Wall Street Breakfast: Shock Waves

Shock waves

There has been a lot of hype over the past couple of years to reintroduce commercial supersonic travel by the end of the decade. One of the most promising contenders, high-flying startup Boom Supersonic, recently inked an agreement to sell 20 Overture planes to American Airlines (NASDAQ:AAL), just a year after signing a similar deal with United (NASDAQ:UAL). The Overture is set to carry 65 to 80 passengers and fly as fast as Mach 1.7 (1,304 mph), cutting trans-Atlantic and trans-Pacific flight times dramatically.

The problem: Finding an engine manufacturer. Rolls-Royce (OTCPK:RYCEY) just announced it would exit the project after having completed various engineering studies. Following the comments, GE Aviation (NYSE:GE), Honeywell (NASDAQ:HON), and Safran Aircraft Engines (OTCPK:SAFRY) also confirmed that they were not interested in making a supersonic engine for Boom. Meanwhile, Raytheon’s (NYSE:RTX) Pratt & Whitney, another company capable of making such an engine, called the plans “tangential” to its business.

“Boom has stated it wants its aircraft to be as environmentally responsible as it can be, which is a noble and critically important objective, but it is already hard enough and expensive enough for Boom to build the airplane,” noted Henry Harteveldt, travel analyst at Atmosphere Research Group. However, if Boom could successfully build both a plane and an engine, the startup could become an acquisition target for aerospace companies like Boeing (NYSE:BA) or Airbus (OTCPK:EADSY). The firm could alternatively sell its engine design for a pretty penny, or cash in on the “boom” by profiting off the resumption in commercial supersonic travel.

Fun facts: While there have been many supersonic military aircraft, the only models to carry civilian passengers were the Concorde and the Russian-built Tupolev Tu-144. The Concorde went out of service in 2003 – weighed down by high expenses and a fatal crash in 2000 that prompted the model to be grounded – while the Tu-144 had limited service and retired in 1999. Commercial supersonic travel was such a hot topic when it was developed in the 1960s that Seattle named its NBA franchise the “SuperSonics” after Boeing’s supersonic transport project, which was later canceled. (2 comments)

Look out below

The market looks set for a lower open on Monday, with stock index futures down another 1% as investors display more nervousness about the Fed decision later in the week. The central bank is expected to raise interest rates by another three-quarters of a point, though there are calls for a 100 bps move, after the August CPI figure showed that inflation has not peaked yet. All of the major averages are coming off their worst week since June, as well as their fourth weekly loss in five weeks, while the benchmark S&P 500 (SP500) just broke below a key support level watched by many traders.

Commentary: “Over the last three years, the level on the SPX with the most amount of volume traded has been 3,900,” wrote BTIG’s Jonathan Krinsky. “It closed below that on Friday for the first time since July 18, which, in our view, opens the door down to the June lows (3,640).”

“While it likely won’t be a straight line, we have still yet to see any panic in the VIX (VIX) curve and monthly RSI has yet to get below 46 in this cycle,” he continued. “1987 is the only ‘bear market’ in the last 90 years that didn’t hit sub 42 Monthly RSI. There are areas working, but they are mainly in the defensive low-vol arena. These areas typically outperform until the bear market hits its final low.”

More analyst talk: “As the S&P 500 hovers below the all-important 3,900 level, and the 10-year Treasury yield inches ever closer to 3.5%, the Fed-sensitive 2-year Treasury note flirts with 3.9%, suggesting that the Fed’s aggressive campaign to kill off inflation is to be taken seriously,” noted Quincy Krosby, chief global strategist for LPL Financial. “The canary in the coal mine may not yet be dead, but is probably struggling to breathe.” (10 comments)

Need for speed

Seeking for some financing to help with its EV transition and investments in software, Volkswagen (OTCPK:VWAGY) is taking iconic sports-car maker Porsche public. The deal is set to be Europe’s largest listing in more than a decade, with a valuation of €70B-€75B, and proceeds from the sale totaling €18.1B-€19.5B. Trading is scheduled to begin Sept. 29 on the Frankfurt Stock Exchange.

Snapshot: As part of the listing (and a nod to its well-known vehicle line), 911M Porsche shares will be divided into 455.5M preferred shares and 455.5M ordinary shares. Only up to 113M preferred, non-voting shares will be sold, raising about €9.4B at the top of its range. A holding company controlled by the Porsche and Piech families will buy 25% of the company – with voting rights – at a 7.5% premium. Sovereign wealth funds of Qatar, Abu Dhabi and Norway, as well as mutual fund company T. Rowe Price, will also subscribe to as many as €3.68B worth of preferred shares as cornerstone investors.

“We are now in the home stretch with the IPO plans,” Volkswagen CFO Arno Antlitz declared, noting that a prospectus will be published later on Monday. VW will additionally hold an investor meeting in December to propose distributing 49% of the IPO’s total gross proceeds to shareholders via a special dividend.

Go deeper: Porsche has hired Italian investment bank Mediobanca, which took Ferrari (RACE) public in 2015, as a financial advisor for the IPO. While the two companies are in the luxury auto business, Ferrari has exclusively focused on expensive sports cars as Porsche expands into the more affordable market and SUVs. Ferrari is also run independently of its former parent Fiat and the Agnelli family, trading freely on the open market, while only 10% of Porsche’s shares will be offered to retail investors, and do not carry any voting rights. (45 comments)

Tensions in Europe

The European Union is running out of patience for Hungary to come in line with the bloc’s democratic norms and rule-of-law values. The ex-communist country of nearly 10M people is accused of systemic irregularities in judicial independence, weaknesses in constitutional and electoral systems, and deficiencies in anti-graft measures. EU legislators last week even voted to declare that Budapest was no longer a “full democracy” under the so-called “conditionality mechanism” and have since threatened to freeze €7.5B in funding unless it takes action to stamp out fraud and corruption.

Quote: “It’s about breaches of the rule of law compromising the use and management of EU funds,” said EU Budget Commissioner Johannes Hahn. “We cannot conclude that the EU budget is sufficiently protected.”

Hungary, which joined the EU in 2004, will have one month to respond to the bloc’s new ruling, though the country’s parliament is expected to vote this week on a series of laws aimed at easing the conflict. EU members will also have three months to assess the Commission’s recommendation and could limit any punishment if they find Budapest’s actions are credible. Up until now, the bloc has treaded carefully to win Hungary’s assent on major decisions, but if things go haywire, Hungary could even lose its right to vote in the Council of the European Union.

Outlook: The EU has been already shaken by an unprecedented energy crisis from the war in Ukraine, shortly after the United Kingdom formally left the bloc in 2020. Compounding the problems are populist Prime Minister Viktor Orban’s cozy relationship with Vladimir Putin – and his blocking of further sanctions on Moscow – which could hamper the EU’s ability to respond to the war. Hungary has routinely blocked EU decisions ranging from votes on a global minimum corporate tax to policies surrounding Ukraine’s integration into the West. Other recent tensions that have surfaced include the $5.8B earmarked for Hungary’s COVID-19 recovery fund, which has yet to be signed off by Brussels due to corruption concerns over Budapest’s spending plans. (2 comments)

Leave a Reply

Your email address will not be published. Required fields are marked *