Friday, 21 November 2014

Micro Level Trends – A Capital Markets' Mentality – From Fragmented Confusion to Simplified Confuscianism

In the pursuit of an alternative, philosophically flavoured web-log, two distinctly different 'Ying' and 'Yang' sections follow.

The intention is to starkly highlight the apparent oppositional cultures and values between the present 'clubland corners' of international finance (as seen by previous Libor and recent FX scandals) and the spiritually powerful and socially righteous influence of the millennia old eastern perspective that is Confucianism.

Today, beyond the everyday functional and very necessary 'lingua franca' of capitalism, which itself can unfortunately appear alien, it seems that new and more opaque language constantly arrives. That of codified terms and phrases seemingly invented to cause dis-connectivity and remoteness.

As such the very language of western-derived “global capitalism” must itself be re-orientated to something far more broadly understandable, credible and convincing so as to underpin worldwide belief in an often volatile but 'up-lifting' ideology.

To this end, investment-auto-motive's intentionally juxtaposes what appear very alien counter-parts;

1. The Lexicon of Modern Finance
2. The Edicts of a True Sage

If 21st century capitalism is to become truly improved, then the “better tomorrow” rhetoric heard soon after the 2008 'depression' must be translated as action positively woven into the worldwide fabric of investment, commerce and consumption; with far greater gravitas prevailing.

[NB the word 'depression' scarcely used but all too true]

1. The Modern Western Lexicon -
(aimed at the layman)
It must first be said that the core lexicon of 20th and 21st century finance pertains to the necessary central functions of deploying capital as part of the investment process. This spans an A-Z which covers a host of acronyms, words and phrases which underpin broad business modelling, project modelling and other aspects of “investment” per se: DCF (discounted cash-flow), NAV (net asset value), BV (book value) and P/E (price to earnings level).

However, the result of a over a century's worth of finance sector expansion (ie “financial innovation” via “financial instruments” saw both the growth of ever more systemic complexity and a greater remoteness of the system's own primary governors. The size of the global derivatives market a obvious example of the former, whilst the latter seen by the dishonourable actions of some affecting the inner workings of Libor and FX markets

Competitiveness, and indeed hyper-competitiveness, has historically been a product of the yesteryear “WASP” mentality within a finance sector clique which in the modern era was spawned from Vienna, moved to Paris, onto London, Hong Kong, New York, Tokyo, Delhi and Shanghai – Shenzen. As capitalism itself moved onto the next big economic chapter in whichever country, it was inevitable that the very culture of finance in each city would be imbued by the “hungriness” of new sector entrants, whether once poor and ambitious individuals working within a firm, or similarly new start-ups seeking a either a slice of any transaction value within a burgeoning new market, or able to gain from “buying low and selling high”.

As with any tribe-like SIG (special interest group) cultural identity is partially borne from, and later promoted by, the application of a clique-like language: so as to be “in the know or in the club”, both verbal and often visual.

The language and codification obviously becoming more remote and specific the greater the SIG secrecy. Today's multi-device, multi-platform communication age has both allowed clans of similarly minded to form in cyber-space and seemingly promoted different clanships; dedicated chat-rooms spanning from youth-orientated tribes (eg Goth / Emo / Twilight / Zombie / Cyber-Punk etc) to the likes of Mumsnet (obviously for pre/post natel mums) to 'silver-surfer' rooms for an ageing and seemingly ever more socially remote older populace. Add-in the constant stream of information overload from ever multiplying sources, and it is little surprise that speech and general communication has become condensed: the impact of shortened “text speak” [txt spk] setting the stage for ever more diverse, explicitly / implicitly alienating codified “SIG speak”

[NB As an interesting aside, given this trend, a following post script looks at how this trend is possibly being inadvertently (or possibly intentionally promoted) via the continued fascination with the WW2 code-breaker Alan Turing in the new film 'Imitation Games'

The very story highlights the pathway “from confusion to clarity” via Confucianist principles].

As regards the financial sector SIGs, just as crypto-Tarantino film-buffs and emerging film-directors seek to de-construct and reconstruct filmic plots and motifs, and video-game players seek to similarly de-construct and reconstruct on-screen war strategies (just as chess-players have); so it seems that any SIG will (all too unfortunately) attract and include various hyper-competitive, and so often collusive, types. Others drawn-in to possibly Machiavellian schemes so as to either not feel socially omitted or even to avoid victimisation.

Given that humour provides a sensory feeling of well-being, confidence and belonging, it has historically been deployed by the manipulative as a method by which to bring other people onside, so creating group bonding and the facilitation of any nefarious plan. This done possibly with the ignorance of those 'on board' used as uninformed pawns, to the obvious direct detriment of specific victims.

This has been the typical process for the “boiler-room scandals” that have existed from the formation of the very first 'professional' stock-market in Amsterdam, throughout the centruies and decades to date: 'The Wolf of Wall Street' sadly glamourising the prime perpetrator, Jordan Belfort; with Paramount at least serving the retail and institutional shareholders of its parent Viacom by making $392m on a $100m budget.

Much as the novelist Arthur Hailey shone a torch into the auto-industry workings of 1970s Detroit in his book 'Wheels', so far more infamously by the late 1980s the “big as life” fictional characters that are Gordon Gekko and Patrick Bateman and Sherman McCoy had been created, respectively in the film 'Wall Street' and novel and film 'American Psycho', and likewise 'Bonfire of the Vanities'. Each reflections of Wall Street's 'top-dog' mantra, anti-hero swagger and differing levels of anti-social psychosis.

These reflective stories had the immediate effect of social ripples across the then increasingly apparent 'post-industrial' era. Wherein NYLON 'big bang' innovation had led to the blooming of the financial services sector, and so according aligned content feeding the broad public's fascination with the metaphorical “cut and thrust” of high finance deal-making; titles such as 'Barbarians at the Gate' crystallising the Sun Tzu mentality where competitiveness met avarice.

That 'cut and thrust' made all too physically real by investment banker Bateman; whilst the self-made anti-establishment Gekko simply sought to dissect the undervalued assets of troubled firms.

Though Gekko was later recast in 2010 as becoming more humane, what both characters originally share is the overt “hunger” and nigh-on unlimited “animal spirit” which unfortunately propels many a young new financier.

Hence, the seemingly ever re-generated, rapacious internal mentality that exist within certain sections of the world's money markets; created in the modern age by the media and super-charged by notional professionals with agenda-driven SIG mentality.

Thus, over the prevailing decades the media has created a definite milieu in the public's consciousness, one of money, power and hedonism: the mythologies of Wall Street, The City and financial districts elsewhere. It is one which still attracts the intelligent, young and ambitious, even if the reality for many high-flyers is the mundanity of process-led, time-crammed vs high precision, tasks; the very antithesis of the sector's notional 'sexiness'.

Perhaps no wonder then that such a lexicon is created, by the more imaginative. The concern being that – as seen time and time again - the ambitious and dishonourable create self-serving inner-circles in often quite remote self-contained, specialist silos.

The following phrases are a mixture of sayings drawn from the finance sector: some 'sexified' by the media and so re-injected into Wall St, The City etc with added appeal and zest; but for the most part drawn from John Lanchester's 2014 glossary-like book “How to Speak Money”, as partly illustrated by The Times newspaper supplement T2 on 28/08/2014. This with additional commentary by investment-auto-motives as deemed useful.

Starting with the infamous:
“Murders and Executions”- uttered by Bateman, the darkly humouristic re-interpretation of Mergers and Acquisitions which had already become an over-used Wall St phrase by the mid 1980s, and periodically utilised by later new entrants into finance, itself as a codified message as to who was or was not supposedly “in the know”.

Continuing with the lesser known:
“Bear Hug” - an offer supposedly so generous apparently impossible to refuse, but as with all value assessment, why cash-out if the underlying asset is obviously valuable to others who are desperate to 'over-pay'? Better then in most cases then to “maintain one's own larder”.

“Buy Side” - the typically large institutional funds (ie pensions, insurance), private fund managers and private equity funds that purchase investment intelligence services from...the
“Sell Side” - those analysts / brokers / investment bankers who undertake the 'bottom-up' and 'top-down' investigative work.

“Consolidated” (the) – those funds which undertake investment strategy in-house, typically for proprietry and client trading to theoretically demonstrate that through a shared “skin in the game” approach that they are wholly aligned to creating a 'win-win' outcome for the client. (This somewhat undermined by certain hypocritical firms that foresaw the US housing bubble and 'shorted' their own interests whilst advising clients to 'stay long').

“Carry” (the) - short-hand for 'carried interest': the incentive fee earned by a fund's managers, separate from the management fees which pay the operational costs; increasingly seen as an overt expense to be reduced or eliminated by an increasingly informed and demanding client base.

“Cheeteahs” - high-frequency trading (HFT) firms with IT systems and geographic locational advantage to act as rapid-fire (micro-second) first-movers in high volume markets. (As with 'Bulls' and 'Bears', Wall St likes its animal metaphors to enliven its 'animal spirits'

“CoCos – Contingent Convertible Notes, debt which converts to equity depending upon pre-set circumstances, typically the share price staying above a specific value for a certain length of time. If instead a firm's value-creation remains poor – and its stays “a dog” - its remains as a typically set high yield fixed income instrument.

“Cramdown” - the re-organisation of a failing company, as approved by major vote-holders and/or official agency, to the detriment of other share-holders, the latter forced to take a...
“Haircut” - in the Chapter 11 restructuring process, or complete bankruptcy, the requirement for many creditorsor often lower order creditors to accept much reduced cents on the dollar as resultant comprimised repayment

“Dark Pools” - non public market, private exchanges by which large trade volumes may be undertaken without visibility which may create consequential reactionary market-shifts by other observing traders; recently 'open' exchanges such as the LSE seeking to offer similar 'closed curtain' services at specific times of the day, primarily for institutional and large private equity funds.

“Dumb Money” - a derogatory term for the majority of small-time retail investors who rely upon the apparent 'professionalism' of financial service sector intermediaries; especially so 'financial advisors', who themselves are typically un-informed foot soldiers with often only basic knowledge of the products of the company they represent
[NB This the massive cohort of the population that John Lanchester seeks to inform]

“Dumplings” / “Princelings” - the children of wealthy, powerful Asians given jobs at western banks to assist broader present or prospective client relations.

“Gearing” - a alternative term to 'leverage' or more precisely Credit. Gearing typically used as a credit to equity ratio; originally applied to cash-flow rich businesses by either equity-holding founders or early/mid stage private equity parties, or often both; the theoretically quickly grown business able to 'throw-off' much improved cashflow and so rapidly raise the value of equity stakes. But through the late 1990s and 2000s, this over-stretch and failure to meet projections caused the collapse of various companies; so providing rich-pickings for either asset-strippers or 'fire-sale' buyers, often for bolt-on acquisition into similar business models.

“Greeks” (the) – hellenic symbols used to denote a 'future's formulae':, 2.gamma, 3.theta and 4. “vega” (the latter not real but creatively conjured-up to fit); reflecting 1.stock-price today, 2. the date for exercising the option, 3. the price for exercising the option, 4.the expected volatility of the stock.

“Headwinds” - a term used to denote usually macro-level challenges encountered by a fund's general portfolio, or directly experienced by the specifically oriented fund (typically sector directed, geo-politically directed or regionally or globally 'events driven'.

“McNuggeting” – the creation of a stabilised price environment, by way of stabilised input costs, for commodities/products with historic supply and so price volatility.

“Shorting” - the borrowing of all or a specific allotment of a counter-party's held shares in a target company which the borrower believes will actually fall in stock-price, so ultimately paying less for the block of shares at the later date; a risky move given the possibility for a rise of the stock-price if supporting intelligence appears.
“Naked Shorting” the term used for a form of market manipulation via the illegal selling of shares that do not “affirmatively” exist, hence by-passing the conventions of supply and demand.

“Target-Rich Environment” – the appropriation of military-speak demonstrating the broad range of theoretical investment opportunities available.

“Tournament System” (the) - the hierachial employment structure by which ambitious lower order staff, management, executives and company founders work hard – so providing high productivity - in order to hopefully eventually gain the sizeable renumeration package of CEO / Partner / Chairman level.

“Nugget Hunting” – a contorted term originally used for the real (or supposed) discovery of major gold nugget deposits. Rumours periodically spread to induce gold-rush migration of the poor toward certain regions so boost sales of associated goods and services (eg ancillery equipment empty hotels, etc) aswell as locate mass labour and consumers for alternatively planned industries.
[see Australia's 'Welcome' nugget in Ballarat, Victoria, specifically its real discovered size vs the size of the giant nugget publicised ]. The true 'nuggets' then not the metals / minerals in the ground but sales by the stores.

Thereafter applied to create an apparent market demand, which to gain from relies upon purchase of associated goods / services. Latterly apparently used in the IT-centric “Mining” context for BitCoin.

An Aside -

Just as John Lanchester's book seeks to inform the layman about the hidden, obverse sophistication of financial markets, so similarly his former engineering namesakes - Lanchester Bros Automobiles
- likewise sought to educate its clients about what was then the remote world of vehicle engineering. In their instance, the advantages gained from a well balanced “mid-ships” powertrain.

It is this philosophy of “balance” that is vital to the well-being of the financial sector and broader national economies, unfortunately the massive sizemic shifts experienced in 2007-8 requiring unprecedented counter-balancing forces (flat base rates, QE programmes etc)

2. The Edicts of a True Sage
(aimed at financiers)

The words of Confucius have been periodically seen within the investment-auto-motives weblog over the last seven years, applied when contextually useful to demonstrate the need for straight-forwardness, trust and social cohesion all corners of society; and especially that of finance.

Unfortunately (like the financial sector itself) the more 'modern' a society becomes, the less straight-forward it becomes. Especially so since the ever more sophisticated inter-twining of subtle message-driven media (through formats and technologies) with general mass societal and so personal consciousness. The 20th and 21st century's 'top-down' (im)morality messaging contrasts sharply to the yesteryear 'bottom-up' morality message of Confucius; wherein individuals themselves where expected to be morality broadcasters for the betterment of society.

[To this end the Confucian perspective has been latterly echoed by such diverse commentators as the 18th century's Jean-Jacques Rousseau and 21st century's (very media savvy) Russell Brand].

Thus it seems that even six years on from the financial crisis, there is reduced yet a still prevalent mass western reaction regards “the betrayal of capitalism”. The prime concern being that partial collapse of once wholly positively perceived capitalism, occurred within a post-religious secularist era: thus the heavy fall of two 'grand-narrative' social frameworks. So creating an ever bigger “belief vacuum” for many, so possibly opening the door to new forms of combined spiritual and economic “snake-oil” sellers; such false promoters likely to easily surmount the barriers to entry into financial services given the circumnavigation abilities over the regulatory environment.

So it is in this age and context, that every corner of the financial services sector should heed the words, sentiments and perspectives of the non-religious Confucius, as were handed down through Chinese history (from the Han dynasty onward) by way of The Analects; a compilation of his recorded sayings.

Chinese Emperors recognised the value of the Confucian belief system, spread via The Analects, so as to encourage a capability for general self-rule over the massive swathes of land which formed both dynastic regions and Old China large. The Sage's quotes etc reflected what was considered an age-old natural framework for societal affairs, best viewed as instrument for personal guidance and so 'bottom-up' societal influence; rather than the literally hidebound 'top-down' dogma of formal religion which was thought to promote tribalism, division and selfishness.

Central themes are those of:

1. “Superior Man” - obviously now translated as the “Superior Person”.
2. the Art of Living
3. Balance
4. Constancy
5. Courage
6. Death and After-Life
7. Demeanour and Deportment
8. Division of Labour
9. Education
10. Family
11. Filial Love
12. Fine Arts
13. Genius and Inspiration
14. God
15. High Aim
16. Learning
17. Manners
18. Meaning of Government
19. Meekness
20. Mental Morality
21. Military Training
22. Pious Observances for Deceased Parents
23. Propriety
24. Providence
25. Provision for Dependents
26. Qualities of a Leader
27. Rectification of Purpose
28. Sincerity
29. Speech and Conduct
30. Taxation
31. Temperance
32. Uprightness
33. Will

The initial categories, pertinent to the realm of responsible investment, have provided the following selected quotes

“the object of the superior man is truth”
“the superior man must make his thoughts sincere”
“what the superior man seeks is in himself, the ordinary man looks to others”
“the superior man is not partisan”
“the superior man does not set his mind 'for' or 'against', but to what is right”
“the superior man is correctly firm and not merely firm”
“the superior man is distressed by his want of ability”
“the superior man seeks to develop the admirable qualities of men, and does not seek to develop their evil qualities; the ordinary man does the opposite”.

“the practice of right living is deemed the highest”
“from the highest to lowest, self development must be deemed the root of all by every man”
“by nature men are nearly alike, by practice they get to be wide apart”
“when the ancients sough to exemplify illustrious virtue throughout their empire, first ordered well their states; desiring to order their states, they first regulated their families; wishing to regulate their families, they cultivated themselves; wishing to cultivate themselves they first rectified their purpose; wishing to rectify their purpose, they first thought to think sincerely; wishing to think sincerely, they first extended their knowledge as widely as possible”
“when you know a thing, to hold that you know it, and when you do not know a thing, to acknowledge that you do not know it – this is knowledge”
“when a man's finger is deformed, he knows enough to be dissatisfied; but if his mind be deformed, he does not know that he should be dissatisfied; this is called ignorance of the relative importance of things”
“when you hear words that are distasteful to your mind, you must inquire whether they be not right”
“there are four things from which the Master was entirely free: he had no foregone conclusions, no arbitrary predeterminations, no obstinancy and no egoism"

“learning without thought is labour lost; thought without learning is perilous”
“the wise through not thinking become foolish; and the foolish by thinking become wise”
“the study of strange doctrines is injurious indeed”

“those who are born in the possession of knowledge are the highest class of men. Those who learn and so acquire are next. The dull and stupid who yet achieve knowledge are a class next to these. Those who are dull and stupid and yet do not learn are the lowest of the people”

“the great man is he who does not lose his child's heart”
“he who has sincerity without effort hits what is right and discerns without laborious thought; he is a sage who naturally and readily follows the path”

“there is no evil to which the inferior man will not proceed when alone. When he beholds a superior man, he tries at once to disguise himself, concealing his evil under a display of virtue. The other penetrates him as if he saw his heart and reins”...”what is in fact within, will show without”

“the superior man is easy to serve and difficult to please, if you try to serve him in a way which is not accordant with right he will not be pleased; but in the employment of men he uses them according to their capacity...(conversely)...the inferior man is difficult to serve but easy to please; if you try to please him, though it be in a way which is not righteous, he may be pleased; but in his employment of men he wishes them to be equal to everything”.

“those who follow the part of themselves which is great, are great men; those who follow that part of themselves which is little are little men”.

“Let a man stand fast in the nobler part of himself, and the meaner part will not be able to take it from him”

“it is the characteristic of the completest sincerity to be able to foreknow...he is like a spirit”

Conclusion -

The history of modern capitalism has indeed been volatile, and undoubtedly those already with wealth and influence have been able to take advantage of such periodic volatility (as with 2008 onward) by recognising the timing of cycles and the opportunities born from challenges.

Yet as now globally recognised as capitalism spreads, it's very model (when well modulated) offers new horizons for most: alternative possibilities, increased education, less arduous work, greater convenience and improved comfort.

“Modulation of the System” then is the key, and this is the central theme of Confuscianism, itself ostensibly born from the 'Tao'

Although the mass media rightly draws public attention upon financial sector scandals, it must be remembered that the “watchdogs” and 'good guys' of the system: those internal supervisory bodies and specifically external regulatory agencies, which are responsible for highlighting such problems.

Although the 'revolving door' still operates - to good and ill consequences – the fact remains that the system itself relies upon the good judgement and righteousness of not just the “watchdogs” or “sheriffs”, but of the very inhabitants who choose to undertake their workaday lives within the sector.

Of course their will specific functional SIGs, and within each, those who are dishonourable, whether by way of politicised career climbing or more problematically able to 'rig the system' ultimately to their monetary advantage.

Yet it still appears the fact that, above and beyond the banking scandals seen, the very scale and importance of national and international finance, from London to Beijing, demands that those in positions of functional responsibility be trustworthy; thus Confuscian to some degree.

Today's prime issue then is for seniors and executives having the wherewithal to understand the deep complexities of specific parts of an oft befuddling, inter-connected system.

John Lanchester highlights the problem.

As the son of an old school banker in an era when investment was directed toward wholly “visible” commerce, the yesteryear system was clearly comprehensible. Yet today, in an age when money and associated instruments have themselves become the prime products, the very structure and fabrication of the financial system itself must be questioned, and not just by the layman; but critically by those who occupy the the upper echelons. However, as internal managing agents and official representatives of their own company's stockholders - many of which exist on the inside - they themselves are encapsulated by, and so "held hostage" by the modern, global financial system.

Can the complexity be deconstructed and the simpler yesteryear "visible" model become re-expanded? So as to fill the gap of any discontinued overly sophisticated instruments and markets. And if the genie cannot be put back into the bottle, can it at least be partially contained and off-set?

The very premis of 21st century capitalism is the burgeoning of new B2C and B2B economic participants across a myriad of EM regions, coupled with new business and consumer trends within ethically re-aligned AM countries.

This offers enormous hope of at least stemming the previous tide of never-ending financial innovation, which itself was created to maintain a form of fabricated economic momentum which was fundamentally slowing within the west even as new-tech promised to replace old-tech.

As such financial innovation becoming at least partly replaced by investment in the tangible, whether directly physical (as seen with infrastructure build plans) or the tangibly related (ie services and research/development). Thus the 'real' as opposed to the all too abstract and ethereal.

If this economic reality check does indeed hold sway, over the remainder of 21st century, it would be best served through the ideal of a merged mentality within the financial sector, wherein the selfish gene and animal spirits might be subsumed into that of a higher Confucian consciousness.

The American, Japanese and now likely European provision of Quantitative Easing – themselves necessary counter-balances - ensures that over the forthcoming decade that Capitalism is not the “zero-sum game” which up to 2007/8 it had appeared to become.

The trickle-down wealth will ensue, even if painfully slowly at present.

Importantly it may well be the influence of mainland China, through its promise of ever greater financial global connectivity (propelled by the recent Shanghai – Hong Kong 'Connect' exchange), that provides the impetus.

Whilst China obviously has its own relative glut of US$ billionaires, and many of their “Princelings and Princesses” will lead the capitalist charge across the globe, the very fact that filiel reverence still largely spans generations will play a role. Since the generational links hold with critical memory the “days of want”, the previous responsibilities of dynastic leadership, and (even if failed) the pro-societal ideals from its Communistic past.

This portends that Confucian capitalism must promise and deliver publicly perceived fairness in order for itself to reach full potential.

Post Script -

As per the SIG mentality...
...and the manner in which it has affected the western mainstream.

The emergence of special interest groups has been prolific with the inter-connectivity of the web, able to unite (but also divide) people across a plethora of often self-identity related topics and issues. However in an Orwellian-McLuhan manner, it appears that the broad adoption of often SIG specific communicational short-hand has become itself a powerful force in moulding broader mass culture.  

This seemingly very well recognised by the culture industry itself.

A contemporary example within British popular culture is the UK advertising poster for 'Imitation Game': the story of Alan Turing. This seemingly multi-directed at various target SIG audiences across the generations, from those with WW2 memories (which helped form much of their own identities), the Baby-Boomer generation, and onto younger Y-generation “IT geeks”, “games geeks” and the increasing number of “socially distant” who with a graduate education and insight into post-modern sociology might even think themselves akin to a modern-day Turing.

The film's 'quad' poster shows a myriad of background dials representing the Enigma code-breaking machine, all appearing similar with a pointer set to between D and E. This then somewhat of an initial disappointment to some viewers drawn to hoping to deduce any“secret code” created by the films director or poster designer. But of course to add intrigue there is nod to code-breaking. Within the thirty-plus dials set to D and E there is one set differently to between W and X; those who take the time to view all the background dials, supposedly becoming “in the know”.

investment-auto-motives suggests this then a “copy+” of Damien Hirst's cigarette-butt case installation artwork, which deploys a single cigar-butt innocuously amongst a hundred-plus cigarette-butts.

Thus in the intelligence and communication age, a level of often meaningless visual codification (beyond that of status fashions or cars etc) has become a marketing commodity in its own right.

This would no doubt amuse Turing himself. He, a laser-focused yet a 'simple soul', unfortunately existed in a complex environment which offered anything but the essential everyday truth(s) he sought.

Truth unsurprisingly the essential platform which all intelligent people demand, for powerful progress.

With this as a guiding principle, the 21st century edict must surely then be: "Minimum Confusion... Maximum Confucianism".

Thursday, 6 November 2014

Companies Focus – The Global Eleven Auto-makers - Coupled Ratios Analysis: Q3 2014

The seemingly lengthy summer and autumn sell-off across various cyclical sectors - including autos – was driven by a perfect storm of macro-level (and for some micro-level) headwinds.

Yet entering Q4, the fear factors have good reason to subside, providing for improving socio-economic contexts and so investor optimism.

Q3 Economic Backdrop -

Initial concerns regards continued Ukrainian political friction, worries were escalated by the the further additions of slowed Sino-Euro productivity reports, and the overcast shadow that was the end of American QE. Hence the associated outlook of expected global deflation if the USA could not do the global 'heavy lifting', even this possibility then undermined by rumours of the Federal Reserve's 'hawkish stance' on rates to discourage internal inflation. This in turn was compounded by mixed North American consumer data at the everyday retail level of shopping and utilities, coupled with somewhat slowed big-ticket item sales (inc private cars) and slowed home mortgage applications.

So general recognition that whilst the USA would be able to serve its own economic interests – seen by the boom of domestically produced pick-ups underpinning blue-chip and SME investment confidence – much of the remaining world, would experience little immediate corollary.

With this previous outlook, though Q2 Coupled Ratios analysis did indeed demonstrate its rational, highlighting general global autos improvement to date and capturing those worthy companies will mid and long term appeal, the fact is that markets became very skittish given the lack of near-term support for seemingly high p/e valuations versus immediate doubt.

Brutal Q3 Market Reaction -

The summer-long sell-off of cyclically orientated companies has been somewhat brutal. Perhaps expectantly so given general sentiment about the previous current affairs and associated headiness and (vitally) the lack of a more subdued American market correction which investment-auto-motives hoped to have witnessed in late 2013. Without the required 5-8% correction then, the latter fall-out was all the more harsh, and importantly all the more widespread, impacting worldwide bourses.

Whilst affecting all auto-producers, the consequential stock-price drops seen – at one time-point -9% for BMW to -13% for GM and -24% for FIAT SpA (of old) – resulted from what at times seemed an overtly irrational perspective by some investors and specifically the pounce behaviour of short-termist traders; communities within the latter obviously intent on heavy 'shorting' of those companies which appeared weak over the mid-term (as exemplified by the targeting of UK supermarket Sainsbury's).

However, even under such pressures other actors within markets showed examples of well gauged rationality. As was the case with GM, wherein its necessary absorption of heavy cost charges associated with its broad “ignition switch” recall was countered by the welcome boost of Siverado sales with better than average per unit margins.

Return to Rationality -

Importantly, that somewhat short-termist and heavily distopian reaction has presented a return to greater investment rationality.

The expectation looking forward now being that with the end of American QE (though still seemingly dovish on rates) investors – at least in the US, if not in Japan or probably Europe - will increasingly return to a now more necessary, traditional approach: that of company “fundamentals” amid a calmer macro backdrop.

Whilst it appears that all but US-centric firms continue to suffer during the pan-global slow-down, from Q2 onwards and across the summer, investment-auto-motives equally recognised that those foreign firms that were directly exposed to North America (ie with local production or high export volumes) would be well placed to gain likewise.

Especially so if also supported by homeland fiscal and monetary policies; as has been - and now is again - the case with “Abenomics”, so intentionally deflating the Yen to boost Japanese auto-makers' and consumer electronics' own FX gain at the bottom-line; this seen in the 9% rise in the share price of Toyota, assisted by its very size of volume sales exposure to the USA.
So quite obviously such immediately specific investment opportunities have and do appear to exist per N.America; to quote of one Detroit sales chief via a Bloomberg report: “the US economy has steadily improved all year. Now we are poised for stronger expansion backed by an improved jobs market, higher consumer confidence and lower fuel prices”.

Such words welcome after such a summer of investor, or rather trader discontent.

They presage the notion that whilst obviously US-centric – see Jay Leno's car enthusiast website for the pro-American SME message - the American domestic economy will also start to draw-in greater import demand; whether in “visible” goods such as premium German cars, Japanese capital goods and eco-engineering and via “invisible” services such as Asian IT and web consulting.

Previously burgeoning trends regards increased foreign direct investment (FDI) toward the Triad regions – especially so USA and pan-Europe - set to continue, as various EM firms across many industrial sectors seek ever greater market exposure in previously notionally 'post-industrial' countries; so replaying the yesteryear moves of the likes of Arcelor Mittal in steel during the 1990s, or Nissan and Toyota during the 1980s.

Furthermore, whilst the most recent raft of reports for China still appear glum, the previous geo-specific distress signals of the broader global economy across Europe, S.E. Asia and portions of S.America, may be reducing. Whilst seemingly slow given the need to convince often socio-reactionary politicians, various economic reforms have been tabled and are setting-out conditions for improvement. They in turn are transforming what were previously heavily regulated and so restricted sectors previously state-owned, much unionised or monopolised sectors, Greece's television sector just one example.

Europe's virtually stagnant growth rate and SE Asia's better controlled, slowed growth means that labour costs remain inflation constrained, so offering reduced headwinds and so improved conditions for local corporations and SMEs alike.

Critically, cash rich EM firms continue to seek out local and foreign Merger and Acquistion opportunities (as seen with the UK's United Biscuits sold to the Turkey's Yildiz Holdings) so in a timely manner following the likes of TATA Motors' previous purchase of Jaguar Land Rover.

And critically, the macro-economic climate brightens: primarily via the witnessed and expected effects of major QE programmes (previously in the US, currently with Japan, and expectantly so for Europe), such opportunistic conditions now enhanced with the notion of 'affordable oil'.

Here investment-auto-motives must be underline the fact that OPEC's actions to intentionally not constrain supply appears an implicit recognition by global commercial and political leadership that 'affordable oil' must itself acting as a 'prop' for the global economy; now that US QE ends, Abenomic 2.0 has limited worldwide effect and before any desperately needed 'Draghi Put' (beyond QE-lite) takes effect.

Although America's own 'miracle-growth' oil-shale sector is reportedly unable to compete at below $76 p/b or so, the drop of worldwide barrel prices to the present $83 (even if presently over-sold and returning to $88 or so) not only critically reduces and stabilises industrial input costs - so supporting manufacturers across Europe, MENA, Brazil and Asia - but China's recent oil bulk buying bodes well for renewed industrial activity, even if indicator signs are presently weak. Furthermore such “oil lows” for both pre-refined “Brent Crude” ('Sour') and post-refined “West Texas Sweet” will undoubtedly serve as a critical economic bridge for the UK and N.America between what has been artificial liquidity pumped growth, and a new nascent era of authentic investment confidence.

Thus with many share prices across cyclical sectors - and specifically automotive - “re-rationalised”, combined with the support of “affordable oil” and still ostensibly doveish central bank sentiment around the world, Q4 2014 appears to offer a steadier real-world investment impetus, economic optimism and investor sentiment..

To gauge which automotive companies are conservatively best placed from the 'bottom-up' / “fundamentals” perspective, investment-auto-motives presents 'Coupled Ratios Analysis' of Q3 2014 financial results.

Q3 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.

Those companies which appear most frequently within the optimal 'investment windows' are deemed as more risk averse and so preferable.

[NB Those that may appear beyond any single 'investment window' may be undergoing “turnaround” progress, or conversely (temporarily) over-valued by the market, experiencing mid-term liquidity problems or burdened with comparatively heavy debt]

Hence, whilst “Coupled Ratios” condenses usual 'fundamentals analysis', it obviously excludes 'top-down' macro influences and the details of internal, company specific actions or strategic directions.

All must be considered by the practising investor.

Resultant Outcomes -

See attached picture for the requisite 4 distinct graphs. Information gleaned from Q3 2014 company intelligence as presented, external information agencies and modelled by investment-auto-motives as necessary to provide estimates of absent information.

Market Valuation Ratios:

Herein, almost in an almost 'ad infinitum' manner, Hyundai and Volkswagen appear most strongly within the 'investment window'. In addition Honda retains its place, moved only slightly lower to take-up Volkswagen's previous coordinate position. FCA gains by moving to just within the 'window', previously hovering on the cusp, whilst Renault re-enters after previous absence. Daimler gains slightly to sit upon the boundary-line, thus gaining further credibility, whilst PSA is shown as overtly high (effectively unmoved) given the lack of available data. Seen to leave the investment space are Toyota, becoming rapidly notionally over-valued, and BMW shifting off the border as its p/b rises. GM sees little re-positioning beyond the window, at its relatively high p/e driven by American investor economic confidence, whilst Ford also beyond experiences a slightly reduced p/e and positive substantial re-rating of its p/b.

Past successive 'coupled ratios' analysis witnessed VW drift ever more upwards as per the general pack relative to improving economic conditions. However as described in the analysis detail in Q2's observation, with an older model mix, awaiting new launches in late 2014 and beyond, VW was unable to ride the American vehicle market upturn through Q3. This, plus the previous 'sell-off' sentiment of cyclically biased big-caps is seen by VW's p/e and p/b marginally lower re-rating.

Honda's relative p/e and p/b stability over Q2 and Q3 appears to demonstrate its management's dedication to managing investor interest and expectations relative to its far bigger Japanese peer. With internal recognition that though smaller in production capacity, its broader commercial activities (cars + motorcycles + power products), whilst advantageously partially anti-cyclical, must be strategically managed to avoid top and bottom line volatility at the consolidated group level, and so provide the operational levers by which to try and maintain a steady investment story, within the 'window'.

FIAT's metamorphosis into FCA (Fiat Chrysler Automobiles NV) and its new NYSE listing, is timely indeed given its re-positioning into the top of the investment window. Its reduced p/e gained from slowed trading volumes versus improved P&L and income statement, thanks unsurprisingly primarily to USA vehicles sales and relative success in Asia. As expected, aided by investment bank insights, FCA then has been moulded and timed to befit stock market conditions.

Renault re-joins the investment space from what were overtly high p/e valuations created by early-bird investors awaiting both the possibility of ECB QE and at worst the group's eventual sales and revenues upturn. Those high p/e's however dragged down by the recent brutal sell-off. However, (as with PSA) with input costs better constrained and revenues improving, risk-averse 'heavyweight' institutional investors will become increasingly drawn, with most investor types presuming an uptick in share price as a result of either stronger than guided results or a necessary advent of full Euro QE.

Hyundai, having enjoyed unparalleled advantage versus western VM competitors shortly after 2008/9 and across latter years, experienced a massive gain in share price. But the rebound of American and European players has undermined the S.Korean's competitive advantage in western markets whilst other target EM markets which likewise enjoyed Hyundai-Kia's previous lower price-point have obviously experienced slowing local vehicle markets. Together this combination has heavily impacted Hyundai's fortunes across Q2 and Q3, its record share price on the Xetra bourse loosing approximately 30% over recent months as investors perceive Hyundai's worldwide challenges. Nonetheless it still sits lower-centre within the 'investment window', a function of its prevailing conglomerate discount, though awaiting a sales and revenue rebound.

Profitability Ratios -

Herein, it is seen that there has been an improvement over Q2 for most auto-makers, even though many do not yet qualify within the 'investment window'.

Those that remained strongly within are Hyundai (though profiting slightly less than Q2), Toyota (much improved over Q2) and BMW (marginally under Q2 performance). Arriving from the bottom boundary are Daimler and a re-entering is Volkswagen.

On the very cusp is Honda (with static QoQ profitability but slightly improved RoE). Just beyond is Ford (with likewise static QoQ profitability but substantially decreased RoE), whilst Renault sees a profitability jump. Further below the 5% profitability boundary are GM (effectively static) and a lower placed FIAT (slightly improved).

PSA remains far below, and though viewed as improving as per its scant 'Back in the Race' results material, is still estimated as yet to reach break-even.

Liquidity Ratios -

The majority of auto-makers experienced a major decline in OCF (operational cash-flow) over Q3. The only three to escape this trend were BMW (effectively static QoQ) and Toyota ) moderately reduced) and Daimler. The three pointed star in fact bucked the trend thanks to its earlier investment efforts and cost absorption, pro-cyclical exposure to all 'on-road' vehicle segments, and strong newer model mix, so gaining substantially in OCF.

Remaining within the 'investment window' are Daimler, BMW, Toyota and (a much estimated) PSA.

Whilst experiencing substantial OCF fall-back, Volkswagen and Honda at least remained in positive OCF territory. Tumbling into negative OCF were – in ranked order of loss – Renault, Ford, GM, FCA and Hyundai.

[NB as is the usual calculation Operational Cashflow is simply deduced from the calculation of OCF = EBIT – (CapEx + Financial Investments). However given the lack of transparency offered by some corporations, the FI portion has been omitted so as to provide simplistic but comparable calculations].

Debt Ratio -

Relatively little change for six of the eleven auto-makers. These being: GM and FCA, respectively well within and upon the border of the 1:2 segment (of cash to debt), PSA and Renault respectively well within and upon the border of the 1:3 segment, and Toyota upon the 1:4 border with BMW statically positioned outside the 'investment window'.

Negative changes seen with Honda, previously upon the 1:4 boundary but slipping in cash and debt terms, with Ford likewise slipping at far higher levels.

Positive change for Volkswagen, rising from the 1:4 boundary to 1:3 line, and for Daimler, its cash generation added to its cash cushion along with slightly added debt, moving from well outside the 'investment window' to its outer 1:4 border.

Results -

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

Four Appearances:

Three Appearances:
Volkswagen, Daimler, Hyundai, Toyota

Two Appearances:
FCA, BMW, Renault, PSA, Honda,

One Appearance:
GM, Ford,

Conclusion -

The depicted graphs, representative of matched and merged data sets, highlights the rational investment attractiveness of each of the global eleven players utilising Q3 (and as necessary Q2) results with recent stock price and associated data.

Unlike the quarters of previous 'recession rebound' years which ostensibly dissected auto-makers into obvious winners and losers – the likes of VW and Hyundai vs the likes of Renault or FIAT – more recent quarters have seen the combined effects of both internal auto-sector structural change and the boost effects of demonstrated and expected QE.

So essentially starting to level-out what was once a very one-sided playing field, and providing those mainstream manufacturers which have large American and European market exposure respectively sound and improving revenues impetus.

As a result, the once polarised investment attractiveness toward star performers of the previously split pack has diminished, with numerous investment stories of differing size, stature and time-scales continuing to appear.

Within this more complex yet wholly positive backdrop, attuned investors will be seeking out those specific firms which show greatest contextual promise. The once lack-lustre Daimler presently a shining example of organisational metamorphosis, with combined: the divestment of non-core EADS stake, reduced engineering development and production costs, 'back room' efficiency efforts and critically renewed focus on well targeted products across a broad vehicle spectrum.

Clearly the Stuttgart firm's recent performance provides contemporary prominence, but each corporation, within its own context, has its own obviously very specific investment tale. De-constructing the very fabric of the micro and macro with insightful aplomb is then vital for investors.