“A Deeply Disturbing Picture”
Boeing is back in the metaphorical hot seat with a string of bad news. As covered by Chris Woodyard for USA Today, last week, the company released internal communications that House Transportation and Infrastructure Committee chairman Peter DeFazio called “incredibly damning”. The released documents reveal the extent to which the company downplayed the importance of the MCAS (a system designed to compensate for potential handling issues caused by the 737 Max’s engines’ weight and positioning) and the repeated downplaying of the need for pilots to spend time training in simulators, with the goal of “avoid[ing] regulatory hurdles” and reducing costs. Boeing has since “changed course” and recommended simulator training when the Max is returned to service, but damage has already been done. Boeing today announced that it “had more canceled orders than new purchases in 2019” as discussed in this article from Axios, and American Airlines announced today that it was “pulling the Boeing 737 Max from its schedules until early June”, as covered in this article from CNBC. Beyond just the potential damage to the bottom line, we’ve been following Boeing as an example of short-term thinking and cost cutting in corporate America (see here and here), and the backlash appears to have reached the halls of Congress. Case in point, following the announcement of Boeing’s incentive structure for its new and outgoing CEOs, three senators wrote a letter to Boeing’s board urging them to cancel the incentive payments, calling the payments “unconscionable” and “obscene”.
“Economic Expansion Continues Its Historic Run”
The NFIB’s December Small Business Optimism data was released today, with the headline index falling, but still qualifying as a “historically strong reading”. The labor market continues to be tight, with 50% of businesses, 94% of those hiring or trying to hire, reporting few or no qualified applicants, but the tight labor market may be taking its toll. Reports of positive profit trends “fell 10 points to a net negative 8 percent reporting quarter on quarter profit improvements… Softer earnings add more cost pressures (especially labor) raising the need to raise prices”. Another big mover was the Uncertainty Index, which rose 8 points. The commentary was positive on the outlook, citing progress on the USMCA agreement and hope for a “phase one trade deal with China”, but cautioned that “expansions don’t die of old age… They end because something bad happens, often by elected officials enacting bad policies”.
“Aversion to Fat Cat Bailouts”
Today, the Fed announced plans to continue to provide overnight and term repo operations to the tune of “at least $120 billion” and $35 billion, respectively, for January, with the term operations dropping to $30 billion in February. For markets, this is simply a continuation of the past few weeks, but there are rumors of a potential change. As Daniel Kruger writes in “Hedge Funds Could Make One Potential Fed Repo-Market Fix Hard to Stomach”, the Fed is considering lending cash directly through the repo market’s clearing house. The idea would be to enable the Fed to more efficiently provide funding to “smaller banks, securities dealers and hedge funds”. Critics are concerned that the “new approach could… create political problems for policy makers”, and that direct lending to hedge funds would “lead to the perception the Fed is fueling risky bets”.
