Last month we started a new series designed to identify macro trends and information we are following that might impact our thoughts on individual securities. Last month we highlighted global themes like the China vs. US trade war and global banking.
This month we will cover the following topics:
- US Automakers
- Signals from the US Yield Curve
- Small Stocks and the US Dollar
The US Automakers
US automakers are having yet another poor year with all announcing disappointing outlooks in recent weeks. After showing promise earlier in the year with a share price up over 30%, Fiat/Chrysler is now down nearly 10%.
New chief executives at Ford and Fiat/Chrysler have stated that success in foreign markets, particularly China, is key to their success. The new chief executive at Ford, and former executive of steel desks, has been greeted with a ½ billion loss on Chinese operations in the first half of the year while the new Fiat/Chrysler chief executive has recently said, “China is clearly a key priority for me in the coming weeks.” But what is the Chinese “bet’?
Tesla had a recent market capitalization of over 65 billion, sold just 100,000 cars in 2017, and has burned 8 billion in cash over the past 4 years. Better value might be found in the German automakers. The auto unit of BMW has generated over 20 billion in cash since 2014 and, sold over 2 million vehicles in the past year, while the entire company is valued around 55 billion dollars. BMW has made a push into electric vehicles, but perhaps the biggest question for all automakers, is who can win in China?
Electronic vehicle sales in China for 2017 totaled over 700,000 vehicles. While 5 Chinese companies account for the bulk of electronic vehicle sales within China, the WSJ reports a stunning 487 companies are competing. Recent subsidies are reported to be in excess of $15 billion with over $45 billion planned.
Within China, only 3 non-Chinese companies even have sales of any kind, those being Nissan Leaf, Tesla, and Denza. With a combined market capitalization of approximately $120 billion, US automakers may be very challenged to compete.
Toreador Explorer owns Asbury Automotive Group,Avis Budget Group and Allison Transmission. Toreador Core owns Borg Warner, Delphi Technologies PLC, O’Reilly Automotive. Toreador International owns Porsche Automobil Holding SE.
Small Stocks and the US Dollar
US small stocks, as measured by the Russell 2000 are up around 10% on the year. Notably, the upwards march in price appears to predate the rapidly escalating trade tensions. This observation suggests small stock strength might be due to other factors than the smaller exposure these stocks have to exports.
Over long periods of time, during periods of sustained USD strength, small stocks have performed well according to research from Perritt Capital.
Presently, US stocks appear to be the beneficiary, perhaps even the flight to quality asset, in a period of escalations trade tensions. Long US small stocks might be embedding a strong bet on continued USD strength.
Signals from the US Yield Curve
The difference in yield between the 2 and 10-year treasury, the “two-tens yield curve” is viewed as a reliable indicator of recessions. Since 1960, every recession has been proceeded by an inversion of this spread.
Saying “this time is different” has not been a good survival strategy in investing. But what is truly different, and what is the same? Since entering an era of low rates, Japan has not seen an inverted yield curve in nearly 30 years, a period including numerous recessions.
And, as pointed out by research by Variant Perception, the more highly sensitive “three month-ten year yield curve” looked like a reliable indicator in proceeding the last 8 recessions, but 5 recessions before that had no inversion.
Lastly, those looking for signals from the yield curve might want to watch the interest rate swap curve. Corporations and banks, lend and borrow at rates approximating the swap curve, not the lower and often distorted rates from the treasury curve. Fed governor Jerome Powell says there are no indicators yet flashing red, that does suggest they are indeed currently flashing yellow.
To view last month’s Unique Market Perspectives charts, click here.