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Today’s Featured Topic

BIG AUTO Faces New Headwinds, Reinforcing MRP’s Short Autos Theme

Summary: The world’s largest economies are engaged in a trade war, and auto makers are getting caught in the crossfire. The industry also faces a slew of other problems which will be hard to overcome. 

The auto industry’s headwinds are getting stiffer by the day, reinforcing MRP’s Short Autos theme. A confluence of factors including shifts in consumer preferences, rising interest rates, the proliferation of mobility services, and an escalating global trade war that could push car prices higher. Consequently, we expect vehicle sales to slow this year and over the next several years.

The sedan segment appears to be the weakest within the broader industry. This year, car sales are on pace to be the slowest since 1958 as more Americans flock to light-trucks, a category that includes SUVs, pickups and minivans. Just five years ago, U.S. vehicle sales were evenly split between cars and light trucks. Now, the sales ratio is more than 2:1 in favor of light trucks.

That shift puts manufacturers with car-heavy sales mixes at a big disadvantage. Light trucks will account for 75-80% of U.S. vehicle sales by 2025, as even upscale auto buyers are feeling the lure. Indeed, at least half of all full-size pickups are now being sold as luxury-oriented models.

The resulting rapid growth of the luxury truck and SUV segment has substantially increased U.S. carmakers’ share of domestic sales of models with an average price of $60,000 or more, at the expense of companies like Mercedes-Benz, BMW, Lexus, and Porsche.

Still, although total vehicle sales in the U.S. were up 1.8% during the first half of 2018, compared to the same period last year, the increase was due to low-profit sales supported by rebates and subsidized leases. In fact, retail sales would be down if it weren’t for these rising incentives.

Meanwhile, rising U.S. interest rates means the monthly payments on car loans will also go up, which could disincentive some buyers and contribute to slower sales.

Mobility services create another drag. More consumers are embracing ride-hailing and ride-sharing services around the world to the extent that traditional automakers anticipate a major erosion of their core business in the years to come. Per KPMG, 59% of auto executives agree that half of today’s car owners will no longer want to own a vehicle by 2025.

In response to this new threat, the largest manufacturers are creating mobility units within their organizations and launching their own car-sharing services. These include Volvo’s M, Daimler’s Car2Go, BMW’s Drive Now, GM’s Maven and VW’s all-electric car-sharing platform WE, which will launch next year. The rise of mobility services not only threatens the classic business model of Big Auto, it is also especially bad for traditional car rental companies such as Avis, Hertz, Enterprise, and Alamo.

Then there is the big X factor of China/US and EU/US tariffs to consider. The EU currently imposes a 10% tariff on all car imports, while the U.S. imposes a 2.5% duty. Unless the EU is able to strike a deal that reduces or removes its tariff on imported U.S. vehicles, President Trump may increase America’s border tax on European cars from 2.5% to 20-25% as he has been threatening to do.

But, securing a European deal on U.S. autos is complicated because WTO rules forbid countries from signing bilateral deals covering only specific sectors. If the EU circumvents this rule by removing its tariffs on all car and component imports, regardless of the country of origin, the region risks getting flooded with cheap Chinese car parts.

Hiking U.S. tariffs tenfold would hurt German car brands like BMW, Mercedes-Benz, Audi and Porsche which have enjoyed great popularity among Americans and helped Germany run a large trade surplus with the U.S. Germany’s automakers have long wanted to eliminate EU/US car tariffs.

Smaller European manufacturers are particularly exposed to higher U.S. tariffs because they typically don’t have factories in America, a huge market for luxury cars. Larger European luxury manufacturers such as BMW and Daimler have U.S. factories, but still rely on open borders. Typically, they make SUVs in the U.S. and sedans in Europe, and ship them back and forth as demand requires. Although BMW makes more cars than it sells in the U.S., it will still suffer in a trade war because they are largely not the same cars.

Further East, China announced in May that it would reduce tariffs on imported cars from 25% to 15%. But cars originating from the U.S. won’t be among the beneficiaries because Beijing just imposed an additional 25% tariff on U.S. auto imports this Friday in retaliation to U.S tariffs on billions worth of multi-sector Chinese goods. So while car companies that import vehicles from Europe or Japan will have to pay a 15% tax, those that import from the U.S. now face a stiff 40% tariff if they want to sell in China, the world’s largest car market. Ford Motor (F), Tesla (TSLA), BMW (BMW) and Mercedes-Benz maker Daimler (DMLRY)—which build premium sport-utility vehicles in the U.S. and ship them to China—stand to suffer the most. They will be forced to charge consumers more, or absorb the added costs, as their rivals take advantage of the reduced tariffs to lower prices. One beneficiary of the lower tariff rate for example would Audi (NSU), which only exports cars built in Europe.

Tariffs aren’t the only problem for U.S. car makers in China.They could soon find their new product models at the bottom of China’s regulatory pile for things like safety approvals, or their state-owned Chinese partners might shift resources toward European joint ventures instead.There’s a precedent for this sort of maneuver by China. During a dispute with Japan over contested islands in 2012, Japanese car makers experienced a 10% drop in their Chinese market share within a few months. A similar shadow strategy this time around could be a big problem for companies like General Motors, which now sells more vehicles through its China joint ventures than in the U.S.

All the factors above point to a tough environment for the auto industry going forward. MRP is therefore reaffirming its Short Autos theme. Investors can gain exposure to the theme via the First Trust NASDAQ Global Auto ETF (CARZ). In the nine months since we launched the theme on October 12, 2017, CARZ has dropped 10.5% while the S&P 500 (SPY) has risen 8%.

Here are links to reports MRP has previously published on the industry:

We’ve also summarized the following articles related to this topic in the Transportation section of today’s report.

  • Autos: Car sales set to plummet to 60-year low
  • Autos: Auto Sales Rise in 1st Half, but Analysts Warn of Turbulence 
  • Autos: Natural gas engines could have a very big role to play in the future of transport 
  • Autos: The EU Has No Easy Answers to Trump’s Car Tariff Threats 
  • Autos: Volvo has launched a mobility company for on-demand car access
  • Autos: Jaguar Land Rover says hard Brexit will cost it £1.2bn a year


Chart: Automobiles (CARZ) vs S&P 500 (SPY)

Other Disruptive Change

Economics & Trade

  • CEE: Central Europe’s Goldilocks economies
  • Saudi Arabia: Doubts Grow Aramco IPO Will Ever Happen
  • Trade Wars: US, China hit each other with $34 billion in tariffs
  • Trade Wars: U.S. Industries Fear Worst Is Yet to Come From Trump Tariffs
  • Trade Wars: Chinese Tariffs Hit Trump Counties Harder
  • Trade Wars: Retaliatory tariffs taking toll on Hershey, Campbell Soup and other CPGs


  • Digital Assets: Swiss Stock Exchange Operator is Launching a Crypto Assets Exchange 
  • Digital Assets: South Korea is Officially Recognizing Crypto Exchanges as Regulated Banks 
  • Digital Assets: South Korea Will Officially Legalize Cryptocurrency and Blockchain-Based Industries
  • Payments: An Isolated Country Runs on Mobile Money 

Manufacturing & Logistics

  • 3DP: GE files patent to trace 3D printed parts with blockchain


  • Quantum: Synthetic Diamonds Lead Princeton Team to Quantum Computing Breakthrough


  • Aerospace: Blue Origin Plans to Begin Colonizing the Moon No Later Than 2023
  • EVs: VW announces new all-electric car-sharing platform ‘WE’ to launch next year


  • Oil: Big oil is sowing the seeds for a ‘super-spike’ in crude prices above $150, Bernstein warns

Biotechnology & Healthcare

  • 3DP / Bioprinting: Towards a 3D printed human heart
  • MedTech: Smart bandages designed to monitor and tailor treatment for chronic wounds 


  • Commodities: Here’s how the commodities sector performed in the first half of the year

Joe Mac’s Market Viewpoint





CAPEX Booms!

The Federal Reserve has said for years that it wants to get inflation in the U.S. back to 2% per year. Some indicators are already showing inflation rates higher than that. But, the Fed persists with its fixation on the core personal consumption expenditures (“PCE”) deflator as a superior measure. That number has been stuck below 2% since May 2012. The trend of the inflation data, however, may be changing soon.

Joe Mac’s Market Viewpoint: CAPEX Booms! 


Other Viewpoint Reports

Joe Mac’s Market Viewpoint: The Inflation Complication 

Joe Mac’s Market Viewpoint: A Review of MRP Themes 

Joe Mac’s Market Viewpoint: The Coming Value Rotation 

Joe Mac’s Market Viewpoint: Beyond the Bond Bubble 

Current MRP Themes






Autos (S)


Electric Utilities (L)






Long-Dated UST (S)


Defense  (L)


Industrials (L)




Materials (L)


U.S. Financials & Regional Banks (L)


ASEAN Markets (L)




Oil & U.S. Energy (L)


France (L)


Greece (L)




Saudi Arabia (L)


Palladium (L)


U.S. Pharmaceuticals (S)




Gold & Gold Miners (L)


Robotics & Automation (L)


Video Gaming (L)




Lithium (L)


Steel (L)


Value Over Growth (L)



Solar (L)




Obesity (L)


Major Data Points







US Stocks Close Higher on Friday

Wall Street closed in the green of Friday 6 July 2018, as US non-farm payrolls climbed by 213 thousand in June of 2018, following an upwardly revised 244 thousand in May and well above market expectations of 195 thousand, with the jobless rate rising to 4 percent from 3.8 percent in the previous month. TE



US Trade: Imports Rise 0.4%; Exports Hit Record High; Trade Deficit Smallest in 1-1/2 Years

Imports of goods and services to the US increased USD 1.1 billion from a month earlier, or 0.4 percent, to USD 258.4 billion in May 2018. Goods imports rose USD 1.1 billion to USD 210.7 billion. Imports of services decreased USD 0.1 billion to USD 47.7 billion. On a non-seasonally adjusted basis, imports grew from China (14.6 percent), Canada (6.9 percent) and Mexico (4.8 percent), but fell from Japan (-3.7 percent) and the EU (-0.2 percent). TE

Exports of goods and services from the US rose USD 4.1 billion from the previous month, or 1.9 percent, to a record USD 215.3 billion in May 2018. Goods exports increased USD 3.7 billion to USD 144.9 billion. Exports of services increased USD 0.4 billion to USD 70.4 billion in May. On a non-seasonally adjusted basis, exports rose to Japan (5.9 percent), Canada (4.4 percent), the EU (4.3 percent), China (3.3 percent) and Mexico (1.2 percent). TE

The US trade deficit narrowed sharply to USD 43.1 billion in May 2018 from a revised USD 46.1 billion in the previous month and below market expectations of USD 43.7 billion. It was the smallest trade gap since October 2016. TE




US Jobs: Jobless Rate Rises to 4%; Wages Rise Less than Expected; US Economy Adds More Jobs than Expected

The US unemployment rate rose to 4 percent in June 2018 from 3.8 percent in the previous month, which was the lowest since April 2000 and above market expectations of 3.8 percent. The number of unemployed persons increased by 499,000 to 6.6 million. TE

US average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents to USD 26.98, or 0.2 percent, in June 2018, following an unrevised 0.3 percent gain in May and slightly below market expectations of a 0.3 percent rise. TE

Non farm payrolls in the United States increased by 213 thousand in June of 2018, following an upwardly revised 244 thousand in May and well above market expectations of 195 thousand. Job gains occurred in professional and business services, manufacturing, and health care, while employment in retail trade declined. TE



Soybeans Prices Surge

Soybeans increased by 2% to 850.66 USd/Bu. TE



Coffee Prices Surge

Coffee increased by 2% to 109.2 USd/Lbs. TE


Other Disruptive Change





Economics & Trade

CEE: Central Europe’s Goldilocks economies

JLR is just the latest carmaker to come to Slovakia. VW arrived 27 years ago, followed by Kia and PSA. The firms together churn out over 1m cars annually, more per head of population than any other country. The new JLR factory gives a fair picture of Slovakia’s, and more broadly central Europe’s, model of development. First, it was built with foreign capital and largely by foreign contractors. Second, it depends on customers in economies to the west slurping up goods made relatively cheaply in the hinterland. And third, government support was essential.

EU funds boost investment in infrastructure that appeals to foreign investors, like roads and rail. Even in Poland, the region’s biggest and most diversified economy, this money matters. It will be nearly 3.5% of GDP and 10% of public spending each year until 2022.

Countries from the Baltic states in the north to littoral Black Sea states have become considerably richer over the past two decades. GDP per person in the Czech Republic is now close to that in Spain. Bulgaria and Romania are much poorer, but managing to win investment and grow, too.

The challenge for these countries is to keep closing the income gap. The next stage of development is bound to be harder, requiring more productive firms, more private capital and more skilled labour. It is not clear that central Europe is ready. Economist


Saudi Arabia: Doubts Grow Aramco IPO Will Ever Happen 

The IPO of Aramco was meant to be the cornerstone of the kingdom’s plan to be less reliant on oil. It would create the largest public company in the history of capital markets. Yet doubts have crystallized in recent months. Saudi officials and people close to the process say the company and the country simply aren’t ready for an IPO that could raise $100 billion but also bring unprecedented scrutiny to the kingdom’s crown jewel.

Until recently, despite the delays, work on the IPO had appeared to be progressing, if slowly. For months bankers and advisers worked with the company and with government officials to ready the company for the IPO, a staggering task that involved figuring out how to disentangle the state company from the government and from other state-owned entities.

But Oil prices have more than doubled to nearly $80 a barrel since Prince Mohammed floated the idea of an Aramco IPO, and the Saudis have also raised billions of dollars by selling sovereign bonds to foreign investors. The Saudis raised $17.5 billion in their first-ever global bond issuance in 2016 and have since done several more. Saudi Arabia has also shown it can make economic and financial changes without the impetus of the IPO. For instance, this year its stock market has secured inclusion on key indexes that is estimated to bring billions of investment into the kingdom. WSJ


Trade Wars: US, China hit each other with $34 billion in tariffs

The U.S. imposed 25% duties on $34 billion worth of Chinese imports Friday morning, following through on a proposal in June to subject more than 800 products to duties. Tariffs on another $16 billion in goods is scheduled to take effect in two weeks, for a total of $50 billion.

China responded swiftly with retaliatory tariffs of $34 billion on goods including soybeans, pork and electric vehicles. The country’s Commerce Ministry said the U.S. has “ignited the largest trade war in economic history.”

Trump said the U.S. could target an additional $200 billion in Chinese goods, followed by another $300 billion — bringing duties on a total of $550 billion Chinese products, which is more than the $506 billion the U.S. imported from China in 2017.

While U.S. tariffs levied against Canada, Mexico and the European Union were justified for national security reasons, the dispute between the U.S. and China revolves around technology and theft of intellectual property. Businesses have acknowledged the need to send a message to China about its technology practices, but most disagree that tariffs are the right away to go about it. SCDive


Trade Wars: U.S. Industries Fear Worst Is Yet to Come From Trump Tariffs

U.S. companies for months bemoaned the tariffs on Chinese imports that will take effect Friday. Now they fear the worst is yet to come in an escalating confrontation with Beijing over trade. Some businesses have tried to persuade the Trump administration to back down by saying they’d be left with no choice but to consider reducing production, firing workers and even shifting operations out of the U.S. to account for the added costs from import tariffs.

SEMI, which represents semiconductor companies and others in the manufacturing supply chain for the electronics industry, estimates that the initial round of tariffs will increase costs for its members by between $20 million and $35 million. The second list of $16 billion in goods — which is more heavily focused on technology products — could produce a hit of at least $500 million. The American Chemistry Council estimates that the second wave of promised tariffs will affect $2.2 billion in imports of chemicals and plastics from China and $5.4 billion in U.S. exports to China from retaliatory duties.

The Trump administration did remove some products from an initial tariffs list after companies and businesses groups objected, but the list of $16 billion in goods targeted for tariffs include Snow Joe tillers, garden cultivators and log splitters, and imposing duties only means higher prices for consumers and added cost and uncertainty for businesses. B


Trade Wars: Chinese Tariffs Hit Trump Counties Harder

The U.S. tariffs on China will initially hit about $34 billion of goods, with plans in place to raise that total to $50 billion. The tariffs will fall mostly on Chinese aerospace products, information technology, auto parts and medical instruments. Beijing is retaliating with tariffs on $34 billion of American goods, aimed at farm products, cars and crude oil.

Beijing’s retaliation will affect huge swaths of the American heartland. The retaliatory tariffs will fall especially hard—affecting more than 25% of a county’s economy—in nearly 20% of the counties that voted for Trump, affecting eight million people. Only 3% of the counties that voted for Democrat Hillary Clinton, with a total population of 1.1 million, would be so heavily hit.

U.S. regions with more than 25% of their economy affected by the Chinese tariffs are likely to feel a painful fallout if the tariffs remain in effect. Industries such as soybeans in the Great Plains, auto manufacturers in the upper Midwest and oil-producing regions in the Dakotas or Texas will be among the most affected. WSJ


Trade Wars: Retaliatory tariffs taking toll on Hershey, Campbell Soup and other CPGs

Hershey and TreeHouse Foods are among the companies being impacted after Canada imposed levies on nearly $13 billion in American goods after the U.S. placed tariffs on steel and aluminum. Candy, salad dressing and cucumbers are among the products that are subjected to a 10% import tariff. Hershey will be impacted because it sells a lot of its products in Canada, while TreeHouse will have to pay import tariffs on some products while dealing with higher commodity costs. The impact will be less severe on packaged foods companies such as Kraft Heinz and J.M. Smucker.

Companies could decide to raise prices on some of their products to make up for lost sales, but the risk, of course, is that it further stymies sales in places where retaliation is not taking place. The competitive environment makes it unlikely for those increases to succeed. It’s possible they could look to boost sales in countries not affected by the tariffs, renegotiate contracts with their suppliers or close some plants, resulting in job cuts across their supply chain — but none of these are desirable solutions. The most likely scenario is that they absorb the lost sales for the time being and focus on what they can control internally. FoodDive




Digital Assets: Swiss Stock Exchange Operator is Launching a Crypto Assets Exchange

SIX, the owner and operator of Switzerland’s principal stock exchange has announced plans to launch the SIX Digital Exchange – a crypto assets exchange fully regulated by the country’s financial regulator and central bank, claiming to be ‘the first market infrastructure in the world to offer a fully integrated end to end trading, settlement and custody service for digital assets.’

Dubbed the SIX Digital Exchange (SDX), the blockchain-powered platform will facilitate the tokenization of clients’ existing securities as well as enable the issuance and trading of digital assets. SIX further stressed that the platform will see ‘the same standard of oversight and regulation’ from FINMA, Switzerland’s financial regulator and the Swiss National Bank, the country’s central bank. SIX will also facilitate its clients offer their own tokens through initial coin offerings (ICOs) to raise funds.

Pointedly, the exchange operator noted that SDX will not be used to enable the direct trading of cryptocurrencies like Bitcoin and Ethereum and will instead help introduce traditional financial market participants to tokenize their bankable and non-bankable assets into digital assets. CCN


Digital Assets: South Korea is Officially Recognizing Crypto Exchanges as Regulated Banks

For many years, the government of South Korea has considered regulating the cryptocurrency sector with practical regulations and policies, primarily to prevent large-scale hacking attacks and security breaches from occurring, as seen in the case of Bithumb and Coinrail in early 2018. However, local financial authorities feared that regulating the cryptocurrency market would lead the public to believe that the government has legitimated the cryptocurrency sector. Consequently, South Korea postponed the regulation of cryptocurrency exchanges.

This week, local publications revealed that the government of South Korea has come to a consensus to recognize crypto exchanges as regulated financial businesses, creating a new industry dedicated to cryptocurrency trading platforms. In the short-term, the newly created regulatory framework for cryptocurrency exchanges may have a negative impact on both the trading platforms and investors, because it would mean stricter Know Your Customer (KYC), Anti-Money Laundering (AML), and customer verification policies.

In the long run, local analysts have stated that the decision of the government to legitimize the cryptocurrency sector will lead to large-scale institutional investors and retail traders entering the crypto market, allowing digital assets to be considered as an emerging asset class. CCN


Digital Assets: South Korea Will Officially Legalize Cryptocurrency and Blockchain-Based Industries

South Korea plans to categorize cryptocurrency exchanges as legal entities in a move that will lay a solid and formal foundation for the legitimacy of crypto and blockchain technology. The South Korean media outlet TheBchain reports cryptocurrency exchanges will soon be categorized as “cryptoasset exchanges and brokerages.” It’s part of an overall effort by the government to implement a new classification system for all blockchain-related industries. Cryptocurrency and blockchain platforms like Ethereum will be classified as “Blockchain-based software supply and development businesses.” The government is expected to release full details on the new system later this month. Hodl


Payments: An Isolated Country Runs on Mobile Money

Mobile-money services have taken off over the past decade in Africa; 1 in 10 adults across the continent—about 100 million people—use them. M-Pesa, broadly considered the first major and most successful mobile-money technology platform, counts 26 million users, roughly half the population. More than half of the world’s 282 mobile-money platforms are in sub-Saharan Africa.

And nowhere are the benefits of mobile money more apparent than in Somaliland, where the extreme economic and financial conditions have allowed Zaad, a service from the main local telecom, Telesom, to catalyze commerce in one of the most isolated parts of the world.

Without mobile money, cash has a hard time flowing through the country. No commercial banks really operate here, and hauling physical cash over rough roads is time-consuming. Companies use Zaad for their monthly payrolls, instead of handing wads of cash to their employees.

Other services have also sprung up, creating more competition. Dahabshiil, a Somali-owned money-transfer service that operates in 126 countries and is popular across the Muslim world, is another player in mobile services in Somaliland. WSJ


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