Saturday, 20 September 2014

Micro Level Trends – Social Economic Indicators – Skirt Lengths and Car Colours...Fact, Fiction or Half-Truth Hyperbole ? (Pt 1)

The asset management industry and behavioural economists alike, through indicator selection, have long sought to become ever more certain about economic conditions and associated prevailing trends over the near, mid and long terms.

Quantitative Insights -

Depending upon the internal beliefs of seniors, a company's size and its associated general capabilities, it will seek-out as many conventional formal indicators as possible; spanning the usual metrics from central bank's inflation reports, the provision of (antiquated titled) 'non-farm payroll', consumer reports (such as the Retail Price Index), productivity reports (such as Purchasing Managers' Index) and of course policy statements from central banks and influential independent or quasi-independent government bodies (such as the OBR here in the UK).

However, critically furthermore, forecasters, commentators and investors, whether in the press, academia or deal directly within money management itself, seek to convince their audiences, clients and possibly themselves via the inclusion of additional “alternative indicator”s of the non-conventional formal and metric modeled kind.

Whilst distinctly modelled trend analysis itself has developed ever more so via the collection and availability of “big-data” from “big-corps” and even government agencies (spanning Tesco's ClubCard, Google's effective (and nigh-on 24/7) locational mapping of its users, and the commercialised availability of state intelligence) the desire for an ability to read the more implicit, softer dynamics of social trends, so as to gauge economic sentiment, remains as potent as ever.

By adding as many indicative inputs as possible, or by grouping a seemingly balanced mix of conventional and non-conventional inputs, general commentators and 'on the pulse' money managers are thereby considered as better informed given the number of “quills to their arrows, and arrows to their bow”. A sought after standing developed to both gain input insights, but also to boost perceptions of clients, readers and industry counterparts.

Qualitative Insights -

Today with the UK's green shoots of recovery appearing more and more healthy, the Financial Times' FM section - dedicated to fund management issues - quoted the words of one asset managers' upbeat mantra regards much improved consumer confidence levels garnered from the observation that more new cars have apparently appeared in the UK painted in brighter (ie happier and more optimistic) colours.

By now, this has become a hackneyed observation, very much like its precursor pertaining to the length of women's skirts.

Yet as with skirts, it seems that this is simply a belief system given, and may well be either at worst a popular misconception, or at best at least only partial truism.

These supposed economic indicators have no doubt been explored before by academic economists, academic sociologists, academics and amateurishly by practising money managers. But with next to nothing in the immediate public domain, this topic deserves greater investigation, albeit in a lightweight manner. 

With an obvious inclination to all things regards investment and automotive, investment-auto-motives has undertaken a very short analysis of the matter to see whether such popular beliefs have the true substance of repetition, or have arrived simply from over used rhetoric stemming from a singular instance.

This Part 1 quickly reviews the length of skirts, whilst the following Part 2 critiques the colour of cars.

Societal Observation -

Identifying the threads of mass social, mass consumer consciousness, and indeed the very much finer threads from narrow but influential social groups, has been a subject of analysis ever since its importance to the success of consumer capitalism was initially recognised. The first step forward perhaps Thorstein Veblen's 'The Theory of the Leisure Class', and its section on 'Conspicuous Consumption', which described the trickle-down trend consumption habits amongst the mass populace

[NB Long recognised is the concept of “Veblian pricing”, wherein the very price of an item / service denotes its apparent 'value', such stratospheric 'values' witnessed in art auctions, or as seen recently, through a billionaire's record order for a fleet of bespoke Rolls-Royce motor cars].

Thus there is a long history of various social observer types commenting upon the very important correlation between a nation's consumption habits within social trends and its relative burgeoning, stagnant or declining economic strength.

Sewing-Up the Matter -

Perhaps best known is the notional indicator of the length of hemline on women's skirts, which through the 20th century apparently rose and fell according to boom and bust.

This observation actually started at the beginning of the 1920s together with the general greater emancipation of women. Such 'freedom' gained by previous traversing of social taboos by activists such as Pankhurst et al, the female maintained 'home-fires' during WW1 translating to new voting rights, and new opportunities of industrial and commercial employment. These new 'freedoms' providing new purchasing powers which in turn provided a snowball of influential enterprise opportunities across clothing, home decoration and the rise of the status-seeking self through populist imagery. All reflected by the transition for younger ladies toward likewise freer (less constricted) clothing, promoted by populist weekly reads and evolving cinema (especially so in America, the UK and Germany). Hence the care-free idealism of the 'flapper girl' as seen wearing knee-length hemlines in supposed 'high society' column magazine pictures, in actuality translated as mid-shin length everyday hemlines for the new crop of shop-assistants, factory workers and administrative clerks. But more critically the era led to the popularisation of non-utilitarian fashion inspired wardrobes which generated consumption.

Thereafter, after the burst market bubble of late 1929 and the immediate major pains of the Great Depression, it was a return to modest, common-sense, multi-mode clothing, made necessary from reduced spending power, but also a wider adoption of a conservative middle class social mentality which itself visually railed against the previous frivolity and excess. For the most part hemlines staid put at calf-height, materials more durable.

Thereafter, WW2 promoted similar staidness, with “make-do-and-mend” of older clothes encouraged and in the UK the rise of 'Utility' style clothes (and furniture etc) which discouraged the superfluous stylistic use of excess valuable material. However, ironically it was also during this economically austere period that hemlines rose as a consequence of national Supply Boards intentional shortening the skirt length of female uniforms within women's war service branches (WRENS, WAAFS etc) so as to similarly minimise material usage.

This reality then undoing the theory of shorter skirts appearing during economic boom periods.

Post war society actually saw a return to longer hemlines, with reduced rationing of material and the renewed impact of fashion, especially that of French fashion houses such as Chanel and their 1947 'New Look'. Thus ironically the growth period of the 1950s actually maintained a longer skirt, though coupled with a more clinched waist. However, it was the actual usage of larger swathes of material itself, when once again publicised by a new set of fashion magazines, which helped the textile industries across Europe and the USA to re-expand and so power national economies.

It was the new youth and teenage culture, underpinned by the anti-norm pseudo-intellectual 'Beat Movement' of the late 1950s, with less restrictive shortened knee-length skirts offering greater freedom for activity which provided the new norm in fashions for the early 1960s.

With a new generation of baby-boomer women entering the workforce, it was this continued idea of female empowerment and self-owned sexuality – consumerism now the entrenched conduit for apparent self expression – which led to the miniskirt as promoted by British designers and models. (The Mini name obviously deriving from 'minimal' and supposedly partially influenced by the radical small 1959 Austin-Morris car).

Such fashion driven apparel had the effect of generally shortening general use skirt hemlines, as seen by wide adoption for most ages by the late 1960s and across the 1970s. Ironically, as with war-time, once again skirt shortening occurred during a long volatile period for financial markets and what was essentially a sustained period of economic stagnation for the UK, Europe and N.America; if not actual adverse austerity.

Conversely, like the better-off 1950s, much of the 1980s – an age of economic re-flourishing - saw a return of longer “classic” skirts, promoted by the stylistic “new romanticism” of the period and corporate 'power dressing' for women, spilling over into everyday fashions. Likewise the return of upper middle class motifs, which espoused notional personal prosperity, was best known via the general influence of The City brigade (along with their old-money establishment cousins on Wall Street), the wealth-led, and weekend pursuits lifestyle, encouraging a raft of aspirant followers fro the middle classes thanks to Laura Ashley et al.

The 1990s saw skirts rise once more with a return to youth culture orientation (played-out by Madonna etc), a return of counter-culture ideals (though commercially packaged), a notion of general 'democratisation' (centre-left led politics) and more liberal Euro orientated stylistic influence.

Conclusion -

Thus as demonstrated, the fact is that the history of hemline lengths actually runs counter to the popular belief that hemlines rise during prosperous periods.

It was only the appearance and social impact of the Mini skirt, commercialised by Mary Quant and others toward the tail-end of the initial post-war boom - and its surging mass adoption and general fashion impact before the arrival of late 1960s economic contraction, that has led to the evergreen misnomer that skirt lengths depict prevailing economic reality.

Nonetheless, that hyperbole has been deployed within the finance industry to the present time. And seemingly so with as much pro-cyclical, multi-decade revivalist vigour as the cultural re-assertions of the advertising and events sectors, in the rehashing of social synergies between Mary Quant's and Alec Issigonis' original, progressive output.

To Follow -

Part 2 follows, and similarly reviews whether indeed the colours of new cars bought by the public do indeed equate to the renewed zeitgeist of improved economic confidence.

Done so by briefly, and simplistically analysing the prevailing economic climates of the 20th century, and overlaying the most prevalent and popular car models manufactured, with (as best a possibly retrieved) the colours and shades that were offered.

As with the history and corollary of skirt lengths, was it actually the new and more optimistic 'new era' offerings of manufacturers themselves (closely linked to renewed availability of wholesale and consumer credit) which actually prompts new periods of a apparent consumer confidence, and so a positive snowball effect?

Ultimately, before delving into Part 2, it must be recognised that such apparent personal 'observations' will inevitably be deployed not as thorough socio-economic trend indicators (actually dependent upon sample sizes and scientific rigour) but as easily adopted back-fitted qualitative rhetoric. Rhetoric which notionally validates any emergent feel-good factor during a resurgent period based on improved quantitative 'dashboard' metrics.

Saturday, 6 September 2014

Companies Focus – The Global 11 Automakers - “Coupled Ratios” Analysis

The previous weblog provided detail of the sizable recent share-price falls for the most of the global eleven auto-makers (akin to many corporations). This auto-sector reaction stemming from a number of causes, including: (primarily) the Euro-centric market response to Ukrainian geo-political unease, partial reaction to Gaza fighting and the tail-off of Japan's own 'Abenomics' boost; whilst one US producer suffered market reaction to problematic operational legacy.

However, of these, it has been the 'European question' that has undoubtedly been most prolific, the previous combination of Germanic locomotive influence together with national-based short-term policy actions to support B2B and B2C consumption, ultimately running out of 'puff' leading to the recent 'dashboard indicators' of renewed economic stagnancy. Overall the previous boost effects of conventional monetary policy proving only short-lived.

Now, as expected, so as to fend-off the very real threat of deflation the “Draghi Put” has been announced. The ECB now set to undertake “unconventional policy”, following the largely successful footsteps of the USA, UK and Japan. This move consisted of the necessary blended effect of reduced base-rate, negative overnight rates for central bank 'cash warehousing' for major banking institutions and most potent, the effective cash injection that is QE via bank bond buying, so lowering yield rates and prompting investors into alternative asset classes; especially equities.

Whilst eventually an expected action by the ECB for an economically weary Europe – itself only part-way through its own necessary yet painful reforms - this is indeed welcome news for a broadly receptive financial audience: across capital markets' dealing desks, for the CFO's of large corporations, SMEs, new entrepreneurs, and eventually for its the trickle-down effect into the mass populace at that is European 'Main Street' at the regional level.

Thus it is precisely now that investment-auto-motives presents the intentionally (slightly) delayed “Coupled Ratio” Analysis.

Q2 2014 Positioning -

As is well recognised, 'Coupled Ratios' was formulated to coalesce the most popularly deployed investment measures across the four primary investment considerations; these being:

- Market Valuation Ratios
- Profitability Ratios
- Liquidity Ratios
- Debt Ratios

The first consists of P/E (price/earnings) vs P/B (price to book value). The second of Profit Margin vs RoE (return on equity). The third of Current Ratio vs Operational Cash-flow Ratio. The fourth of Total Cash vs Total Debt.

Resultant Outcomes -

Market Valuation Ratios:

For the majority of the global eleven auto-makers there has been little effective re-positional movement since the outcome of the first quarter.

The exceptions are PSA moving ever nearer operational break-even, so raising its P/E standing (this not quantified but theorised from more recent price increases over Q2), and Renault which has seen its previously overtly high P/E standing reduced by a mix of profit-taking from previous investors, its P/E still relatively high given the expectancies of both longer-term 'early-bird' stock-holders and latter buyers who recognised the latter-day effect of mid-term price rises as Renault's improved earnings both maintains share price levels but reduced the resultant P/E value, so drawing-in new batches of investors.

However, specifically regards the application of the conservative 'investment window' set by investment-auto-motives, PSA appears to be at long last moving into the very bottom of the frame, whilst Renault whilst now a more price attractive proposition, still sits at a heady P/E; by far the highest of the eleven manufacturers.

Interestingly, all the other VMs sit just 'fully valued' just within or just outside the investment window. All except GM and Ford, which respectively have overtly relatively high P/E and P/B values, a consequence of the present strong vitality of the US economy.

As has been the historical precedent Hyundai sits nearest centre-ground of the window (with its conglomerate discount), with the once closely aligned VW over successive quarters headed continually 'north easterly', now sat more amongst Honda, Toyota and FIAT; with BMW and Daimler on the window border.

Profitability Ratios:

Herein Hyundai, BMW and Toyota respectively sit well within the investment window, hardly moved from their Q1 status, whilst Daimler has slipped slightly in its P/E rating to now become positioned on the border. Likewise are static VW and Honda.

Outside of the frame, Ford improves its standing to head toward the border, seeing improved profit margins but reduced RoE in Q2. GM slips (given its recall problems) whilst Renault improves on both measures in a substantive positive move. FIAT however sees reduced RoE without improved profit margins over the Q2 period.

Liquidity Ratios:

Q2 results saw major shifts in overall liquidity for most auto-makers, only Hyundai, Daimler and Honda remaining virtually static, the former two well within the window, the latter sat on the border.

GM's previous strong standing as a cash generator and storer slipped notably to leave it positioned beyond the frame. Liquidity reductions were also seen at Toyota and BMW, but their previous very strong and strong standings allowed for such movement whilst still retaining investment proposition status.

Interestingly (thru' a tough Q2 in the USA) VW saw its operational cash-flow rise significantly (thanks to retained VW-Audi popularity in 'soft-landing' China) so boosting its strength within the window.
However, the greatest positive shifts came from FIAT and PSA, both previously in negative OCF territory, significantly advanced to respectively just within and well within the investment window. Likewise Ford saw a dramatic shift as the prime US market (and especially F150) generated cash, so much so that Ford moves (happily) beyond the window given its high Current Ratio, awaiting the internal reinvestment of the sums accrued together with debt pay-down.

Renault remains far outside the window, hardly moved demonstrating cash use for new projects CapEx.

Debt Ratio:

An improved cash position for GM, maintaining a stronger stance within the 1:2 (cash to debt) segment.

Hyundai and FIAT remain static on the transition-line between 1:2 and 1:3, so keeping their attractiveness. PSA jumps from previously outside of the window (ie beyond 1:4) to now sit just inside the 1:3 segment, whilst Renault stays static as its slightly less attractive immediate neighbour.

VW slips from the 1:3 border to the 1:4 border, on the edge of the investment window. Virtually static on the 1:4 line are Honda and Ford, whilst Toyota slips slightly with slightly increased debt.

Outside of the window are BMW and Daimler, the latter slipping notably

Results -

As is the norm, investment-auto-motives illustrates the number of 'investment window' appearances for each company.

Four Appearances:
Hyundai (strongly), Toyota (generally strongly), VW (weaker), Honda (weakly).

Three Appearances:
PSA (weakly).

Two Appearances:
BMW (strongly), FIAT (strongly), Daimler (weakly)

One Appearance:
GM (strongly), Renault (strongly), Ford (weakly)

Conclusion -

The depicted graphs, representative of matched and merged data sets, highlight the investment attractiveness of each of the global eleven players, utilising Q2 results and very recent stock price related data.

What is becoming harder to instinctively gauge - so making 'coupled ratios' more useful than ever - is the need to contrast and compare the auto-makers with the best availed global markets exposure. Exposure which encompass the a now nearly “naturally aspirated” US economy (after its own QE injection), and a soon to be 'direct injected' European economy, versus a still very prominent soft-landed China.

All are global players, and all will inevitably gain, but as will be seen, some will gain more so, and the seeds of commercial and investment advantage are plotted herein verses the winds of macro-economic change.