KKR and TPG, are potentially interested in Foster's wine business, but they are not currently working on rival bids, sources told Reuters.  Earlier this week Foster’s rejected a $2.5 billion offer for its wine business as too cheap. *View article

from Summit Notebook:

Would you send a postcard of Boeing’s new Dreamliner?

BOEING/787

For some fans, Boeing's first test flight of its new 787 Dreamliner this week was apparently a virtual postcard.

The aerospace company says people sent about 25,000 postcards electronically of the lightweight commercial plane made primarily from carbon-based plastics and titanium.

from Breakingviews:

O’Leary treats shareholders like Ryanair’s customers. Quite right.

It would be easy to dismisss Michael O'Leary as a brazen bigmouth were it not for his irritating habit of delivering profits where other airlines struggle to survive. Now he is threatening to switch Ryanair's strategy from growth to cash generation if Boeing fails to cut the price on his next 200 aircraft. The shareholders may moan that they are bing treated as badly as the airline's passengers, but O'Leary's right (in both cases).  The passengers are treated like cattle, subjected to levels of misery inconceiveable to air travellers a couple of decades ago, but Monday's half-time figures showed that they don't care. People love O'Leary's combination of dirt-cheap prices and reliability. Your plane may not come down anywhere near your final destination, but it will do so on time. The result is a 15 percent rise in passenger numbers, to 36.4 million, and oil-fired profits up by 80 percent to 387 million euros despite a 17 percent fall in the average fare. The shareholders might learn from this robust approach. It's always hard to tell whether O'Leary is entirely serious, but his threat to change the business model from growth to cash generation does not sound like a joke. It's a fine tactic to bully Boeing, which needs the order far more than Ryanair does. There will be no shortage of slightly-used planes if he wants them; as he put it: "Many of our competitors are losing money, consolidating or going bust." His threat to "end the relationship" with Boeing sounds entirely plausible. The market disliked the idea of Ryanair distributing profits to shareholders rather than reinvesting, but it makes eminent sense. Both BAA in Britain and its "clueless" counterpart in Ireland, the DAA, have invested billions in extravangant projects at London Heathrow and Dublin, and the airline industry is riddled with examples of vainglorious expansion. O'Leary has built Ryanair by unrelenting focus on costs and prices. His grandstanding about "stupid" tourist taxes in the UK and Ireland on planes (but not trains or ferries) and his earlier suggestions about getting passengers to stand are merely light entertainment; the real proof of the model is 2.5 billion euros in cash on the balance sheet, and a pay freeze rather than pay and job cuts for the company's 7,000 employees. Shareholders in airlines are used to getting wiped out by their management's ambitions. Ryanair is a demonstration that it does not have to be so. 
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