Monthly Archives: April 2011

Woodstock for Capitalists

Right now, while this is being published and if everything is going as planned, Luca and I are in Omaha, Nebraska. By now we should be already registered to attend tomorrow the annual shareholders meeting of Berkshire Hathaway, company famous for its CEO and Chairman, Warren Buffett.

While studying an MBA at EOI business school in Seville some 5 years ago, I developed a special interest in investing. I started reading some books and this led me to the bible of them all, Benjamin Graham’s “Intelligent Investor”, which I have referred to in this blog a number of times.

Warren Buffett, of World fame, was one of Graham’s disciples. He started very early setting up small businesses and investing in stocks. Decades later, he is known as the “oracle of Omaha” and considered to be on of the best investors ever.

About 2 years ago, Luca and I decided to invest in Berkshire Hathaway, mainly to acquire the right to attend this weekend’s party (you may call us freaks, right). Sure, we have arranged a nice holiday trip around it passing by Montreal, DC, Chicago and even Des Moines (!). But the end of this trip, was attending the shareholders’ meeting (others travel to attend a concert of U2!).

If you want to grasp what the experience may feel like, start by reading one of his letters to the shareholders of BRK, e.g. this year’s letter [PDF]. It’s 26 pages, ok, but it won’t take you more than 1 or 2 hours, and who knows, it may change your view of saving, investing, managing businesses, doing you a great favour. Apart from that, you’ll have a great fun reading it, as it is a very entertaining and humorous piece.

Finally, a positive note from an extract of the letter to reflect on, in today’s times:

“Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.”

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A day in DC

Two years ago, in December 2008, I came for the 1st time to Washington DC. That was the first time I came to the USA and even though it was on a business trip, I managed to take some 4 hours in 2 days to do some sightseeing. I loved it.

Yesterday we arrived again to DC. This time Luca and me, on holidays, again just for 2 days. We checked in our hotel, The Quincy, in L Street NW, not very far from the White House… though I acknowledge that distances are misleading in this city: why wouldn’t you walk from Lincoln memorial to Washington memorial if “it’s just over there”, and from that to that other museum in The Mall, and for that matter to the Capitol. In the end you walk many kilometres. The hotel was a success. For just 100 dollars a night, we’ve got a room of rank of the best ones I get in business trips with the company, so the start of this stay was promising.

Today has been a long but entertaining day. I woke up without alarms at 5:30am. I checked the time and enjoyed the fact of having 45 more minutes of sleep. At 6:15am I got up, dressed in running gear and went out for a morning run. Only to discover that it was way hotter and more humid than I expected and dressed for. I didn’t come back to leave the sweater and paid for it later on. I was amazed by the dozens even hundreds of people I saw running before 7am around the city, especially in the Mall. I knew Americans love to run and do wake up early. Still, what I saw was beyond expectations. I went from the hotel to the Washington memorial passing by the White House (2 km), then to Capitol (other 2km) and back rounding the Washington memorial. In total 8.6 km. The plan was to round the capitol from behind and pass by the Jefferson memorial (4 more km) but I was way too overheated for that.                            

Back in the hotel I did some stretching, took a shower, washed clothes and got dressed to continue hitting the streets of DC. We went for breakfast at a cafeteria close to the hotel, then to a store to buy a new photo camera and at 9am we were at the Lincoln memorial ready to start a day of reflections (though the reflecting pool was empty and under construction).

We then headed to the World War II and the Washington memorials. Then to the American History museum. This one is one of the 19 museums of the Smithsonian. All of them admission-free, all of them wonderfully arranged. It is almost impossible to overstate the quality of those museums. In each one you could spend a week if you had it for each. There are hundreds of materials to read, to watch, to listen to… in each room. In this one we paid special attention to the rooms dedicated to the flag and the song that would become the American anthem, to the gowns of the First Ladies, to the presidents and Abraham Lincoln. By 11:45 we had to leave for the next appointment in the day.

This time we had booked a guided tour through The Capitol, which houses the Senate and the House of Representatives. We had to wait rather long as expected long queues weren’t such, so we took the extra 30 minutes we had in the schedule to have lunch in the restaurant within the building. The visit was funny and the guide entertaining, but I expected more of it. With that visit you don’t get to actually see the chambers. I guess that deal in Spain is better. However, as we were about to exit, Luca saw a sign for the Library of the Congress and there we went.

The visit of the LoC is wonderful as well. You get to see two bibles from the XV century, one made by Gutenberg, what is left from Jefferson’s library (a third from the original, but still over 6,000 books – including some from Cervantes) bought by the Congress, and one of the reading rooms, which anyone could access provided the she would get the card by filling a form and paying 2 bucks (that‘s not so easy in Madrid with the national library).

Afterward, we headed for the American Indian museum. Another one from the Smithsonian institution. By then I was exhausted and overloaded by information, so I paid attention to one of each 10 signs to read, but still enjoyed the museum.

As we went out it was already 17:20, time for museums to close… but as we passed by the Air and Space museum I saw a sign saying that that particular museum would open today till 19:30. There we went. We needed something relaxing so we bought a couple of tickets for the 3D movie “Legends of the Sky”, a splendid documentary of 50’ which has the 787 program as the main theme and covers some basic principles of flight such as propulsion, materials, structures, etc. It also reviews a b it of aviation history from the Lockheed Constellation to the A380. I especially liked the final line telling children that everything is not yet invented in aviation, we’ve just started. Then we entered the replica of the Spacelab, the gallery of the Apollo programme and the room dedicated to interactive explanations and games of the principles of flight: wonderful again. This was the second time I visited this museum… it won’t be the last.

By the time we left the museum, Luca and I were completely worn out by the rhythm of the day, with just some strength to walk back to the hotel and take some pictures in front of the White House on the way. We stopped at the Irish terrace close to the hotel to enjoy an American dinner composed of buffalo rings, hamburgers and 4 large beers to call it for the day.

Two years later, I continue to be more than delighted with DC.

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Historias del Fútbol Mundial

Tengo la costumbre de, siempre que paso por un aeropuerto, visitar la tienda de libros y revistas, a ver si encuentro algún libro. Siempre que vuelo ya llevo algo de lectura conmigo y estas visitas a la tienda de turno las hago por si encuentro algo interesante. A veces lo encuentro.

El año pasado antes de emprender un viaje a Holanda, cuando se estaba jugando la Copa del Mundo en Sudáfrica, encontré en Barajas el libro “366 Historias del Fútbol Mundial”, de Alfredo Relaño. Tras ojearlo un poco, lo compré pensando que estaría bien como complemento al evento futbolístico del momento que tan bien acabó para España. Digamos que para imbuirme un poco más del espíritu futbolístico.

El libro no tiene un hilo argumental, sino que está estructurado a modo de calendario. Ordenadas según los meses del año, el libro tiene una historia por cada uno de los días del mismo. Cada historia una hoja, dos páginas. Perfecto para tener en la mesilla y leer unas pocas historias de vez en cuando.

Muchas de las historias son muy conocidas, algunas casi contemporáneas, y otras tantas no tanto. Por ejemplo, en estas semanas de abril y principios de mayo, cuando se van a vivir tantos partidos entre Real Madrid y Barcelona, en el libro aparece una historia con bronca entre ambos equipos en las semifinales de copa de 1916 tras la cual estarían hasta 10 años sin volver a enfrentarse. ¿Qué diría la prensa durante 10 años sin un partido del siglo cada semana?

Otras historias de estas semanas:

  • El plante del Barcelona en la vuelta de la semifinal de Copa del Rey contra el Atlético de Madrid en el año 2000.
  • La victoria de España en la Copa del Mundo Sub-20 en Nigeria, con Xavi y Casillas. Preludio de lo que ocurriría 10 años después un poco más al sur.
  • El nacimiento de la expresión del “miedo escénico” del Bernabéu en la final a doble partido de la UEFA contra el Colonia en 1986.
  • El accidente que acabó con el Torino en el monte de Superga en 1949.
  • El nacimiento de la Copa en 1902, cuya primera edición duró 3 días y ganó un equipo conjunto formado por jugadores del Athletic y el Vizcaya de Bilbao (que más tarde se fusionarían); o del Scudetto en Italia, cuya primera edición duró 1 día y ganó el Génova.
  • La derrota del Barcelona en la final de la Copa de Europa en Sevilla frente al Steaua de Bucarest.
  • La aparición de las tarjetas amarillas.

Y así hasta 366…

Todavía no he terminado de leer todas las historias del libro, pero las que llevo leídas (algunas releídas) ya me permiten recomendar el libro sin miedo a equivocarme.

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Turboprops market different dynamic

In the last post I discussed about the dynamics of commercial aircraft orders and its correlation with air traffic growth and GDP growth.

In the previous post, I had discussed about turboprops. Today, I want to connect the two dots in a particular way.

I want to show how civil turboprop market is unrelated to the larger and more known turbofan civil aircraft market and how its dynamics are completely unrelated to World GDP growth and thus world air traffic growth.

For this purpose I studied the numbers of ATR (using the info available in its website from yearly news releases discussing results).  I proceeded in the same way as before, analysing the correlation between the different variables.

In order to take a larger time span, I used ATR deliveries instead of orders, as I found a larger data set for deliveries (obviously aircraft delivered were previously ordered, lag in between is not that obvious, today’s backlog is about 3 years production).

In the following graphic I plotted ATR deliveries, GDP growth and oil price:

ATR deliveries vs. GDP growth and oil price.

When calculating correlation between the different variables, I discovered that the correlation between GDP and deliveries is rather low, despite of the time lag applied (be it 2, 3, 4 years…). However I found that the oil prices and deliveries did correlate very well with a lag of 5-6 years, yielding coefficients of 0.55-.65, which are rather high.

This different behaviour of the turboprop market compared to the bigger turbofan market could be explained by the oil price forecasts that airlines shall make each time the oil price goes up.

Again, I can imagine some C-suite executive of a regional airline demanding an oil price forecast/report with which to substantiate his gut-feeling that prices will continue to go up and thus turboprops,  which are more fuel-efficient than turbofans, will be best suited for their short-haul routes.

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Filed under Aerospace & Defence, Economy

Air traffic growth vs. aircraft orders

Taking the topic of the headline of this post I want to share some reflections on the commercial aircraft market.

The first is how closely air traffic growth is correlated to world economic growth. This sentence and the following graphic are taken directly from the Global Market Forecast [PDF, 7.9MB] produced by colleagues at Airbus.

Air traffic growth vs GDP growth (source: Airbus).

You may see in the graphic the correlation (correlation coefficient above 0.7) and how the air traffic growth is however much more volatile than the economic growth. This is very intuitive. The better the economic situation the more business trips, family visits and holiday trips will take place. Nevertheless Airbus explains that in some situations and regions this is not enough to forecast traffic and thus they produce hybrid models.

Then, I wondered: how do airlines translate this growth in traffic into airplane orders?

I made some numbers and played with them. I gathered aircraft orders for both Boeing and Airbus in the last ~20 years, plus air traffic and GDP growth over the same period of time. Then, I tried to connect one with another and see how best they would correlate with each other. Even though correlation does not imply causation, it may indicate existence of such causal relations that it’s why I searched for such results.

Here I plotted GDP growth (IMF), traffic growth (ICAO) and aircraft orders:

Aircraft orders vs. air traffic and GDP growth.

One could expect that airlines, after collecting first hand data of traffic growth plus the aggregate demand from industry sources (IATA, ICAO) and after applying their complex planning models would order aircraft from manufacturers. Thus, a correlation might be expected between traffic growth and aircraft orders. What we don’t know is whether airlines would place orders in the same year where the traffic growth actually takes place or there would be a lag (due to the airline analysis process, the negotiation with the manufacturer, arranging the financing, waiting for the next air show…).

The correlation results I got between these 2 variables are satisfactory though not that high. Matching data of the same year yields a 0.35 correlation coefficient. If however, we apply a 1-year lag in between air traffic growth data and orders the correlation is better, 0.44 (a lag of 2 years would worsen it down to 0.27 and so forth).

I found it curious that correlation between orders and GDP growth is much better! Matching data of the same year yielded a 0.61 correlation coefficient (which is rather high). A lag of a year would produce a still high 0.56 (2-year lag, 0.41; 3-year, 2.6…).

This was a striking result for me. After all, even though individual airlines do have complex models and experienced analysts behind them, taking the aggregate of the market, it seems that orders are placed less on data of traffic and more relying on data of economic growth, and rather soon, acting within the same year or a year later!

Who knows how the process within the airlines actually works… I can imagine thoroughly thought and thick studies coming from planning & analysis departments being put aside in the board room where one or two directors (more assertive than the average) convince the rest of the soundness of an operation based half in broad economic prospects (world GDP growth) and half in gut-feeling… wouldn’t surprise me much.

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