Meeting Of Minds – August 2018

Published on: August 28th, 2018

In Raoul’s Meeting of Minds, he takes a deeper dive into the auto sector which he categorises as vulnerable on several fronts. He concludes with some actionable short trades in his least favourite single name stocks. Julian meanwhile, briefly examines the myth of excess returns available via EM carry before turning his attention to what will be a fraught and fractious autumn in Italy. Why do we care? Because Italy has the third biggest bond market in the world and has the potential to destabilise the Eurozone project once and for all.


  • AB
    Anthony B.
    1 September 2018 @ 10:37
    Julian, on page 26, you mention tempering your enthusiasm on being short EM due to institutional positioning. What variables and levels are you most focused on in assessing how much more room there is to run before they step in? Is it the Goldman Index or a U-turn in fed policy? The arguments laid out would suggest the EM sell off should continue at least through year end. Thanks to you, Raoul and the team(s) for so much food for thought!
    • JB
      Julian B. | Contributor
      6 September 2018 @ 21:24
      Hi Anthony sorry if there's any confusion but I haven't tempered my view on EM. Yes its true that EM bonds, especially in local currency have fallen considerably. But broad EM equities (EEM) are barely down 20% and typically falls 30-60%. As for the trigger for a bounce ultimately it has to be an about turn from the Fed and that will only occur if and when we get a sufficient sell off in US equities (so far US macro is too strong).
  • MB
    Matthias B.
    29 August 2018 @ 12:48
    and a question to Julian (and Raould can chip in as well if he wanted) on his previous constructive stand on gold in light of his FX views (strong USD): since the dollar started it ascend in mid April, gold sold off substantially (not as bad as the Lira or Arg Peso but worse than the Euro), Silver fared worse which may as well relate to its partial treatment as industrial metal (where copper and zinc faced strong downturns). If Italy was to worsen as you describe and further EM spillover occured, I would presume that gold remains vulnerable. At what point would you expect gold to eventually bottom and rally along the US dollar? the gold/silver ratio hit an all time high today and is probably multiple standard deviations away from a long term mean, would it make sense to rather buy silver than gold? tks again!
    • JB
      Julian B. | Contributor
      31 August 2018 @ 14:07
      Matthias I did some work on commodities for my institutional clients and the contrast between Gold and Silver is indeed extreme. In that sense it's one of my favourite "buys" when the dollar tops. As to when that happens is very simple. We need the Fed to reverse their tightening backing off hikes but more importantly QT. The trigger for that is simple. Lots of pain that starts to impact US stocks.
    • MB
      Matthias B.
      2 September 2018 @ 16:38
      tks a lot Julian.
  • MS
    Mark S.
    30 August 2018 @ 03:50
    Julian I have a question based on your tweet today. You wrote 'broad financial conditions keep easing'. Besides the stock market, how are you seeing this? Rates are going up as is the market, but is there a way you are seeing the easing besides the market? Second actions that could reverse this from watching you on other RV videos are Increase in US dollar, sharp hike in Fed Interest rate hike in response to surprise inflation #, sell off in bonds etc. But What about these countries with the currencies spinning out of control? Raoul mention USDCNY over 7 being the big one for him. But what about Turkey? SA? Argentina? Brazil? Australia? I realize these have a potential contagion but besides China is there another big one? If seems that EURUSD seems like it's a little unreliable as a marker breaking below but then well above 1.15? Thanks
    • JB
      Julian B. | Contributor
      31 August 2018 @ 13:31
      Hi Mark. So are you know a typical FC index contains an element for FX i.e. the $, short term rates, bond yields, credit and stocks. However, no 2 indexes are exactly the same. I like to use the Chicago Fed index for domestic US FC and the Goldman index, which has a higher $ element for "overseas US FC". Back in the spring, we looked at the 5 elements of FC and concluded that while the $ and bond yields had responded correctly the moves had been more muted than in previous fed hiking cycles i.e. they hadn't tightened FC much. That said, they had at least moved in the correct direction. The two elements that had failed to respond and indeed continued to ease were stocks and credit. I believe there are a number of reasons for this from QE to the Greenspan Put (why should the equity market be afraid of the Fed when they have their back) to the fact that Fed Funds are still very negative. At some point, this has to change and you have correctly identified the triggers i.e. the $, yields etc. As for countries overseas unfortunately as is typically the case when the Fed hikes they are going to be left to their own devices. The Fed won't ignore them completely especially as we saw in early 2016 when Chinese contagion forces Yellen to change tack. However, with nominal GDP at home running way above potential, they will have to keep tightening until something significant breaks and causes US stocks to drop sufficiently that they can stop.
  • sB
    sylvain B.
    31 August 2018 @ 03:28
    if Macro view on Auto then short the sector. Shorting Renault is a micro story and you will be short a deep value stock. This is why i wouldn't short Renault. Stock is down 11% YTD and 24% since April. Carlos Ghosn, CEO, just bought EUR7mios worth of stock at 71.50 euro (largest purchase ever). The stock is the cheapest among the peer group. Stock trades at 0.6X book, with a P/E of 4.1X and less than 3X EV/EBIT and boasts a dividend yield of 5% with a payout of only 20%. company generates eur1.7B in free cash flow or 8% FCF Yield Current market cap (21b implies) 0 value for Renault, as it is less than the stake in Nissan, Mitsubishi et Renault Finance. Renault and Avoztaz are currently valued on negative FCF to perpetuity. The company has EUR16B in cash on the balance sheet and could use it to pay a spec div or buybacks 14% held by French State than wants out. A Chinese group may be interested buyer of the stake. At current price I would be long Renault and short VW for ex
  • MB
    Matthias B.
    29 August 2018 @ 12:28
    well argued. questions for Raoul: since you are bullish USD, bearish EUR, would it not make more sense to short VW and Renault in Euro (besides that their main listing is in Europe thus provides better liquidity)? And given that the OEM suppliers normally face a bigger cycle than the manufacturers themselves, would it make sense to short european or US suppliers, such as Leoni/Schaeffler et al. ? tks a lot.
    • FD
      Fjodor D.
      29 August 2018 @ 14:44
      Fully concur with Matthias. I'd also be interested why those three car producers (all have come off 20% over the last weeks and are just OS) and not e.g.: GM or F? What be good to know if US car loans have fixed interest rate payments or variable ones.
    • JL
      J L.
      30 August 2018 @ 10:00
      If you short them in dollars you are actually going short EURUSD so that is what fits a bearish EUR view. I'd just short the most liquid stock and place currency bets separately elsewhere.
  • PD
    Peter D.
    29 August 2018 @ 16:41
    Great articles. I was struck by the apparent ill-health of the auto finance sector in the US set out in this article. Rather than looking to short car makers themselves, might there be merit in shorting finance companies with significant auto loan books in the US? If so, what sort of quality bias would you look for the loan book to have (if any): sub-prime, near prime or prime? Many thanks.
  • AS
    Alan S.
    28 August 2018 @ 19:46
    Okay, I'll ask the obvious: How does one buy a put on EURJPY? Researched it, and humbly I ask, besides futures contracts, is there a way?
    • SR
      Steve R.
      28 August 2018 @ 23:45
      It totally depends on your trading platform. Does it provide the ability to enter into FX option trades? I personally use Saxo, so it's literally right-click and select Forex Options Trade menu option.
    • JL
      J L.
      29 August 2018 @ 15:53
      easy on Saxo, no way of buying fx options on Interactive afaik, only options on XXXUSD futures
  • KJ
    Keith J.
    28 August 2018 @ 21:14
    As the millennials grow up and have kids they’ll want cars. No use calling an Uber in the UK with 2 kids unless they have car seats (they don’t). Not sure how strict laws are elsewhere but I suspect they may opt for safety anyway. This will of course be done on the never never but perhaps not with the luxury German names. Anecdotal, but I have numerous friends who were driving BMWs on finance 5 years ago but, now they have kids, are driving Hondas or Fords.
    • SR
      Steve R.
      28 August 2018 @ 23:47
      Totally agree with this. Just about every parent takes their kids to school in a car these days. Kids are expensive so parents trade down from the Audi/BMWs to Ford Mondeos etc.
    • JL
      J L.
      29 August 2018 @ 10:55
      UK has a very different dynamic to the south of Europe and even German cities. Better weather and (vastly) better public transport and cycling infrastructure means a car is not necessary for taking kids to school at all really. That said all of my friends with kids end up getting a car for weekend trips etc but as you say it is mostly budget cars (regardless of their income).
    • LD
      Lance D.
      29 August 2018 @ 11:23
      they don't want kids my daughter and her friends are horrified at the thought of having kids they see them as a waste of money ( i am always the first to confirm this fact with them too hahaha.)
    • LD
      Lance D.
      29 August 2018 @ 11:29
      however they are not to enthusiastic about car sharing & see uber as the lesser evil the big thing in my house hold when it comes to travel is the deal that can begot for public transport they really do kick the arse out of public transport .. baffles me i think they stink but hey what do i know huh?
  • DO
    Daryl O.
    29 August 2018 @ 06:56
    Again, 2 really good articles. Thorough but concise. Complexity to clarity. Thank you both.
  • TR
    Todd R.
    29 August 2018 @ 01:23
    I would really love an audio version of this. Would be perfect for commuting or while on a run.
  • JJ
    Josh J.
    28 August 2018 @ 21:36
    RV - can all the macro insiders research be distributed through videos? Or at least a short video accompanying each written piece?
  • JS
    John S.
    28 August 2018 @ 20:30
    Thanks for the update. Is there also the opportunity to short US sub-prime auto loan lenders or is that a knock on effect that will take some time to play out?
  • LD
    Lance D.
    28 August 2018 @ 12:18
    wow this italy thing is just a mind field so thanks for coming back to this..