Third Quarter Market Recap

Strengths

• Delta Air Lines reported stellar earnings for the third quarter. Net income rose 13.1 percent year-on-year to $1.5 billion, or $2.31 per share. Operating cash flow was $2.2 billion, up an incredible 50 percent from the same three-month period a year earlier. Delta returned $470 million to shareholders through dividends and share buybacks during the quarter.
• Spirit Airlines announced that it has signed a deal with Airbus for the purchase of 100 new Airbus A320neo Family aircraft, with the option to buy up to 50 additional aircraft. The jets are planned for delivery through 2027. Spirit President and CEO Ted Christie called the order “another milestone” for the low-cost carrier, which is the fastest growing airline in the U.S. What’s more, the carrier will unveil its new cabin redesign in December 2019, complete with new, more comfortable seats and extra legroom.
• Global flight demand, as measured by revenue passenger kilometers (RPKs), edged up a modest 3.8 percent year-on-year in August, according to the International Air Transport Association (IATA). China saw the fastest demand growth of any region, at 10.1 percent, though this number was down from 11.7 percent annual growth in the previous month. The most impressive stat from IATA’s monthly report was that the industry-wide load factor reached a new all-time record for August. The passenger load factor, which measures how efficiently a carrier fills seats and generates revenue, registered 85.9 percent, up a tick from the same month last year.

Weaknesses

• Investigators from the Indonesian National Transportation Safety Committee officially put the blame on the Boeing 737 MAX for the downing of the country’s Lion Air flight last year. After months of investigation, officials said Boeing was at fault for “introducing an automated system in the MAX without adequately briefing airlines and their crews about its existence or instructing them how to override the software should it malfunction,” writes the New York Times. The report undercuts Boeing’s insistence that pilots should have been able to deal with the software malfunction using standard emergency procedures.
• Boeing’s earnings took a major hit in the third quarter and the first nine months of the year. The manufacturer reported net earnings of $1.2 billion in the three months through September 30, more than half of what they were a year earlier. As for the nine-month period through September, net earnings were $374 million, down a whopping 95 percent from the $7.0 billion the company made in the same period in 2018. Operating cash flow for the quarter was negative $2.4 billion, reflecting lower deliveries of its 737 jet as well as advance payments.
• Alaska Airlines and American Airlines scaled back their shared rewards program for the second time in the third quarter, a move that will likely raise the ire of some frequent fliers who have taken advantage of the partnership over the years. What this means is that passengers may no longer redeem their Alaska rewards points on American flights, and vice versa. When asked for an explanation, an American spokesperson said the cuts were put in place after a “review of its airline partners and programs.”

Opportunities

• United Continental raised its earnings forecast for the remainder of the year as travel demand continues to climb. Thanks to another quarter of expanding pre-tax margin, the carrier has “further confidence to raise our full year 2019 adjusted diluted EPS guidance, putting us ahead of pace to achieve our goal of $11 to $13 in adjusted diluted EPS by the end of 2020,” United CEO Oscar Munoz stated.
• American Airlines announced it will be spending $100 million on a new parts distribution facility at its main hub, DFW International Airport. The project, construction for which will begin this fall and take between 12 and 18 months, will help speed up the delivery of parts across the carrier’s supply chain. “This new facility will provide ample space to store parts, which enables us to select parts up to 75 percent faster than we currently can, minimizing any potential maintenance delays,” an American spokeswoman told the Dallas Morning News.
• Australia’s Qantas Airways successfully completed its test run of a 19-hour nonstop flight from New York City to Sydney, a route that some analysts believe will revolutionize air travel. For one, regulators will need raise the cap on pilot duty time from its present 18.5 hours for the Qantas route to be regularly scheduled. “This is the last frontier in commercial aviation,” commented Qantas CEO Alan Joyce.

Threats

• Congress is set to ratchet up its scrutiny of Boeing leadership as new details emerge suggesting management put pressure on company engineers to certify their own systems. The House Transportation and Infrastructure Committee will be investigating such conflicts of interest that are believed to have contributed to the crash of Indonesia’s Lion Air flight in October 2018. In related news, a Southwest Airlines pilots union have filed a lawsuit against Boeing, saying the manufacturer misled pilots. The group is seeking some $100 million in lost income from Boeing since the group believes it was the company’s negligence that led to the grounding of its 737 MAX aircraft. Boeing maintains that the MAX will return to service by the end of the year.
• Operating margins for U.S.-based carriers will contract for the third straight year in 2019 due to oversupply, according to Oliver Wyman’s most recent economic analysis. With flight demand rising worldwide, airlines have added capacity and new routes at a rapid pace, making pricing more competitive and putting pressure on yields. As such, margins are expected to narrow to between 5 and 6 percent by the end of the year, down from 9.2 percent in 2018 and 12.7 percent a year earlier.
• The International Monetary Fund (IMF) revised down its growth forecast for the world economy to just 3 percent, its lowest level since the financial crisis. In addition, odds of a full-blown recession are the highest they’ve been in more than a decade. Slower economic growth could dampen air travel demand.

Strengths

• For the quarter ended September 30, gold beat stocks. The yellow metal returned 3.8 percent while the S&P 500 returned just 1.7 percent. Plus, gold outperformed bonds with the Bloomberg U.S. Treasury Bond Index seeing a 2.4 percent gain. Gold had its fourth straight quarter of positive gains, which is the longest run in eight years. Palladium also shone, hitting a new record of $1,701.93 an ounce on Monday and returning almost 10 percent in the third quarter. Turkey continues to be a big buyer of the metal. The central bank’s gold holdings rose $196 million from the prior week, and are up 47 percent year-over-year.
• In mining company news, Gold Fields exercised its option to buy a larger stake in Cardinal Resources. Previously, Gold Fields owned approximately 11.1 percent of outstanding Cardinal shares and now owns 16.4 percent, according to a company statement. Gold Fields operates mines in Ghana, where Cardinals’ shovel ready assets are.
• Investors now appear to be shifting money down market to smaller capitalization names as confidence grows in duration of the coming gold cycle. In the week ended September 17, investors poured $193 million into the VanEck Junior Gold Miners ETF (GDXJ), the largest ETF that invests in junior gold miners. The fund attracted the most money in more than two years on growing optimism that companies will perform strongly alongside higher gold prices, reports Bloomberg.

Weaknesses

• Gold sales in India, the world’s second largest consumer of the metal, continue to weaken. Around the Dhanteras holiday, gold buying usually increases for jewelry. However, weak demand due to higher prices might decrease sales by 50 percent this year, according to the national secretary of the India Bullion and Jewellers Association. Gold imports fell 68.18 percent in September compared to a year earlier. Jewelers are struggling to find buyers because of the higher prices and companies are giving big discounts. On the other hand, imports of silver, the poor man’s gold, jumped 72 percent in India from a year earlier to 543.21 tons in August, reports Bloomberg. Increased silver buying could make up for the decreases in gold.
• In a new sign of a potential economic downturn, U.S. hiring missed projections and wage gains cooled in September even as the jobless rate fell to a half-century low. Bloomberg’s Katia Dmitrieva writes that “the jobs report caps a week of U.S. economic data that whipsawed stocks and sent already-low Treasury yields tumbling, led by a key manufacturing gauge that sank deep into contractions with the worst reading in a decade.”
• Discounts on gold in India have widened significantly due to muted retail demand and higher unofficial imports, according to the World Gold Council Market Intelligence Group. The gold discount was $28 in July and then widened to $55 an ounce in August. Gold demand out of India, the world’s second largest consumer, has weakened due to higher prices but could rise in the coming month as Diwali approaches.

Opportunities

• According to delegates at the London Bullion Market Association (LBMA) annual conference, gold will rise to $1,658 an ounce by October 2020. Last year’s attendees “pretty much nailed” the metal’s rally in 2019, reports Bloomberg. The group also forecasts silver at $23 an ounce next year, rising 11 percent from today’s $17.60 level. Lastly, the attendees predict palladium will reach $1,924 an ounce by this time next year. Palladium is closing in on $1,800 an ounce as a supply deficit persists, according to Australia & New Zealand Banking Group.
• Even as the gold price appears to have stalled, money is still flowing into ETFs backed by the metal. Inflows have increased for 18 sessions in a row, the longest run since 2009. Citigroup says that inflows are “likely to persist” and sticks with its forecast for a rally to $1,700 an ounce over six to 12 months, writes Bloomberg.

• According to Wood Mackenzie, peak gold supply is coming if miners do not increase their spending on exploration and find new resources. Analysts wrote in a note that “exploration budgets were slashed following the fall in gold price from the highs in 2011 and 2012 and they have since failed to recover.” Tighter supply supports forecasts of gold bulls such as David Roche, president and global strategist of Independent Strategy, who said that gold could hit $2,000 an ounce by year end.

Threats

• China’s slowing growth is now spilling into gold jewelry demand. According to forecasts from Metals Focus, jewelry consumption is set to drop 4 percent in 2019. Investment demand is also forecast for a 20 percent decline. Higher metal prices are also hurting jewelers. Chow Tai Fook Jewellery fell as much as 4.6 percent after it announced it will record an unrealized loss of up to HK$1 billion.
• Federal Reserve Bank of Dallas President Robert Kaplan said in a Bloomberg TV interview that rate cuts “should be limited, restrained and modest” and that right now we are “in a fragile period.” The comments could dampen investor enthusiasm that has sent inflows into gold-backed ETFs soaring. UBS also sent a warning that U.S. households are struggling financially. According to a quarterly UBS survey, 44 percent of consumers reported that incomes do not cover expenses, or barely cover them. Additionally, just 17 percent of households reported in the survey that their financial condition had improved in the last six months, which is 3 percentage points down from a year earlier.
• The Minerals Council of Australia (MCA) has warned that gold companies could face mine closures if the Victorian government moves ahead with a 2.75 percent royalty on gold production. Australia is one of the largest miners of the metal. The MCA says that the projected $16 million in revenue the government would see from the royalty pales in comparison to the $300 million spent by Victorian gold mines in 2018 on wages, goods and services, taxes and community grants, the Financial Times reports.