Lessons We Can Learn from Boeing’s Recent Fall


Many analysts are trying to ponder how such a huge loss in the value of Boeing stock this week makes much sense from a fundamental perspective. It doesn’t have to.

Often, a move in a stock or an index can be quite instructive, especially to those who may not really understand why stock prices are what they are and what really moves them. This is the case with the losses Boeing stock has suffered this week, due to one of their planes crashing.

What makes this move stand out so much is all the commentary that we’ve seen about this much to do with fundamentals, things like how this may have affected the company’s value, it’s earnings potential, or how the potential costs of this mess could affect things.

Such things can influence stock prices, to the extent that people trade based upon this data. If a bad earnings report comes out, people sell more, because that’s what you do. Enough people act on this news that the stock can go down and go down a fair bit, or they may buy on more positive news and drive the price higher.

The direct cause of any movement in price with a stock or a market is the actual trading that happens, the fluctuations in buying and selling pressure that drives prices in one direction or another. We can see these sides fight it out every day, and they often take turns, as a movement up can cause people to take profits or a move down might prompt them to buy the dip. Prices are also driven by the momentum of both the current trend and the outlook, and the trend actually measures this momentum directly and clearly.

This trading encompasses all the factors that influence these decisions, including company fundamental data, news, economic data, trends, expectations, inflation, interest rates, Santa Claus, moon phases, astrology, or whatever the market chooses to base their decisions on.

Whatever the motivation, the story always unfolds with the price action, on charts, and this is why technical analysts will tell you that no matter what is influencing the price of something, charts tell all.

Focusing on Just Some of the Factors Will Confuse Us

The reason why this basic tenant of markets is so important is that if we don’t appreciate this, we can end up pretty confused. We may come up with some measurements of what we think should be the case, but this may or may not match reality, depending on the weight that the market actually places on it.

What we’re looking at may influence price to some degree, in other words, but we don’t want to make the mistake of thinking that our perspective, looking at earnings for instance, is what makes the world go around. To the extent that other factors influence price, since we’re not considering them, we will then be mistaken.

We do know that, while there are certainly some concerns about Boeing’s 737 MAX program, especially given that countries, including the United States now, have panicked and grounded these aircraft, and there does seem to be an issue with the plane’s software that increases the risk of crashing during takeoff, there really isn’t much indication that this will be anything more than an easy fix.

The FAA isn’t even concerned about this and gave the aircraft a thumbs up on Tuesday, but this ended up not being enough to placate President Trump, who decided to join the rest of the world in not allowing 737 MAX aircraft to fly for now.

Flying is by far the safest form of transportation, even flying on a Boeing 737 MAX. We do want to address issues of safety of course, and this is the second crash within 6 months with this aircraft, but this still involves a very low incident rate given how many flights these planes make, around 100,000 so far. While 2 may still be unacceptable, and does need to be addressed, it is hard to see how this can present the degree of danger that we would think would be required to simply shut them down.

The Word Panic Is Sufficient in Itself to Explain All This

When this news hit, the market panicked, and even though the stock went down even further than its Monday open, for a time, after Trump grounded them as well, the worst is over now and we can now look to see how much the market feels that we have overreacted to this.

Meanwhile, the stock has lost $29 billion in market capitalization, although this is far from the same thing as saying the company has lost this much in value. Market capitalization is just a handy number to compare stocks, but that’s about it.

Cybercurrencies can provide the opportunity for a lot of people in the industry to perform a reality check, the ones that are left scratching their head to make sense of the size of this downward move by Boeing using explanations based upon company fundamentals.

No, it will not cost $29 billion or anything close to resolve this, nor have the company’s earnings been impacted this much, nor is the company worth $29 billion less than it was last week based upon this crash. This has little to do with what people’s expectations of the future of the company is either, and we cannot begin to make sense of any of these reasons as a sensible explanation.

If fundamentals alone drove market prices, cybercurrencies would have no direction at all, yet they do trade, and they trade with a level of volatility that is well beyond what the world has ever seen. Cybercurrencies have no real fundamentals or even any intrinsic value, as what we see is pure market action, pure belief driving momentum dramatically in one direction or the other, pure bets in other words.

We know, quite clearly, that stocks prices are influenced by fundamentals, because people allow this to influence their decisions, but they are also influenced by a lot of other things. As it turns out, stocks are much more like cybercurrencies than like the purely fundamental driven view that many analysts adopt as their models, but if they do not realize this, they will continue to be misguided.

The truth is that people heard the news of this crash and just sold the stock. With the consensus remaining that Boeing’s long-term prospects look strong, this all looks like an over-reaction by the market. We’re already seeing new money enter to look to take advantage of this disconnect, evidenced by the strong response to both the initial sell-off and the one today that was inspired by the President.

This will require that the longer-term outlook remain positive though, as this depends on enough people continuing to bet money on this. If we can only understand that the direction of the betting is what really makes these things happen, we’re at least looking at the right thing.

We can think of all this as working in a similar way as parimutuel betting, where people bet on horses based upon their beliefs, which changes the price of these wagers accordingly. When we do, we actually end up with a truer understanding of financial markets then if we think that certain factors that influence sentiment have some magical properties to negate all the other things that go into this, which is like deciding this with blinders on.

Stock markets are belief driven systems primarily, and the belief here is the reality. We need to make sure that our own beliefs are aligned enough with this reality if we actually do want to have a good idea of how this all works in real life.