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Episode 4: South Korean exports and German IFO and manufacturing

Episode 4- Part 1

How South Korean exports are affected by China’s slowing economy

Published on: November 19th, 2019 • Duration: 7 minutes

This week, we look forward to Thyssenkrupp’s upcoming earnings and how South Korea’s impending export numbers could be affected by China's economy. We also look back at last week’s U.S. retail sales data. Specifically, the strong data out of the auto sector and how this helped buoy Ford along with their positive earnings.

  • [00:00:04] Welcome. This is before and after the twice weekly markets show from Refinitiv. In this episode's before section, we will discuss ThyssenKrupp's, upcoming earnings reports and the pending South Korea exports announcements as they try to avoid a 12th straight decline. The after segment looks at the stronger than expected U.S. retail sales reports and what the data tells us about that. T  hyssenKrupp is having an existential crisis. The German multinational conglomerate has seen its stock price fall to 50 percent below the five year highs. Even after the Q3 recovery in global asset prices, the stock is down 13 percent year to date versus the German DAX index, which has gained 25 percent. The legendary company, a merger of Thyssen AG and Krupp, can trace its history through those companies back into the eighteen hundreds and today is divided into six hundred and seventy subsidiaries worldwide. With word that ThyssenKrupp has been shopping their 16 billion dollar a year elevated division, it's staggering that a company as storied as this has had no better survival plan than selling prized assets to cover cash losses and pensions. The unsustainable business model has even caused concern in the German government, as the proud national entity has had cash losses in 10 of the last 13 years. Even as, according to GDP data, Germany has avoided recession, ThyssenKrupp finds themselves squarely in the center of the manufacturing sector slowdown. Investors have to ask if they want to be long in a business that has few positive prospects and no discernible business plan other than selling off its only pieces of value to stave off the inevitable. If you are a trader in a rental position for weeks or months, you should consider these points. Even though the stock price is down 13 percent on the year, it has bounced 40 percent off its lows thanks to the DAX climbing the wall of worry on the fuel of the global equities liquidity frenzy. This should be classified as a higher risk pre earnings trade than usual because of the stretched decline over two years, down 64 percent and the recent bounce since August lows of up 40 percent. German manufacturing readings have been horrific and have yet to stop their downward acceleration. The most likely scenario is that the ThyssenKrupp earnings are going to reflect this and it should be a very serious wake up call for the DAX and for investors in Germany as a whole. This is the rare case that it may be the wisest course of action to play it safe and wait for the results to hit the tape. A big miss could potentially see a double digit single day decline. But the good news for those itching to short is that there should still be some meat on the bone to pick at, especially if you can ride out any end of year squeeze up from the DAX. A long DAX short ThyssenKrupp pair seems like the most solid play. The second before segment is about Korean export orders. With our Refinitiv data in hand, we will explore some scenarios should that number join the recent rebound in global manufacturing data points and help spur on Korean equities. Being Korea's largest trade partner, the slowdown in China has played havoc on the Korean economy. Growth in Korean export orders has been hovering around their 10 year lows of minus 20 percent levels, which have only been exceeded during the great financial crisis and the Korean equity market is 16 percent below its two year highs. Registering at minus nineteen point five percent, last month's Korean export orders was the 11th straight decline and truly demonstrates a drastic slowdown. The largest export sector of the Korean economy, semiconductors, was off by a staggering 29 percent last month, year on year. The stocks in the sector worldwide are reflecting optimism that we have seen the bottom of the cycle. Yet the Korean equities index is one of the weaker indices in the world and only up four point eight percent on the year and slightly down if currency adjusted in U.S. dollar terms. This country's equity market is ripe for bottom fishing on the rebound in global trade. Considering the very real issues China is facing with Hong Kong, there will be an appetite for Asia ex China investments and South Korea is well positioned to receive that flow. Although, the massive Saudi Aramco IPO may divert funds from across all of the emerging market space to fund that listing. Should the export data surprise much weaker, there is a good chance it's the semiconductor sector that is dragging it down. Consideration should be given to being long in the EWY, the South Korean ETF, versus a short in the EWT, the Taiwanese ETF, which is also extremely exposed to semiconductors. EWT is within striking distance of its yearly high and has crushed the EWY this year outperforming it by twenty two point three percent. Look for the spread between these two to revert to the mean. Happy holidays and may all the retail sales be upon you. In today's after segment, we find that October retail sales came in stronger than expected, landing at naught point three versus the expected nought point two gain. This is the start of the true retail season and Black Friday will dictate how strong a year end rally we get. But in the meantime, the gain came on the back of a big uptick in auto sales. Auto sales gained nought point five percent after last month's slump of minus one point three percent. Last episode, we discussed opportunity around Ford. As our Refinitiv chart shows, Ford opened up strong, up 1 percent on the announcement. You will want to see a continuation of buying on higher volume before you believe that this isn't being discounted as a one off number. We should also note another aspect in the overall number, internet sales. The reported number was a double digit gain, up 14 percent year on year, reflecting our anticipated performance even from old school retailers like Wal-Mart. In a previous episode we discussed Walmart scant room for error and maintaining the dedication to taking on Amazon in the one day fulfillment e-commerce arena and pointed out that they needed to maintain their 35 percent growth in that area. Walmart blew through that estimate and reported a massive 41 percent increase in online sales. This should allow Walmart to continue its stellar price performance, at least through to the end of the year. There you have it. A lot to look forward to and a good look back. That's before and after twice weekly from Refinitiv. Be sure to share, like, subscribe and click the bell for notifications. I'm Jamie McDonald. Thank you for watching.

Episode 4 - Part 2

How the German IFO and manufacturing PMI indicates recession

Published on: November 22th, 2019 • Duration: 7 minutes

This week we examine the German IFO Business Climate Index and Germany’s Manufacturing PMI to demonstrate how this might hurt the global economy. Additionally we discuss more on Thyssenkrupp and how their losses might be bigger than they are now.

  • [00:00:04] This is before and after from Refinitiv. I am your host, Jamie McDonald. Today, we explore possible positions and plays in the German and in the US markets as we look at the upcoming German Ifo Business Climate Index and the US Markit Manufacturing PMI. Let's get right into our before segments. Produced by the Ifo Institute of Economic Research in Munich, the Ifo Business Index is a closely followed indicator of economic activity in Germany. Over the last two years this indicator has plummeted from a 20 year high to a 10 year low, last seen during the euro crisis of 2012. Long viewed as continental Europe's key economy, Germany has been reeling in the face of the global manufacturing slowdown and decline in auto sales. With their economic fortunes tied directly to global trade and with particular exposure to China's growth, we've already seen many key German economic metrics collapse. The PMI, which we've highlighted in previous episodes, is treading in recessionary territory. Even having bounced off their summer lows of minus seventy four basis points, German bund yields remain deeply entrenched in negative territory. Stocks in Germany, however, have been pricing a reflation trade, outperforming other key indices like the S&P and the FTSE 100. But with the DAX's scorching second half performance in 2019. An uptick in the Ifo business expectations number is needed to keep this momentum and show that the global manufacturing slump is beginning to turn. Our Refinitiv chart shows us that the DAX had been tracking Ifo business expectations until late 2019, when the index suddenly raced to the upside while expectations continued to plummet. Equity investors may have gotten ahead of themselves or maybe they are pricing for an imminent bounce in the data. Consider that an in-line reading will not move the needle because global equity markets are still in end of the year rally mode. Fear of missing out will continue to climb as the year grows short. A big miss and DAX investors maybe have a moment of clarity and profit taking begins. But if all the other global markets are still in their own risk on mode, profit taking on a poor figure will not last long. If investors are holding their breath awaiting the German business climate numbers, they will not be getting any relief waiting on the US manufacturing numbers. We spend a significant amount of time looking at manufacturing data from across the globe because it's the canary in the coal mine in every place that recession has taken hold and the US Markit manufacturing PMI is upcoming and worthy of investor focus. Unlike the more closely followed manufacturing ISM, the US Markit manufacturing, while having weakened, has held above the expansion contraction line of 50, recently bouncing off a low of 50.3. Investor fixation on manufacturing is justified because of the global slowdown across data points. It has even sparked a debate about which of the ISM and PMI is more valid. This data point will really matter if it confirms the ISM's drop below 50. Despite last month's firm 51.5 reading, the indicator is still flirting with danger and only implying 1.5% GDP growth at this level. To reiterate, 50 is the magic number with PMI. Above 50 and the economy is expanding below 50... not so good. 400 key private sector companies are surveyed on changes in business volumes such as output. There are no sentiment based questions or backward revisions. The number is the number. Last month's report of 51.5  put in a bottom on the US two year yield. That announcement on November the 1st saw a pop of 7 basis points, which is a significant move for the two year. The scenarios look like this a miss below 50 and most likely the entire month's yield rise evaporates in an instant and challenges the 1.5% level on the two year. A strong in-line number or higher would be well-received by a market concerned with damage to the real economy that trade tensions have set in motion. Reuters and other estimates are calling for a 51.4 to a 51.5 and this should see two year yields back above 1.6% building off the near-term rise. Future Fed actions are in the balance. So expect the bond market to react the most on this number as they try to guess the Fed's next move. A decent setup going into this number would be to go long the US banking sector via the XLF ETF. A miss would kill yields, especially short duration, potentially only steepening the yield curve, very bullish for banks and should have a limited effect on the stock market as a whole. While a strong number would be bullish for the broader market and those passive flows should mitigate any sector negativity. In Tuesdays before segments we outlined the difficulties that ThyssenKrupp was facing. The company had been underperforming the German DAX year to date. Even after the H2 rally, the stock is still 50 percent below its five year highs and its results won't do much to change that outlook. It is going to be a bumpy ride for CEO Martina Mertz, who only took the helm in October. The third CEO in the last two years, Mertz, announced that the company would suspend its dividend payment from next year and the share price promptly plummeted over 10 percent in the first few minutes of trading. Well, they are going to need to hold onto all the capital they can because Ms. Mertz also announced that the fiscal year losses to the end of September had widened to 304 million euros from 62 million euros the year before. These losses are only expected to worsen as the company will have to soak up yet another round of restructuring costs. Remember, they are already planning to sell off one of their crown jewels, the 16 billion a year elevator business, one of their few profitable arms in order to cover cash losses and their pension deficit. And the outlook is not good. Next year's free cash flow will probably drop below this year's already abysmal levels. We should expect this stock to underperform the broader DAX index. It may feel like we've missed a decent chunk of underperformance with the initial drop, but there's plenty more juice in this one given that the shares are still 30 percent above the 2019 lows. There have been nascent signs of a rebound within the broader German manufacturing base, hence the focus on the German Ifo earlier in the show. But this is a company that may not be able to benefit until a full restructuring or breakup has been completed. This has been before and after from Refinitiv. Be sure to like share, subscribe and hit the bell for notifications. 

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