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Boeing expected to take another big, ugly charge on 737 Max crisis

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A year ago, Boeing posted record revenues topping $100 billion with hopes of delivering a chart-topping number of airplanes in 2019, including hundreds of 737 Max jetliners.

The news isn’t going to be so rosy on its fourth-quarter earnings call this year. Those bestselling planes were grounded worldwide in March after the second of two fatal crashes that claimed 346 lives. The crisis cost former CEO Dennis Muilenburg his job, prompted Boeing to suspend production of the planes, drove down orders to the lowest level in decades, hurt its supply chain, and wracked up costs that are now around $10 billion. Wall Street is expecting more bad news.

The Jan. 29 earnings call will be the first for new CEO Dave Calhoun, who took the helm on Monday, days after the company released a trove of shocking internal messages that showed employees dissing regulators and airlines and boasting about getting them to approve less time-consuming training. One showed employees complaining that Lion Air, the operator of the first 737 Max that crashed, wanted simulator training for pilots before they flew the planes.

Calhoun is tasked with cleaning up Boeing’s culture, improving employee morale and repairing damaged relationships with regulators and airlines.

“Many of our stakeholders are rightly disappointed in us, and it’s our job to repair these vital relationships,” Calhoun told Boeing employees on his first day. “We’ll do so through a recommitment to transparency and by meeting and exceeding their expectations. We will listen, seek feedback, and respond — appropriately, urgently and respectfully.”

Jeff Windau, industrials analyst at Edward Jones, said he hopes the call will shed some light on the company.

“It would be nice to get some candid comments,” he said. “I’m not expecting a date [of the return to service] but it would be nice to get some indication where they’re at.”

Several Wall Street analysts now expect Boeing, which reports full-year and fourth-quarter earnings on Jan. 29, to take additional charges related to the troubled airplane. The company took a $5.6 billion pretax charge in July to compensate airlines and other customers for the grounding, which is now in its 11th month.

“They’re going to have to pay more,” said Ron Epstein, aerospace analyst at Bank of America Merrill Lynch. He estimates the total cost of the grounding could reach $20 billion — excluding any settlements from lawsuits from crash victims’ families — if the planes return by June or July. Epstein estimates that about 40% of Boeing’s profits last year came from the Max.

Moody’s Investors Service said it was putting Boeing’s debt on a review for a possible downgrade, less than a month after cutting its credit rating by one-notch, as the crisis wears on longer than expected. The lower the credit rating, the more expensive it is for Boeing to borrow. Boeing, which declined to comment on a potential charge, has previously said it would tap the debt markets if it needs more cash to cover the costs of the crisis.

Sheila Kahyaoglu, aerospace and defense analyst at Jefferies, estimated this week that the charges for aircraft customers’ compensation is likely to rise to $11 billion, and that some of that will be reported later this month. That’s assuming the planes return to service in April, she said.

The Wall Street estimates for its earnings vary widely — from a loss of 23 cents a share to a profit of as much as $2.52 a share, according to analysts polled by Refinitiv. On average, analysts expect the Chicago-based company to report a profit of $1.53 a share — a 72% decline from a year earlier. They estimated a more than 26% drop in revenue to $20.8 billion.

Earlier this month, Boeing threw airline customers another curve ball: It’s recommending additional simulator training for pilots on the Max, a reverse of its previous stance and a step that promises to further delay the planes return to service and drive up costs.

As of Thursday, all U.S. airlines with Maxes in their fleets — American, Southwest and United — have pulled the planes from their schedules until early June, a delay that’s threatening to last until the peak travel season of late spring and the summer.

Analysts are also looking for news on how Boeing will manage its supply chain. Spirit Aerosystems, which makes fuselages and other parts for the planes, announced initial job cuts of 2,800 people last week. Moody’s downgraded its debt to junk territory.

Even the planned pause in production won’t stop the cash drain and will cost Boeing $1 billion a month, estimates J.P. Morgan.

“It doesn’t give you the warm and fuzzies when Spirit lays off 2,800 people,” said BofA’s Epstein. Suppliers are walking a tightrope with the 737 Max, because they don’t want to lack workers when Boeing can resume production. “It’s a tight job market and I’m sure there are a lot to companies that would like to hire them,” Epstein added.

Investors are also closely watching Calhoun for cues about Boeing’s bigger picture. The company has faced problems with its KC-46 refueling tanker. Because it’s hobbled by the 737 Max issues, Boeing hasn’t been able to move forward with a new middle-market airplane, giving a bigger lead to rival Airbus, which recently won orders for its forthcoming long-range, single-aisle plane from airlines including American and United. And the scrutiny of the Max could become more time consuming when regulators review its wide-body Boeing 777X.



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South Korea stocks plunge, country raises coronavirus alert to ‘highest level’

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Stocks in South Korea led losses among major Asian markets in Monday afternoon trade after the country raised its coronavirus alert to the “highest level” following a rapid spike in cases over the weekend.

The Kospi was down 3.1% in afternoon trade as shares of automaker Hyundai Motor plunged 3.91% while the Kosdaq fell 3.25%. The Korean won weakened to 1,217.85 per dollar following levels below 1200 seen last week.

South Korea’s Korean Air Lines and Asiana Airlines also dropped 5.52% and 5.54%, respectively. Reuters reported Monday that both the South Korean airlines had announced they are suspending flights to Daegu — the country’s fourth-largest city with the largest number of coronavirus cases — for the time being.

Airline stocks in the rest of the region also fell amid the contagion fears. Australia’s Qantas Airways plummeted 7.22% while Hong Kong-listed shares of China Eastern Airlines and China Southern Airlines both fell more than 4% each.

On Monday morning, the Korea Centers for Disease and Control and Prevention reported that seven people have died from COVID-19. The number of cases has risen to 161 new cases, bringing the total to 763 nationwide — the country with the most cases outside the mainland.

Industry heavyweight Samsung Electronics announced Saturday that a coronavirus case had been confirmed at a mobile device factory complex in South Korea, resulting in the shutdown of the entire facility until Monday morning, according to Reuters. The affected factory reportedly accounts for a small portion of Samsung’s total smartphone production. Samsung Electronics shares were down more than 2.5% in morning trade.

Elsewhere, shares in mainland China were mixed by the afternoon. The Shanghai composite was down 0.34% while the Shenzhen component was up 0.69%. The Shenzhen composite was also higher by 0.851%. Hong Kong’s Hang Seng index fell 1.48% lower.

Meanwhile, shares in Australia also fell, with the S&P/ASX 200 down more than 2% as almost all the sectors declined.

Overall, the MSCI Asia ex-Japan traded more than 1.5% lower.

Markets in Japan are closed on Monday for a holiday.

Developments surrounding the new coronavirus, known as COVID-19, will continue to be monitored by investors as they attempt to ascertain the potential economic impact of the disease.

“COVID-19 news remain front and centre in investors’ minds with a jump in news cases reported outside China, from South Korea, the Middle-East and Italy,” Rodrigo Catril, senior foreign exchange analyst at National Australia Bank, wrote in a morning note.

“News over the weekend will not have helped sentiment as we begin the new week, with the number of cases surging to over 600 in South Korea and over 130 in Italy. Extraordinary containment measures are being implemented, which will increase the hit to the global economy,” Catril said.

Currencies and oil

The U.S. dollar index, which tracks the greenback against a basket of its peers, was last at 99.551 after seeing highs around 99.9 last week.

The Japanese yen traded at 111.56 per dollar following a weakening from levels below 110.4 in the previous trading week. The Australian dollar was at $0.6607 after declining from levels above $0.67 last week.

Oil prices fell in the afternoon of Asian trading hours, with international benchmark Brent crude futures down 2.38% to $57.11 per barrel. The U.S. crude futures contract also dropped 2.25% to $52.18 per barrel.



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Coronavirus live updates: China, South Korea cases

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A Chinese man wears a protective mask as he walks by a propaganda banner on February 20, 2020 in Beijing, China.

Kevin Frayer

This is a live blog. Please check back for updates.

All times below are in Beijing time.

12:36 pm: South Korean airlines sell off

Shares of Korean Air and Asiana Airlines fell more than 5% each following a spike in the number of confirmed cases in South Korea. As the total number of reported infections in the country jumped to more than 700, both airlines took steps to cancel flights to the city of Daegu, where many of the new cases have been detected.

Asiana Airlines suspended flights between Daegu and Jeju until Mar. 9 (see 10:45 am update). Reuters reported that Korean Air also halted all flights to the city until Mar. 28. Low-cost carrier Air Busan sold off 3.89%. — Roy Choudhury

10:58 am: China reports 150 additional deaths

China’s National Health Commission reported an additional 150 deaths and 409 new confirmed cases as of Feb. 23. Of the 409 new cases, 398 came from Hubei province, whereas only 11 were reported in the rest of mainland China. That brought the nationwide tally of total infections to 77,150 confirmed cases and 2,592 deaths.

The Hubei Provincial Health Committee reported 149 additional deaths in the province, including 131 in Wuhan, where the pneumonia-like virus was first detected. As of Feb. 23, Hubei province has reported a total of 64,287 confirmed cases, 2,495 deaths. The commission said 16,738 people have been discharged from the hospital. — Roy Choudhury

10:45 am: Asiana Airlines suspends flights between Daegu and Jeju

South Korea’s second-largest carrier, Asiana Airlines, said it was suspending domestic flights between Daegu and Jeju from Feb. 25 until Mar. 9. Many of the new cases reported in the country came from the city of Daegu. (see 9:24 am and 7 am updates) — Roy Choudhury

9:24 am: South Korea cases surpass 760, fatalities rise to seven

The Korea Centers for Disease Control and Prevention reported an additional 161 cases on Monday morning, bringing the total to 763 nationwide. Most of the new confirmed cases were reported in the city of Daegu.

An additional two people were said to have died, which brought the death toll to seven. — Roy Choudhury

8:47 am: South Korea stocks fall more than 2%

8:15 am: President Xi says epidemic as a crisis and ‘big test’ for China

The coronavirus outbreak is a major public health emergency that has spread rapidly and become difficult to contain, President Xi Jinping said at a meeting in Beijing on Sunday, state media Xinhua reported.

“This is both a crisis and a big test for us,” Xi said, per Xinhua’s translations of his remarks, adding that efforts are being made to cure people of the infection, reduce fatality rates, safeguard social stability, and strengthen China’s emergency medical supplies and daily necessities.

The epidemic’s impact on China’s economic and social development is temporary and generally manageable, but it will deal a relatively big blow in the short term, Xi said, according to Xinhua. The president also stressed the importance of an orderly resumption of work and production. — Roy Choudhury

7:18 am: IMF chief says virus outbreak could put economic recovery at risk

The coronavirus outbreak that began in China and has since spread to more than 25 countries could put global economic recovery at risk, International Monetary Fund Managing Director Kristalina Georgieva said in a statement following a G-20 meeting of finance ministers and central bank governors in Saudi Arabia.

“This is a human tragedy, but it also has negative economic impact,” Georgieva said. “I reported to the G20 that even in the case of rapid containment of the virus, growth in China and the rest of the world would be impacted. Of course, we all hope for a V-shaped, rapid recovery — but given the uncertainty, it would be prudent to prepare for more adverse scenarios.” — Roy Choudhury

7 am: South Korea on high alert, total cases top 600

South Korea’s government raised the COVID-19 alert to its highest level after a recent implosion of confirmed infection cases, which took the country’s tally from 31 as of Feb. 18 to 602 on Sunday. Many of the new cases were from the city of Daegu and were related to a homegrown religious group, Yonhap reported. At least five people have died from the virus, according to the Korea Centers for Disease Control and Prevention.

By comparison, the Diamond Princess cruise that had been quarantined off the coast of Yokohama, Japan, since early February had at least 634 confirmed cases, according to the Japanese health ministry and the World Health Organization. Many countries have started evacuating their citizens from the ship and some people have tested positive after leaving the ship. — Roy Choudhury

A nurse working in the isolation ward communicates with a co-worker on the talkie-walkie in Jinyintan Hospital, designated for COVID-19 patients, in Wuhan in central China’s Hubei province Monday, Feb. 17, 2020.

Feature China | Barcroft Media via Getty Images

All times below are in Eastern time.

4:18 pm: Israel may quarantine 200 South Korean visitors

Israel may quarantine some 200 visitors from South Korea at a military base in a Jewish settlement on the occupied West Bank over coronavirus fears, according to Israel’s Ynet news site. Israeli Interior Minister Aryeh Deri said separately he had ordered South Korea and Japan to be added to a list of Asian countries to which travel to and from Israel was being barred. — Lovelace Jr.

3:48 pm: Austria halts train traffic with Italy

Austria has halted train traffic with its southern neighbor amid concern that two passengers on an in-bound train from Italy were infected with the coronavirus. Italy is grappling with the largest coronavirus outbreak outside of Asia, with more than 130 reported cases and three deaths. — Lovelace Jr.

1:08 pm: Four passengers test positive for coronavirus in England

Four passengers tested positive for the virus in England after being evacuated from the Diamond Princess cruise ship in Japan, according to Chief Medical Officer Chris Whitty.

“Four further patients in England have tested positive for COVID-19, bringing the total number of cases in the UK to thirteen,” the statement from the chief medical officer for England said. — Lovelace Jr.

Read CNBC’s coverage from the U.S. overnight: Austria halts train traffic with Italy, Turkey closes Iran border

— CNBC’s Berkeley Lovelace Jr. contributed to this report.



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Bernie Sanders is the front-runner because of how we raised our kids

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With his convincing victory in Saturday’s Nevada caucuses, Sen. Bernie Sanders is solidifying his status as the front-runner for the Democratic presidential nomination more than ever before.

So how did a life-long avowed socialist and someone who’s never actually won an election as a Democrat get to the top of the party’s mountain?

The simple answer is that he’s being supported by millions of younger Democratic voters, and those voters have been raised to be Sanders voters, even if their parents don’t realize it.

Here’s how it happened:

We convinced everyone college was 100% necessary, and then we made college unaffordable. Since the end of World War II, the chorus of educators, politicians, and journalists making it sound like college was essential for career success only became louder and drowned out any counterargument.

At the same time, college tuition costs have exploded thanks greatly to government programs that produced unintended, but predictable consequences. It mostly started in 1978 when more loans and subsidies became available to a greatly expanded number of students. The cost of college tuition has risen by six times more than the rate of inflation since the 1970s.

Now, millions of American young people are straddled with college loans that look impossible to repay. The total student loan debt in the U.S. now stands at more than $1.6 trillion.

Is it any wonder so many of them are attracted to a candidate who not only promises to forgive their student debts, but presents their predicament as the result of corporate greed and misplaced government priorities?

Luckily for Sanders, young voters supporting him for his college tuition forgiveness promises don’t seem to be too interested in his own family history. His wife Jane Sanders was president of the now defunct Burlington College and she and other administrators were reportedly the subjects of a long-running FBI probe that they misled bank loan officers about the real number of donations pledged to the college.

The FBI probe of the matter ended in 2018, and Jane Sanders was not charged. But the policies she oversaw, which included pushing for major campus expansions, were indicative of some of the root causes of increased college costs in America.

The establishment in both parties ignored young voters. As sacred as our politicians make college education sound, it’s nothing compared to the way leaders from both parties talk about programs for older Americans like Social Security and Medicare.

None of that is a mystery, as older Americans have always been more likely to vote. Even though voters aged 18-29 have been showing increased turnout numbers in recent elections, senior citizens still stand atop the heap. In 2016, 71% of Americans 65 and older voted compared to just 46% of 18-29-year-olds. In the 2018 midterms, that gap narrowed to 66% to 36%, but it’s still a wide gap.

All of this focus on older voters and their retirement funds is a nice sentiment but it’s misplaced. Older Americans aren’t just doing okay. A 2017 study of age-based wealth in the U.S. shows that a typical household headed by an adult 65 and older has 47 times the net worth of a household headed by younger Americans. Yep, Papa and Granny are loaded.

Now, helping older people who happen to be poor or on the margins of poverty is something different. But the cultural assumption many of us have about elderly folks needing more financial help in America is pretty much the opposite of the truth.

Throw in the Affordable Care Act, which literally and foolishly leaned on younger and healthier Americans to foot the bill for covering older and sicker people, and you see a pattern here.

Sanders talks plenty about Social Security, and he’s obviously a senior citizen himself. But he usually expands his campaign promises to include younger people, as he did when he took the lead on the Medicare for All promise in 2017.

We told them America’s house was on fire. For all the policy differences and political minutiae Democrats delve into when criticizing President Trump, the most enduring attacks on Trump from the Democratic establishment remain accusations that Trump is supporting white supremacy and is controlled by Russian President Vladimir Putin.

These are over-the-top accusations, and it’s hard to accept that even most elected Democrats actually believe them. But pushing that message on America for the last three-plus years comes at a price for both sides.

For the Democrats, the price is becoming clear: it’s made moderate presidential candidates look less viable than ever.

Think about it: if you really believe the president is a traitor and supporting violent plots against non-white Americans, is this really the time to support mainstream Democrat or Republican candidates?

Sanders may be a career politician, but he’s never been a mainstream politician. His persona and political brand fits much better into the current Democratic narrative that we’re living in desperate times.

Establishment Democrats are reaping what they sowed.

As a result, it’s looking more and more like Sanders has unstoppable momentum going into the Super Tuesday primaries and beyond. The big question now is whether that Democratic establishment will try to derail Sanders before or during the Democratic National Convention.

But either way, the party would be playing with fire and risking alienating those younger voters forever.

Jake Novak is a political and economic analyst at Jake Novak News and former CNBC TV producer. You can follow him on Twitter @jakejakeny.





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