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Is A Bearish Bet On Boeing The Cheapest Way To Hedge A Crude Oil Collapse?
Traders in the market (what little is left of them) always seek out the investment thesis with the highest upside/downside ratio to a delta in any fundamental forecast. In other words, what derivative play to a secular trend generates the higher IRR? A good example is the ABX which allowed contrarians in 2006 and early 2007 to bet on a collapse in subprime and put on a "short" at next to now cost of carry, with practically no downside if the thesis ended up being wrong, and unlimited upside (just ask Paolo Pellegrini and Kyle Bass). Well, as we just learned, one of UBS "surprises" for 2012 is that oil could drop below $70/barrell. Is this possible? Absolutely - should the Eurozone collapse, and/or China experience the long-overdue hard landing, a deflationary shock (which will naturally only precipitate the central banks into an even more rapid devaluation of legacy paper currencies) can and likely will send crude tumbling (Iran geopolitical concerns aside) as happened back in early 2009 when crude collapsed to around $30/barrel however briefly. So is there a better option to play crude downside than merely shorting CL? Perhaps one idea with better "upside" in case of a deflationary collapse in crude is to get bearish on Boeing instead. As the following chart from Goldman shows, 3 of the 4 biggest widebody (and thus most profitable) aircraft orders are from Gulf airline companies - Emirates, Qatar and Etihad. Together, they amount to about 450 profitable future orders... which could well be cancelled if Gulf states revert to their panicked state last seen so vividly in the spring of 2009 when they were cancelling orders left and right.
The thesis is quite simple - should crude collapse, and deflation reign, for however many brief months (remember: central banks only need to press a switch to add any number of zeroes to the global "monetary" reserve), it will be precisely these companies that will cancel any and all standing orders for delivery. Of course, in addition to Boeing, one may also extend this thesis to Airbus, but with the amount of subsidization by the broke European continent, it is quite possible that in a downside case Airbus actually does better than Boeing. Of course, if and when Europe blows up all bets are off.
As for the other three of the top 6 carriers with widebodies on order, they are all China-related - Cathay, Singapore and Air China. So yes, a global deflationary collapse (once again, pre-central bank response) will force not only the Gulf companies, but those operating out of China to hunker down as well, to the detriment of shareholders of companies who believe that an order is an order, only to realize that orders all too often can be cancelled at any given moment.
source: Goldman Sachs
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You're obviously not talking about Barrick Gold when ABX was mentioned, can anyone shed some light for me?
Edit: Markit ABX, right?
ABX= Asset-backed securities index
otherwise known as the "you really will bet on anything" market. the natural gas thesis holds: the market does not appear to be capable of manipulation because all the phucktards want to drive it higher and "it ain't working." as such it's a safe "technology class" to invest in. Again I reccomend GE--they created the natural gas turbine engines that power a few naval warships back in the 80's--if it's good enough for the Navy it's good enough for you and me. You only make "the big bucks" by building something new--especially something that can literally "go global" (scalable) and be in every device imaginable. i agree--so far it's all just "mindware" at this point--which says to me "stick with the big boyz" cuz if this engine technology is actually deployed only those with the deepest of pockets are going to be the winners. that would not include Detroit at this point btw. In fact i can't think of anybody outside of GE right now that could really "do it and do it right." As a side note i did see the first Catepillar branded Trucks that have ever been made the other day. They used to make just the engines...apparently they're now in the total truck making business. just thought i'd throw that out there.
I'm going to bet big against Boeing!
SELL, SELL, SELL!!!
:o)
-John
http://www.youtube.com/carmarketer
so you are one of the 'sensless'...hummmmmmm.
Difference with early 2009: we're post QE1,2,lite & Twist. We're into infinite implied liquidity measures to "save the world" that are now accepted as needed. And everybody's standing by with a fistful of dollars waiting to grab crude and other strategic materials in the rescue scenario.
For this very reason I see a lower bottom than 2009. Infact, the primary driver in the energy sector is the service industries at this point already.
Even with the service industries running all out... at this time the majors are not doing much hiring themselves but more contracting. These same majors are not committing to new drilling with much vigor but are anticipating the drops.
I sure hope so. I'm already in for a few long-dated way OTM BA puts(for other reasons), and this thought gives solace as the position moves agin' me 'temporarily'.
Taking a big step back here, let's award points to realization that oil falling in price is always about demand. There isn't going to be a supply surge. Libya won't restore production until late 2012 or 2013, and oil was already north of $90 before Libya ever even remotely blew up.
So this guy wants to short Boeing as the play on oil? There would seem not a hell of a lot of direct correlation. Boeing will do poorly as economic collapse unfolds, because more or less everything will do poorly then. Including oil.
So what he is saying is short Boeing NOT BECAUSE OF A FALL IN OIL, but because of economic collapse. He has his cause and effect disjointed.
The 2008 spike in oil prices was largely due to an influx of hot money into oil futures. And a very large portion of those contracts were via sovereign wealth funds looking for havens from an overheated equity market. It's important to remember that during the 2008 spike, oil consumption was *not* rising commensurate to price increases. In fact, as one might expect, oil consumption declined as prices began to rise -- and yet prices continued to drive north as paper investors continued to pile in on the futures side.
It's important to remember this because those betting on a collapse in consumption and consumer-spending to directly correlate to a collapsing oil price may find themselves surprised by oil's failure to mirror declining demand over the short term. Rather than always reflecting demand, speculative interest often plays on speculative interest' as we saw in '08.
Furthermore, geopolitical risk is *seriously* downplayed in the above piece.
You got it right.
Everything will do poorly as economic collapse unfolds - one does not need to be a genius to figure that out. The question here is keeping all other variables constant, where will one see a higher "convexity" to a move lower in oil, in other words, due to the backloaded nature of Boeing's cash flows, a 20% drop in oil will result in a more than 20% drop in Boeing stock price, once the realization of the contract nature of its "cash flows" is perceived.
After what the NLRB did to Boeing and their new South Carolina factory I would move the entire operation to China.
Here Here. I second that. Move Boeing and see how the Fucking unions whine
>. the Fucking unions
Support the bankers!!!! Attack a union today.
Fucking idiots.
Good idea. Then you only have to compete against Russian airliner manufacturing in a race to drive passenger traffic to the railway sector.
would you work for ~$15 bucks/hr as a union or non-union machinist with 20yrs experience, with limited upside in a contractor/employee paid-n-benefit package - for a total gross net ~$25/hr
ps. most parts are made abroad to begin with, having only to be assemble in america
jmo
free market-eerz might say "find another job" - Ned
{might trust their own capabilities vs. the "umbrella" of the union contract, that obtw, feeds other interests.}
{{or can't trust their own ability, maybe because the .gov structure above them wipes out any hope?}}
Boeing outsourced a lot of the dreamliner to make wallstreet happy. The result was a disaster since contractors sub contracted and sub sub contracted. Hopefully they've learned their lesson.
Former Boeing employee here. Boeing outsourced a lot of the Dreamliner in order to try to win overseas business. Yes, it was a huge disaster. Boeing could have eaten AirButt's lunch if they hadn't made that collosal error. Boeing management will be cowering in shame for many years because of that fuckup.
Oil won't fall much. JPM bought half of Barry's "emergency release" at $92 per barrel.
Is a bearish bet on boeing the cheapest way to hedge a crude oil collapse?
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I'm not sure this has the potential for as high of returns-but i think its the safest trade with reasonably high profatibilty
If oil dips below 70 from here-a hedge with cash will bag 30%
if USd rises it favours airbus.
short-term::= hedged.
medium term? maybe
Do you really believe that crude prices will collapse to $30 or lower? Perhaps in a deflationary depression, but that's now where we're headed.
Please explain how Singapore Airlines is "China related"?
Perhaps this link can shed some light on the situation.
http://news.xinhuanet.com/english/2008-01/08/content_7386851.htm
But but but but Cramer is bullish on Boeing! Seriously though don't you have to still be fucking around with USD to play this either way? At this point the only goddamn thing I want to get my hands dirty with is some 5 hr pump n' dump IPO action. That zynga was harder to get in on than gropeon and what a fuckin joke that was. Unbelievable, next thing you know somebody's gonna want like an actual business plan before they give em a billion dollars. Whatever, back to 10yr kiwis until Facebook, I may actually keep that one overnight, it'd be the first since '99 but I doubt it.
The manufacturers all drink the Kool Aid, believing they will sell tens of thousands of new airplanes. Whether oil prices rise or fall the consequences for them are the same:
- Prices increase: crude is already high enough to bankrupt the West, higher prices -- driven by credit increases in asset markets -- bankrupt faster.
- Prices decrease: there is BOTH a long- term AND a short-term bear market in crude as the bankrupting process is well underway. What is taking place both in EU and China, US and elsewhere is energy crisis in drag with effect of high prices and unserviceable debt leading to collapse of credit. Currently, debt is being stripped from asset and other markets. See 'gold price collapse'.
The West's economy runs on cheap -$20/barrel crude, the runup in debt taken on to bridge the difference between what the economy can afford and what it must pay has reached the logical conclusion. Economic peak oil took place in 1998, the explosion in credit without an accompanying explosion in output has destroyed finance.
Cheap crude was once the consequence of massive oversupply, now it is the consequence of the ruin of entire nations. Go ahead, short the airlines but look to your counterparties also going bankrupt.
I like it when you talk crude.
Fuck Boeing and fuck airplanes. I'm sick of flying and I'm more sick of those $10/hr TSA fascists, having to get to SFO before dawn for an 8:30 flight that only takes 45min and is late half the time. I'm sick of every bit of this fucking bullshit. BUILD SOME FUCKING TRAINS ALREADY!!!! I want a fucking high speed rail from Vancouver to TJ and a line from the Bay Area to Tahoe too with a stop in Sac while we're at it. I don't want to fly unless I'm going back east or overseas. Trains are cheaper, more efficient and now they are just as fast if not faster once you factor in the garbage. Fuck Boeing and fuck all the domestic airlines.
Airplanes run on oil, so a collapse in the price of oil makes airliners more profitable and their nitwit managers more likely to buy airplanes with the money. At least, that's the way it always worked in the past.
No - the best macro hedge is and always has been commodity chemical makers.
And if you dig into investor expectations for US chemical makers, you will see they rely 100% on the spread of Oil to Natty remaining high. So the best way to hedge a global slowdown In demand AND lower oil prices is to short DOW, LYO and GGC.
Damn, why am I giving away my secrets before Ive put my trade on. Monday I'm gonna have to short some DOW and LYO, might be better then SMDD even.
I don't think its as simple as this. Commodity prices are also easily effected by inflation (qe3). While there will be demand destruction caused by a Europe collapse (and a US collapse), they'll be printing at some point...oil prices will also skyrocket at some point during this mess. In the end, both predictions are right, but it comes down to timing.
A deflated oil price could really fuck up that Republican supported pipeline. Dont they need at least 70 dollar barrels to profitably frak? I dont think airlines are betting on long term low oil prices and if they cancel they risk moving to the back of the line.
That's two different deals, the Keystone XL is from the oil sands in Alberta down to Texas and there's official Shitloads of oil up there, its just dirty as hell to process & refine and you gotta rape the land scorched earth style to get it. There's so much there that price isn't all that big a deal in the long run. I hate the process and theoretically I'd oppose the pipeline but Obama has to sign off on it like yesterday and fucking do it already because TransCanada will absolutely send it to China if we keep screwing around. The shit's coming out of the ground and getting used by somebody anyway so there's no point in arguing anymore, just go long on A/C, sunscreen & melanoma treatments. The oil fracking is a whole different deal, in the Bakken there's a big field but no two people can agree how much is there, how much can actually be extracted & what the actual long term cost will be so the price figures in a lot more there & all the other places they're messing around with this since technology & attitudes are still evolving. Nobody except the thieves & liars can agree on this or the natural gas for that matter.