Here's What Worries Me About Boeing...

Amber Hestla's picture

Friday, March 15, 2019 - 2:30pm

by Amber Hestla

The ongoing situation with Boeing (NYSE: BA) is important for investors to watch. 

As you probably know, on Sunday, March 10, a Boeing 737 MAX 8 aircraft crashed just six minutes after takeoff in Ethiopia, killing all 157 passengers and crew aboard. 

Authorities have begun investigating the cause of the crash, which was the second crash involving that particular model within the span of several months. In the meantime, a number of countries issued orders to ground the Boeing model, with the U.S. following suit on Wednesday. 

Safety concerns about the airplane maker's 737 MAX aircraft are a tragedy, and I don't have any intention of minimizing them. And we don't have a clear idea of just how much this will affect Boeing just yet. But from an investment perspective, history shows that problems in a single company can spark a significant decline in an overvalued market.

Let me explain...

Historic examples include the October 1989 market crash that followed the collapse of a leveraged buyout deal for United Airlines. That crash was small, with the S&P 500 falling a little more than 6% that day, but the deal's collapse showed traders that buyouts were risky. The news pushed prices down in the junk bond market. 

In 2008, Bear Stearns imploded, and no one seemed to connect the dots to the broader problems. A few months before that crisis, Federal Reserve Chairman Ben Bernanke had said that Fed officials "do not expect significant spillovers from the subprime market to the rest of the economy." 

These are two examples of how news that seemed isolated was more important than it appeared to be. I am concerned that the news about Boeing is much more significant than investors realize. 

Boeing is a large company with 153,000 employees. Having to retool operations could affect those employees and the communities they work in. And those problems are not isolated to just Boeing. Standard & Poor's identifies 316 suppliers to the company. Those companies could see downturns in sales as Boeing addresses its problems. 

In terms of the larger picture, Boeing even affects economic data. The company is the largest airplane manufacturer in the country, and the U.S. Census Bureau specifically excludes new orders for aircraft and other large transportation equipment from the durable goods orders report because a single large order of aircraft in one month can skew the monthly numbers and make it difficult to see the real trend in the economy. 

In the stock market, Boeing is the largest component of the Dow Jones Industrial Average, a price-weighted index that favors stocks with high prices. Shares have already taken a hit, and any further declines could weigh down the Dow and affect how investors perceive the overall market. I believe this stock could be the first of many to sell off. 

Another Thing You Might Have Missed...
And before we leave it at that for now, I want to share one more piece of news I think investors are overlooking... 

In New York City, the Chrysler Building was sold for $150 million. 

In 2008, a 90% stake in the building sold for $800 million. That would value the whole building at about $889 million. The sale price is about 84% less than that valuation. 

Real estate deals can be difficult to value. Reports indicate the iconic skyscraper is about 20% vacant and needs significant upgrades. But it's surprising that the building would decline in value so much while New York's economy boomed. 

Just like with Boeing, I think there is more this story than we know right now. 

Action To Take
I will be watching Boeing closely, along with other stories on the economy, in the days and weeks ahead. And I will be worrying more now than I was a few weeks ago. 

I've been warning my Profit Amplifier readers for weeks that I think there are significant bearish pressures in the market. This situation with Boeing is certainly one to add to the list.

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Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.