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What’s Really Driving This Stock Market Higher

Spurring the overall market’s advance was optimism on two policy fronts: tax reform and Federal Reserve policy.

One doesn’t usually mark the anniversary of a disaster with a celebration, but that’s this stock market for you.

The Dow Jones Industrial Average marked the 30th anniversary of its 508-point plunge on Black Monday, Oct. 19, 1987, by closing above the 23,000 mark. For the week, the blue-chip average added 456.91 points, an even 2%, to end at 23,328.63.

Of course, the doughty Dow didn’t do it alone. The Standard & Poor’s 500 index also ended Friday at a record 2575.21, up 0.86% for the week. Even more impressive is that its winning streak has come with hardly a stumble. Through Thursday, the S&P 500 tied its longest streak without a 3% decline, gaining 22.9% since last Nov. 7, according to the tally tweeted by Charlie Bilello of Pension Partners. That matched the length of the 241-day run from Jan. 26, 1995, to Jan. 9, 1996, which still topped the size of the current skein with a 30.4% advance. But, as the philosopher Yogi Berra would remind us, the current run ain’t over till it’s over.

While records are being set for various stock market indexes in the U.S. and abroad in this global rally, the Dow also has benefited from some peculiarities of its own. Unlike most stock market measures, which typically are weighted by their component stocks’ market capitalization, the DJIA is weighted according to its 30 constituent companies’ share price.

Of course, nobody would put together an index that way today, but that was the state of the art in the late 19th century, when Charles Dow designed his eponymous average. What the Dow lacks in statistical rigor, it more than makes up for in historical continuity and familiarity.

That said, the Dow has benefited from the biggest winners being among the highest-priced stocks, which gives it a bigger boost, as our resident market maven, Andrew Bary, sagely points out. Boeing (ticker: BA) has been the Dow’s top stock, with a 70% gain so far this year, and also is the highest-priced stock in the index, at $264.75. Visa (V) and McDonald’s (MCD) are No. 3 and No. 4, respectively, with roughly 38% year-to-date gains, but Visa’s lower stock price ($107.55) means its contribution to the Dow is less than two-thirds that of Mickey D’s ($166.30).

Conversely, General Electric (GE) could be called the real dog of the Dow, but I like my pooches too much to do that. Luckily, the sole remaining original constituent of the Dow also is its lowest-priced member, at $23.84 a share, so its 25% decline this year has been only a minor drag on the blue chips. GE hit a 52-week low on Friday after posting an earnings miss, but managed to rebound for a 1.1% gain on the session. That may speak more to the huge volume of stock that GE bears have sold short (over $3 billion worth, as colleague Ben Levisohn relates on the Stocks to Watch blog at Barrons.com) than optimism over the turnaround new CEO John Flannery is tasked with.

Spurring the overall market’s advance was optimism on two policy fronts, fiscal and monetary. On the former, the Senate on Thursday passed a budget resolution that seemed to pave the way for debate on tax legislation to begin more quickly than expected. The budget opens the way for $1.5 trillion in tax reductions over the next decade with a simple 51-vote majority in the Senate, and may not require a conference committee with the House of Representatives. Bottom line from the legislative arcana: There’s a chance of a bill getting passed, if not by year end, then by early 2018.

There also seems to be some greater flexibility in discussions over the tax package. House Speaker Paul Ryan was talking about adding a fourth tax bracket for high earners. That might provide revenues to pay for maintaining the state and local tax deduction, a highly contentious issue that could cost Republican votes in high-tax states. The higher top tax bracket, and keeping the state and local deduction originally, had been declared nonstarters. But going into the 2018 midterm elections, getting a win on taxes is more important to the GOP after failing on health-care reform than any doctrinaire policy stances.

It’s also wrong to expect either a major tax overhaul or nothing, according to Strategas Research Partners’ Washington research team, led by Daniel Clifton. “[T]he key to this budget is it still allows Congress to move a significant tax cut if the larger reform fails,” they wrote in a client note on Friday. “This increases the probability of some tax legislation passing in [the first quarter of] 2018.…We wouldn’t be surprised if we see a draft of tax-reform legislation next week.”

For the stock market, the proposed corporate tax cut is the centerpiece of any legislation. RBC Capital Markets’ economists estimate that a reduction in the marginal corporate tax rate to 20%, from an estimated current 27% effective rate, would add $10.50 to the S&P 500 companies’ per share earnings. Assuming that investors are willing to pay 19 times forward earnings, such a tax cut should be worth 200 points on the S&P 500, they estimate. How much of that was discounted in the week’s market advance is another question.

FURTHER BUOYING THE BULLS was speculation that Federal Reserve Gov. Jerome Powell was the leading candidate to be the next chairman of the central bank. But later on Friday, President Donald Trump told Fox Business News that Stanford University economist John Taylor also was in the running.

Trump added that he hasn’t made a decision. “Most people are saying it’s down to two: Mr. Taylor, Mr. Powell. I also met with Janet Yellen, who I like a lot. I really like her a lot. So, I have three people I’m looking at, and there are a couple of others,” The Wall Street Journal reported, based on the FBN interview.

Wall Street was enthused about Powell’s chances given that “he’s viewed as a Yellen clone on monetary policy,” writes Greg Valliere, chief strategist at Horizon Investments. Trump has previously declared a preference for “a low-interest-rate policy,” which the Fed under Yellen has delivered, even with a total of four quarter-percentage point increases since lifting its key policy rate from near zero starting in December 2015.

Yellen’s term as Fed chair runs out early next year, and most observers had assumed Trump would want to name his own central bank head, especially given that Yellen is a Democrat. She also seemed to endorse financial regulations put in place after the financial crisis that the GOP has sought to roll back.

Powell has supported Yellen’s policies but hasn’t been outspoken on monetary policy. He reportedly has the support of Treasury Secretary Steven Mnuchin, who is leading the search for the Fed head. As a Republican with private-sector experience, says Valliere, Powell could easily gain Senate approval.

Taylor is favored more by conservatives for his criticism of the Fed’s easy-money stance, notably its expansion of the central bank’s balance sheet to $4.5 trillion. The policy rule formulated by and named for him would imply substantially higher short-term interest rates. That would worry Wall Street, which obviously prefers the accommodative Fed policies that have helped lift stocks.

The “couple of others” to whom Trump alluded would be former Fed Gov. Kevin Warsh, who also has criticized the Fed’s quantitative easing after departing the central bank, and Gary Cohn, director of the National Economic Council and the president’s chief economic adviser. Warsh is seen as a long shot, while Cohn fell out of favor after criticizing Trump’s failure to condemn white supremacists at Charlottesville, Va.

FBN quoted a client note from Beacon Policy Advisors, a Washington research outfit, which suggested that Trump could chose Powell as Fed chairman and Taylor as vice chairman, or vice versa. That could set up a team of rivals, but Powell and Taylor would be OK with either outcome, the firm wrote.

None of which is likely to matter much in the short term. The federal-funds futures market puts an 83.6% probability on another quarter-point hike in the key policy rate, from a range of 1% to 1.25% currently, at the Dec. 12-13 meeting of the Federal Open Market Committee. In addition, the Fed is slated to begin the process of paring its balance sheet this month.

Even as the Fed begins to trim its holdings of Treasuries and agency mortgage-backed securities (which is discussed in the Current Yield column, on page M9), the European Central Bank and the Bank of Japan continue to pump liquidity into the global financial system, which sloshes across borders. But the ECB this week may announce plans to begin to taper its 60 billion euro ($70.7 billion) monthly asset purchases.

Perhaps the biggest change in monetary policy won’t become apparent until the next financial crisis. Doug Peebles, AB’s chief investment officer of fixed income, last week suggested that the so-called put option provided by central bankers may be ended by the next Fed leader.

It began in earnest after Black Monday in 1987, when the Fed under Alan Greenspan cut rates to arrest the stock market’s collapse. The process was repeated after the Long Term Capital Management fiasco in 1998 and by Greenspan’s successor, Ben Bernanke, after the 2008 financial crisis.

Peebles suggests that central bankers may want to rescind this insurance policy for the markets, which would really be a profound change from the practice of the past three decades.

President Trump announced Saturday morning that he planned to release the tens of thousands of never-before-seen documents left in the files related to President John F. Kennedy’s assassination held by the National Archives and Records Administration.

“Subject to the receipt of further information, I will be allowing, as President, the long blocked and classified JFK FILES to be opened,” Trump tweeted early Saturday.

Kennedy assassination experts have been speculating for weeks about whether Trump would disclose the documents. The 1992 Kennedy Assassination Records Collection Act required that the millions of pages — many of them contained in CIA and FBI documents — be published in 25 years, by Oct. 26. Over the years, the National Archives has released most of the documents, either in full or partially redacted.

[Pressure grows on Trump to release the JFK files]

But one final batch remains, and only the president has the authority to extend the papers’ secrecy past the October deadline. In his tweet, Trump seemed to strongly imply he was going to release all the remaining documents. But he also hedged, suggesting that if, between now and Oct. 26, other government agencies made a strong case not to release the documents, he wouldn’t. Also, Trump was unclear about whether he would publish all of the documents in full or with some of them redacted.

In the days leading up to Trump’s tweet, a National Security Council official told The Washington Post that government agencies were urging the president not to release some of the documents. But Trump’s longtime confidant Roger Stone told conspiracy theorist Alex Jones of Infowars this week that he personally lobbied Trump to publish all of the documents.

[Roger Stone is the man the media can’t ignore]

Stone also told Jones that CIA Director Mike Pompeo “has been lobbying the president furiously not to release these documents.”

Though Kennedy assassination experts say they don’t think the last batch of papers contains any major bombshells, the president’s decision to release the documents could heighten the clarity around the assassination, which has fueled so many conspiracy theorists, including Trump himself.

In May 2016, while on the presidential campaign trail, Trump gave an interview to Fox News strongly accusing the father of his GOP primaries opponent, Sen. Ted Cruz of Texas, of consorting with Kennedy assassin Lee Harvey Oswald right before the shooting.

The assassination experts do suspect the papers will shed light on the activities of Oswald while he was traveling in Mexico City in late September 1963 and courting Cuban and Soviet spies.

Phil Shenon, who wrote a book about the Warren Commission, the congressional body that investigated Kennedy’s killing, said he was pleased with Trump’s decision. But he wonders to what degree the papers will ultimately be released.

“It’s great news that the president is focused on this and that he’s trying to demonstrate transparency. But the question remains whether he will open the library in full — every word in every document, as the law requires,” Shenon said. “And my understanding is that he won’t without infuriating people at the CIA and elsewhere who are determined to keep at least some of the information secret, especially in documents created in the 1990s.”

Jefferson Morley, a former Post reporter who has studied the Kennedy assassination records for years, said the last tranche of material is also intriguing because it contains files on senior CIA officials from the 1960s — officers well aware of Oswald’s activities in the days before the assassination.

On Saturday morning, Stone, the Trump confidant, was rejoicing on Twitter.

“Yes! Victory!” he tweeted.

Spanish prime minister to sack Catalan regional government

New GE Chief Slashes Forecasts, Plans to Exit $20 Billion in Businesses

CEO John Flannery has expressed an urgency to reduce costs and rethink the sprawling company

General Electric Co. GE 1.06% slashed its 2017 projections as new Chief Executive John Flannery started to outline his plans to restructure the struggling conglomerate, setting a goal to sell more than $20 billion of assets and cut an additional $1 billion in spending.

“Our results are unacceptable to say the least,” Mr. Flannery said on a conference call Friday, noting that he was reviewing whether the company could afford to maintain its current dividend payout. “Things will not stay the same at GE.”

Mr. Flannery, who took the job in August and recently became chairman with the early exit of Jeff Immelt, has expressed an urgency to reduce costs and rethink the sprawling company. In addition to lowering earnings targets by a third, the company Friday cut its forecast for 2017 cash flow by half from a July projection.

GE shares gained 18 cents in Friday trading to $23.76, after tumbling as much as 7% earlier in the day. The shares had fallen 25% this year, erasing nearly $80 billion in market value even as the stock market has surged to record highs.

The Boston company’s third-quarter earnings fell as it incurred hefty restructuring charges, reporting a profit of $1.8 billion, down from $2 billion a year earlier. Excluding restructuring charges and other items, adjusted per-share earnings fell to 29 cents from 32 cents, still well below Wall Street expectations of 49 cents.

Mr. Flannery is slated to update investors at a Nov. 13 meeting on the details of his strategic review. He has already been cutting jobs, research operations and executive perks, such as corporate jets. On Friday, Mr. Flannery said he planned to cut an additional $1 billion in expenses next year, bringing total reductions to $3 billion over two years.

Under Mr. Immelt, GE pivoted away from financial services that once accounted for the lion’s share of its profits as well as consumer businesses that made it a household name. It invested in energy markets and moved deeper into emerging economies. Two thirds of its employees and about 70% of its revenue are outside the U.S.

Mr. Immelt sold GE’s ownership of NBCUniversal and shrunk GE Capital, which was one of the country’s biggest lenders before the financial crisis. He also struck deals meant to diversify, acquiring Alstom SA’s power-plant business and merging GE’s oil-and-gas business with Baker Hughes , an oil-field-services provider.

But the company was under pressure from investors, including activist Trian Fund Management LP, to streamline operations and boost profits. GE, which had about 295,000 employees at the start of the year, is still one of the world’s biggest makers of jet engines, power-plant turbines, MRI machines and diesel locomotives.

On Friday, Mr. Flannery said he is looking to sell off about $20 billion worth of assets in the next 1 to 2 years. Mr. Flannery said the company has many strong divisions but also “a number of other businesses which drain investment and management resources without the prospects for a substantial reward.”

The company lowered its adjusted 2017 per-share profit target to $1.05-$1.10 from a previous view of $1.60-$1.70. Analysts currently expect earnings of $1.53 a share in 2017.

The company now projects cash flow from operating activities to be about $7 billion, a steep revision from the previous view of $12 billion to $14 billion. A big part of the drop is coming from the power division, which primarily makes turbines for gas and coal-fire power plants.

In an interview, Mr. Flannery said he was surprised with the results from the power business, GE’s largest, and blamed the former management of the division. He said the other divisions of the company were “quite strong” when looking at their orders.

“I’m disappointed in the power business. Deeply,” Mr. Flannery said, noting there was an overestimation of demand in the power market, along with too much inventory and not enough cost cuts to adjust to the pressures.

“We have not run the business well of late,” he said. GE expanded the division, now its largest by revenue, following the Alstom deal.

The drop in cash flow has raised questions about how the company will fund its dividend, pensions and capital investments. On Friday, Mr. Flannery said the current cash-flow projections aren’t going to be the norm at GE, but the company is looking to balance investing in growth and paying the dividend.

He said investors should think of 2018 as a “reset year.” He wouldn’t commit to the company maintaining its current dividend. Mr. Flannery previously had pledged the dividend wouldn’t change, but said Friday that his view is “continuing to evolve.”

“Expected bad. Got bad,” said analyst Scott Davis, CEO of Melius Research, noting the quarterly results raise questions about whether the company is fixable. “Pressure to break this up just went through the roof.”

GE cut $500 million in industrial costs in the third quarter and has reduced that annual spending by $1.2 billion for the year so far. Earlier this year, GE set a goal to cut $1 billion in such costs this year and next, under pressure from Trian, which recently gained a seat on the company’s board.

Mr. Flannery said he would look at potential changes to the board, which was mostly appointed during Mr. Immelt’s tenure.

“The board is big at 18 people, there is no doubt about that, and that is one of the topics being discussed,” he said.

Incoming Chief Financial Officer Jamie Miller said the company would simplify how it reports results. It will revise how it measures free cash flow to be in line with others in the industry with a “back to basics approach,” she said.

Mr. Flannery already has called on company leaders to review their divisions and plans to streamline the company’s global research efforts. That could include shutting down research centers in Shanghai, Munich and Rio de Janeiro, people familiar with the matter have said.

GE’s revenue jumped 14% to $33.5 billion in the quarter, up from $29.3 billion a year earlier. Analysts had expected revenue of $32.56 billion, boosted by the Baker Hughes deal.

Oil-and-gas revenue rose 81% from a year ago driven by Baker Hughes; without the new assets, revenue fell 7%. Revenue growth was mixed with aviation and health care businesses expanding, but power, lighting and transportation all shrinking. Transportation revenues dropped 14%.

Former Energy Trader Goes All-In on Bitcoin

J. Robert “Bo” Collins Jr. is among wave of traditional financiers looking to capitalize on rise of virtual currencies

J. Robert Collins Jr. spent most of the past 25 years trading commodities. He nearly went broke a decade ago in one of the biggest energy hedge-fund meltdowns, before raiding his retirement savings to make some of it back.

Now Mr. Collins, known as “Bo,” is making a big bet on something that makes commodity trading look almost tame: the roaring market for bitcoin and other cryptocurrencies.

Next month, Mr. Collins plans to open up to outside investors his new cryptocurrency fund, which he called Morpheus Asset Strategies after a character in the dystopian film “The Matrix.”

In March he put his own money into a portfolio trading bitcoin, other virtual currencies and initial coin offerings. In a sign of how these cryptocurrencies have taken off, he says the value of his holdings has risen more than fivefold since then.

“Virtual currency for me is a deep passion,” he said. “We’re just now beginning to turn it into a business.”

He plans for the fund to be part of a new firm focused on investing in blockchain technology called Renovatio Puerto Rico, which means “rebirth” in Latin and is based in the U.S. territory.

By embracing cryptocurrencies, he joins a small but growing group of traditional financiers who have become vocal proponents of an investment that many on Wall Street consider a dubious fad. J.P. Morgan Chase & Co. Chief Executive James Dimon recently called bitcoin a “fraud.”

Not everyone is so skeptical. Goldman Sachs has said it is considering starting a trading operation for bitcoin and other digital currencies.

Few investments have experienced more dramatic price swings this year. Bitcoin plunged 25% from its prior peak to $3,490 in September after China cracked down on domestic trading and exchanges. It has since bounced back and more, trading at an all-time intraday high on Friday of more than $6,000.

Mr. Collins is unfazed, recalling the wild swings that took place in 1996 when futures launched for the power market.

“I was there on day one and I lost money so fast it was crazy,” he said. For any new market, he added, “there’s usually radical volatility.”

There is an estimated $2.2 billion under management in funds that focus on cryptocurrencies, according to Autonomous NEXT. The vast majority of the 110 funds tracked by the research firm started up this year.

Some traders say digital currencies look enticing at a time when volatility in other assets, from stocks to bonds to commodities, has been muted. They consider the transition from trading commodities to bitcoin a natural move.

“Bitcoin appears to be on a cycle of growing maturity in the same way that I saw the crude oil market, the natural gas market, the metals market go on,” said Daniel Masters, a former oil trader who launched a bitcoin fund three years ago.

Mr. Collins, 52 years old, began trading on the floor at the New York Mercantile Exchange in cotton, crude oil and natural gas markets for Pioneer Futures. He then headed the natural gas trading desk at El Paso Corp., which was acquired by Kinder Morgan in 2011.

Looking to move on from trading, he joined the Nymex board in 2001 and was elected president later that year. He took over right as the collapse of energy giant Enron roiled markets. Shortly after, Mr. Collins helped launch the ClearPort electronic clearing service to mitigate counterparty risk, which was lauded as an innovative initiative for derivatives trading.

With commodity prices soaring, Mr. Collins returned to trading. In 2005, he launched a fund called MotherRock to trade energy derivatives.

The fund was up more than 20% its first year, but closed down a year later after losing more than $500 million from natural-gas bets, making it one of the biggest and most high-profile shutdowns ever by an energy fund.

Mr. Collins liquidated about $400,000 he held in a retirement plan to start another fund to trade energy arbitrage. That also closed when banks called on credit lines in 2007, Mr. Collins said.

He retreated to a family farm in Farmersville, Texas. There he discovered a white paper detailing bitcoin while surfing the web one night. In the midst of global financial instability, an alternative, decentralized currency didn’t seem far fetched.

Growing up in Plano, Texas, Mr. Collins recalls an early affinity for technology and electronics. His mother taught high-school computer science and his father worked at Texas Instruments .

His first job after college was at the Federal Reserve Bank of Dallas in the payments division, helping convert U.S. savings bonds from paper into electronic records. Seeing that transition helped smooth over doubts about the idea of virtual money, he said.

“It all synchronized for me,” he said. “It made sense.”

Spain Moves to Seize Control of Catalan Government, Call Regional Elections

Prime Minister Mariano Rajoy seeks to use measures to quell a push for independence in Catalonia

BARCELONA—Spanish Prime Minister Mariano Rajoy asked lawmakers to grant him unprecedented power to remove the leaders of Catalonia and temporarily control the region from Madrid, a forceful move aimed at bringing the separatist movement to heel.

Mr. Rajoy on Saturday said Spain’s central government ministries would administer the region’s agencies until new elections are called, a bold shake-up meant to quell Catalan leaders’ insurrection.

The prime minister will seek to convene regional elections within six months to bring in new leadership and put an end to Catalan leaders’ repeated defiance of the central government. The measures will focus in particular on oversight of security, public order and financial management, the central government said. It will also seek to restrict Catalan lawmakers’ ability to approve some laws. Separatist regional lawmakers approved an unauthorized vote on secession and later signed an independence declaration.

The region enjoys significant autonomy and officials in Catalan leader Carles Puigdemont’s government oversee the region’s own police force and health and education systems.

During a press conference, Mr. Rajoy demurred when asked how the central government would ensure that Mr. Puigdemont and his 13 cabinet members would obey the order.

Immediately after Mr. Rajoy announced the measures, a Catalan government spokesman said Mr. Puigdemont would attend a pro-independence rally in Barcelona that is now likely to become a mass protest against the central government’s move. Afterward, Mr. Puigdemont is expected to make a statement at 9 p.m. local time.

One of the targets of Mr. Rajoy’s proposed measures is Catalonia’s police force, a prized symbol of regional power. The 17,000-strong regional police force, known as the Mossos D’Esquadra, resisted Madrid’s orders to halt the referendum on independence earlier this month. A judge seized the passport of the Mossos chief earlier this week amid a sedition probe. The regional force has said the investigation is based on false accusations.

RELATED

Crisis Tests Spanish Premier’s Patient Approach (Oct. 20)

Spain Poised to Strip Catalonia of Powers (Oct. 19)

Middle-Class Catalans Drive Push for Independence (Oct. 11)

The central government is also seeking to administer Catalonia’s finances. Madrid already seized control of most of the regional government’s spending power in the run-up to the referendum to prevent Catalan officials from dedicating public funds to the independence vote.

Catalonia Vice President Oriol Junqueras said on Twitter that Mr. Rajoy and his allies “have not only suspended [Catalonia’s] autonomy. They have suspended democracy.”

The measures Mr. Rajoy announced Saturday were hammered out in recent days with leaders from two of the main oppositions parties, said the premier, a sign of the widespread political support for his bid to halt the Catalan independence drive. Spain’s Senate, where Mr. Rajoy’s center-right Popular Party has a majority, is likely to approve the measures in a vote on Friday.

The prime minister is invoking a two-sentence article from Spain’s constitution that hasn’t been used since the document was approved by Spaniards in 1978, during the country’s transition to democracy after the death of longtime dictator Francisco Franco. Summoning the sweeping powers of Article 155, Mr. Rajoy said Saturday, was a last resort.

“The government had to apply” the provision, Mr. Rajoy said during televised remarks. “We are applying this article because no government, I insist, no government in any democratic country can accept that the law is ignored, that the law is violated.”

Many Spaniards have watched bewildered as authorities in Catalonia, one of the country’s wealthiest regions, have pressed ahead in their bid to secede. A majority of Catalonia’s 7.5 million inhabitants don’t support independence, recent polls show.

- Powers of Catalan administration will be transferred to the central govt

Fed Chair Yellen: must keep our unconventional policy tools ready to be deployed due to "uncomfortably high" risk of short term rates dropping to lower bound again in the future 

As a result of the Great Recession, the Federal Reserve has confronted two key challenges over the past several years: One, the FOMC had to provide additional policy accommodation after short-term interest rates reached their effective lower bound; and two, subsequently, as we made progress toward the achievement of our mandate, we had to start scaling back that accommodation in the presence of a vastly expanded Federal Reserve balance sheet.

Today I highlighted two points about the FOMC's experience with those challenges. First, the monetary policy tools that the Federal Reserve deployed in the immediate aftermath of the crisis--explicit forward rate guidance, large-scale asset purchases, and the payment of interest on excess reserves--have helped us overcome these challenges.

Second, in light of evidence suggesting that the neutral level of short-term interest rates is significantly lower than it was in previous decades, the likelihood that future monetary policymakers will have to confront those two challenges again is uncomfortably high. For this reason, we must keep our unconventional policy tools ready to be deployed again should short-term interest rates return to their effective lower bound.

Germany’s flagship airline stands to benefit from its competitors’ troubles.

Another day, another European airline flies into storm clouds.

It has felt like that at times this year, as British low-cost and charter airline Monarch Airlines collapsed this month, following budget carrier Air Berlin’s bankruptcy filing in August. And that came after Italian flagship airline Alitalia went into bankruptcy in the spring, leaving it facing a sale.

Deutsche Lufthansa (ticker: LHA.Germany) has scored an upgrade to first class, so to speak, thanks in part to these flops by other carriers. Air Berlin’s unraveling is viewed as particularly helpful for Germany’s largest operator by traffic.

Yet a number of bulls say other factors actually will be bigger drivers. Several see Lufthansa’s stock price rising to 30 euros ($35.36) due to a range of tailwinds, implying a rally of about 20% from its recent price around €25.

Air Berlin’s downfall does provide upside, but only up to a point. Cologne-based Lufthansa has inked a €210 million agreement to take over a large part of the Berlin-based airline’s assets.

The deal “removes the risk of a new entrant disruptively running [Air Berlin] assets,” and it should also help firm up Lufthansa’s position as a go-to carrier, said a team of RBC analysts led by Damian Brewer in a recent note.

However, Lufthansa “will face likely distraction to clear regulatory hurdles and then in integrating these new operations,” Brewer and his colleagues say, adding that “little capacity effectively leaves the market, so the supply/demand backdrop is little changed.”

Their top reasons to buy Lufthansa include a key deal with pilots, the carrier’s reputation among flyers for Mercedes-Benz-like quality, and strong demand, thanks in large part to Germany’s buoyant economy. They have an Outperform rating on the stock and a price target of €30.

Lufthansa and its main pilots union signed a five-year agreement this month that ought to reduce costs and pension liabilities for the carrier. The pact was expected, but it’s another positive catalyst for the stock, said a team of Bernstein analysts led by Daniel Roeska in a recent note. They have lowered their year-end forecast for the carrier’s pension deficit to about €6 billion. They also have a target of €30 for the stock, which they upgraded this month to Outperform from Market Perform.

Even analysts who aren’t that bullish on Lufthansa offer a bit of praise for the big deal with pilots. The company’s pension deficit “will see some relief,” though it is “likely to remain a sizable overhang,” says a Morgan Stanley team led by Penelope Butcher that has a Neutral rating on the stock and a price target of €25.40.

Lufthansa’s valuation isn’t sky-high, even though shares have doubled this year, touching levels last seen in 2001. The stock trades at 6.3 times forward-year estimated earnings, above Air France-KLM’s (AF.France) 5.6 multiple, but below British Airways parent International Consolidated Airlines Group’s (UK:IAG) 7.4 and the U.S. Global Jets exchange-traded fund’s (JETS) 11.7. (About 85% of the ETF’s holdings are airline stocks, including Lufthansa.)

GERMANY’S FLAGSHIP AIRLINE still faces some challenges in the long run, but the Air Berlin developments have helped buy it time, according to the Bernstein analysts. The German market looks set to see more competition from Irish discount carrier Ryanair Holdings (RY4C.Ireland) and others, and fundamental issues will need to be revisited with the pilots union by 2022, they warn.

The medium-term outlook is “more muted,” with profit margins appearing on track to decline in the 2019 fiscal year, the Bernstein team says. Nonetheless, they “see the stars aligning over Germany for the immediate future.”

Lufthansa is among the carriers that have submitted bids for portions of the bankrupt Alitalia. Ryanair—another poster child for the European airline sector’s recent woes—also was moving toward making an offer, then backed away and signaled it wanted to focus on its cancellations crisis.

In any case, the potential sale of Alitalia has been postponed by the Italian government, pushed back from November to April. That aside, investors might not want to bank on the type of consolidation that has helped U.S. carriers boost their profits.

“The recent demise of Alitalia, Air Berlin, and Monarch have rekindled hopes that the European airline sector may, finally, be en route to more consolidation, providing better margins for investors,” the Bernstein team writes. “Sadly, we don’t think this is the case yet. The current market exits remove—at most—1.5% of total market capacity in 2018 and hardly make any dent in the longer-term growth rates.”

The bottom line: Lufthansa’s stock is worth a look, but not simply because the skies are less crowded.

IN EUROPEAN MARKETS last week, the main benchmarks mostly lost ground, with Spain’s IBEX gauge among the biggest decliners as tensions over Catalonia’s independence push flared up again.