Risk-off dynamics accelerate as Chinese coronavirus worsen

Boeing crisis could get very ugly

As the grounding of the 737 Max continues the crisis deepens at Boeing with news out yesterday that the company is in talks to secure $10bn financing as the aircraft producer is hemorrhaging cash. In Q3 the company delivered negative $2.9bn in free cash flow (FCF) following negative FCF of $1bn in Q2 and this number could worsen in Q4 which we will know when Q4 earnings are released next Wednesday. Boeing has maintained CAPEX and dividends levels which has forced the company to increase debt to avoid depleting cash reserves. The total debt has risen to $25.9bn in Q3 2019 from $11.9bn in Q3 2018.

The stock price is down 25% from the peak in March 2019 and is pushing towards dangerous levels that could make many fund managers to reverse their long-term views. Despite the stock is down 25% the enterprise value to total assets ratio is still close to all-time highs reflecting a high degree of confidence in the value of the balance sheet and thus future cash flow generation. If these expectations are shattered next week at the earnings release then the crisis could become severe.

UBS sends a warnings shot to Europe’s banks

UBS shares are down 5% as the bank misses fiscal year profitability and cost targets in addition to trimming its mid-term goals. UBS has been hit by wealth management outflows, negative rates and poor performance in its investment banking division. This obviously sends a warning to investors if they thought overweight European banks was a good idea. Negative rates will continue to haunt European banks until the ECB changes its mind on negative rates.

Rethink equity valuation on monopolies

Clients are often telling us that equity valuations do not make sense any longer and we observe same phenomenon in public discussions between market participants. But as we argued lately we believe investors have to contemplate the fact that equity valuations could potentially eclipse the levels from the dot-com bubble if rates continue at these low levels and the global economy continues to expand. That mix drives TINA (there is no alternative) behaviour and reprice equities closer to bonds, especially the monopolies with robust cash flows. Is Microsoft really expensive with a free cash flow yield of 3% and revenues growing at 12% y/y given 10-year US Treasuries offer 1.8% with rising deficits and potential inflation?