Thursday, 21 August 2014

Companies Focus – The Global 11 Automakers – Vis a Vis Recent Market Correction

Greenspan's use of the phrase “irrational exuberance” before 2008, has now become a hackneyed phrase almost seared into capital markets' mass consciousness.

However since 2009 bottom, whilst feverish in its first rebound phase, thereafter the ever rising main western stock indices in the USA, UK and Europe have experienced slower but still powerfully strong upward trajectories, but critically these have been logically generated trajectories given the impetus of US, UK (and Japanese QE) along with critically a largely positive “dashboard” of still fragile but confidence ratifying economic indicators.

Given the initial scale of the rebound, as critical has been the cautionary manner by which professional investment organisations have periodically “taken profits” so creating 'corrections', and critically utilised such price drops as re-buy opportunities; often so from an enlarging cash-pool from various client sources, the re-growth of private and company based pension scheme contributions a primary conduit.

For some months previously throughout May and June the financial press had been highlighting the danger of apparent irrationality of high averaged index P/E figures, though generally not stating how such high valuations had been heavily skewed by the “tech-story” effect, whilst ironically recognising the irrationality within the intrinsic dynamic of the web-tech sector itself. this effect obviously very much USA centric.

Nonetheless, across the western hemisphere, given that the 5 year rally has whilst endemically powerful also been largely conservatively driven, with it seems even the notional “early bird / catch the worm” speculators actually staying on-board for longer given the rising tide effect of what has been much reduced volatility and the general rise in most financial instruments given the massive amount of liquidity being force-fed then 'taper' drip-fed into US, UK and Japanese economies.

Given the success of previous QE programmes, juxtaposed against the EU's present contracted growth dilemma, it is almost unthinkable that the ECB would not now instigate its own closely monitored programme now that the painful but required path to economic reform is now under-way.

Exempting the obvious 'global agenda' vagaries of Wall Street's unflinching over-support for California's tech-sector, it appears that overall western 'real world' economic traction though slow is sustainable.

This exemplified by instances of corporate share buy-backs highlighting the manner in which large companies themselves seek to balance labour rates against CapEx against their own desire to build internal reserves given their own international M&A and organic growth ambitions.

This in itself an argument for general confidence amongst various investor types.

Of greatest obvious impact since 2008 have been periods of heavy geo-political headwinds, Europe suffering most with at first the 'sovereign debt crisis' of 2010-11 (itself presenting a golden buy opportunity) whilst over recent months the much increased social and military tensions across the buffer nation that is Ukraine and the Middle East (Gaza and Iraq) have undermined near-term confidence.

The Ukraine issue with its low probability but high impact long term potential to fracture the inter-relationships of Euro-zone member states immediately created concerns for EU - Russia trade relations, leaving Germany most exposed given its importation of energy and exportation of vehicles, industrial tooling and chemicals. This in turn undermining internal investment confidence across the German economic engine and the other core nations of France and The Netherlands.

Middle Eastern tensions are of more immediate but remote affect the US, given its close ties to Israel regards Gaza, and a desire to defend via proxy actions the flow of energy interests in the Middle-East. Though of less pronounced impact upon its own stock indices given the combination of homeland economic re-strengthening and exposure to many EM markets via its conglomerates.
Thus we note that European stocks have contracted most so over preceding months – see attached chart for the effect on Autos – potentially offering a new buy opportunity. That opportunity now seemingly availed with the easing of Ukraine tensions through consolatory words by President Putin.

As stated for many years now by investment-auto-motives, investors today sit within an unparalleled new world era of western rebuild, BRIC rebound and broad EM growth.

Furthermore, for the west, and Europe in particular, this economic process now effectively underwritten by administrative policies and actions given the still existent debilitating economic stresses which exists for much of the western populace: from Southern Europe's ex-middle class to the renewed social spark in Ferguson, Missouri.

Though presently socially unpleasant, it is within this continued 'society rebuild' context that investor confidence appears wholly sustainable.

And so to this crucial juncture.

Prior to the provision of 'Coupled Ratios Analysis', investment-auto-motives will simplistically convey the 'drop from the top' that has been witnessed amongst the 'global 11' auto-makers.

Price and % Drop

                  of of 20.08.14

GM                    $38.........$33.11 (-13%).......$34.57 (-9%)
Ford                  $17.75....$16.82 (-5%).........$17.36 (-2.2%)
FIAT-Chrysler  €9.00......€6.85 (-24%).........€7.20 (-20%)
VW                  €195.......€165 (-15%)..........€172 (-12%)
BMW               €95.50....€86.90 (-9%).........€88.55 (-7%)
Daimler             €70.........€59.50 (-15%).......€61.10 (-12.7%)
Peugeot*          €11.50....€10.00 (-13.5%)....€10.60 (-7.8%)
Renault             €72.........€59 (-18%)............€59.30 (-17.6%)
Toyota**         $130.......$116.70 (-11%).....$117 (-10)
Honda**          $42.........$34 (-19%)............$7.90 (-18.8%)
* Peugeot previous high measured within period after Dongfeng dilution
** Toyota and Honda measured from 'Abenomics' induced high

The attached chart illustrates the above.

It demonstrates how the 'Detroit 2' have remained relatively unscathed, GM's drop the internally created micro-consequences of the massive recall. European producers now climbing back from macro-surpression. Japanese having to re-climb primarily via operational efforts with reduced domestic assistance. S.Korean experienced no negative fall given upturn in S.Korean economy.