The ‘Trump effect’ strikes again. A number of auto stocks took a tumble after Trump tweeted that OEMs selling cars in the US might be hit with a 35 percent tax.

By Jeff Sanford

Toronto, Ontario -- January 16, 2017 -- Tuesday Ticker looks at the news from the companies, big and small, that comprise the auto claims economy. This week we dig into the impact that the so-called “Trump effect” is having on the markets, in particular auto stocks, the good news story at Advance Auto Parts, the recent dip in stock price for Chrysler and much, much more!

- North American markets opened the week down slightly. Auto stocks were said to be dragging indexes down. Commentators blamed the “Trump effect” for the weakness in the stocks of the OEMs. President-elect Trump continues to tweet about the auto companies. His latest missive was directed toward German automakers like BMW and VW, with Trump saying the foreign car markets should pay a 35 percent tax to import manufactured vehicles into the US. The tweet wiped billions from the value of the manufacturers in just a few minutes as the phenomenon traders call the “Trump effect” played out yet again.

- Uni-Select enjoyed a price target increase by Royal Bank of Canada (RBC). The bank bumped its target price from $35 to $36 in a research report distributed to clients last week. Monday morning the stock was trading around $30. According to the report, “The average 12-month price objective among brokers that have covered the stock in the last year is $50.12.

- AkzoNobel just announced it is launching a, “... global chemicals start-up challenge.” The program will see the company partner with, “... start-up firms, students, research groups and career scientists to jointly exploit the knowledge of chemistry and solve several real-life chemistry-related challenges.”

The program, Imagine Chemistry, suggests some future trends for paints. According to the company the hope is some of the research could go commercial with three to five years. The “challenge” areas include revolutionizing plastics recycling; wastewater-free chemical sites; cellulose-based alternatives to synthetics; bio-based and biodegradable surfactants and thickeners and bio-based sources of ethylene. "Our world is made of molecules and we believe that chemistry, mastering the elements, is essential to making the world a better place," said Peter Nieuwenhuizen, RD&I Director for AkzoNobel's Specialty Chemicals business.

- BASF announced recently that Thomas Kloster is the new head of its Automotive OEM Coatings Solutions in Europe. Kloster replaces Martin Jung, who moved up to coordinate the integration of Chemetall into BASF. The German chemical maker recently acquired Chemetall for $3.2 billion at the end of 2016. According to a report, “Prior to his new role as head of automotive original equipment manufacturer for Europe, Thomas Kloster served as vice-president for the company strategy at its headquarters in Ludwigshafen/Germany … The automotive industry is a major global consumer of petrochemicals which contributes more than a third of the raw material costs of an average vehicle.”

- Investors continue to find Advance Auto Parts appealing. Financial statements filed with the Securities Exechange Commission note that during the third quarter Hartford Investment Management Co., Boston Partners, Marshall Wace LLP, Marshall Wace LLP, Wells Fargo & Company, Melvin Capital Management LP and FMR LLC all increased their stake in AAP before year-end earnings are released.

Related Market Notes

- For years it has been traditional in markets that aluminum maker Alcca would unofficially start the earnings season by being the first publicly-listed company to announce its latest financial results. That tradition will now change. At the end of November Alcoa announced that it has split into two companies to, “... separate its raw aluminum operations from its aerospace and automotive supply businesses.” According to a report, the split was completed to facilitate the company's focus on the new market opportunities opening up as more auto makers utilize aluminum. The traditional melter/smelter will continue to be named Alcoa. According to a report, “The parent company is now named Arconic Inc. and will sell parts to aerospace giants like Boeing Co., Airbus Group SE  and Lockheed Martin Corp...and offer lightweight alloys to car companies including Ford Motor Co., General Motors Co. and Fiat Chrysler Automobiles N.V.”

- Although many are predicting car sales have peaked, last Tuesday GM projected, “... another year of profit growth and heaped a $5 billion share buyback plan on top of the $9 billion it started repurchasing in 2015 ... Hours later, Ford Motor Co. added $200 million cash to its regular first-quarter dividend.” According to Maryann Keller, an independent auto analyst quoted by Bloomberg, “The auto industry has benefited from cheap and available credit and low fuel prices. All of that has worked in the industry’s favor and no one is saying that’s going to die.”

- Trump's exact quote concerning German automakers follows: “If you want to build cars in the world, then I wish you all the best. You can build cars for the United States, but for every car that comes to the USA, you will pay 35 percent tax ... I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35 percent tax, then you can forget that.” Right after the tweets, “Volkswagen shares fell 2 percent, and shares in Daimler and BMW both fell 1.8 percent ...”

- As markets react to Trump's tweets some economists worry that up to “40,000 workers in the automotive sector across North America could be on the chopping block,” according to a report from an auto-based think tank. The Ann Arbor, Michigan-based Center for Automotive Research, just released a study that indicates, “A withdrawal from NAFTA or the implementation of punitive tariffs could result in the loss of at least 31,000 jobs in the country’s auto parts industry. Part of these cuts would stem from the loss of Mexican import sales ... The report estimated that the other assembly line job cuts would result would from the implementation of the 35 per cent tariff on Mexican vehicle production, as automakers in the U.S. use parts their parts and components to the tune of an average of 11.7 per cent. Furthermore, the report said that this tariff could result in an additional loss of nearly 6,700 jobs on assembly lines across North America.”

According to the text of the report, “Any move by the United States to withdraw from NAFTA or to otherwise restrict automotive vehicle, parts and components trade within North America will result in higher costs to producers, lower returns for investors, fewer choices for consumers, and a less competitive U.S. automotive and supplier industry ... NAFTA has contributed to the growth of integrated automotive production and supply networks within the North American region, and significant changes to the tariff structure will have major ramifications for automotive manufacturers and suppliers. These ramifications range from the vehicle makers’ ability to deliver an affordable mix of vehicles consumers demand, to the ability to support supply chain requirements with globally cost-competitive raw materials as well as products that might not have any sources within the United States.”

- CEOs in other industrial sectors are now tripping over themselves to promise Trump they are about to create vast numbers of jobs in America. Amazon founder Jeff Bezos has promised he’ll create more than 100,000 full-time jobs in the next 18 months. The CEO of Taco Bell promised a similar number over five years.

- Chrysler shares sold off by a remarkable thirteen percent this week after it was announced that the US government is accusing its parent company FCA of violating the Clean Air Act through some software installed on diesel engines built into about 104,000 vehicles. Traders worried that FCA is about to suffer an emissions scandal similar to the one VW is dealing with. According to a CBC report, “The Environmental Protection Agency accused the company of installing and failing to disclose engine management software in 2014, 2015 and 2016 Jeep Grand Cherokee.”

- Of all the billionaires involved in the new Trump administration none is richer than Carl Icahn, the 80-year-old leveraged buyout king. His net worth is $18 billion. According to one report by New York magazine, “he has more money than all the other billionaires on Trump’s team put together.” The report goes on to note that Trump has tapped Icahn to “reform” the very agencies that are overseeing his investments, which are concentrated in sectors like, “... energy, auto supplies, and mining. So far, that work includes helping to choose the heads of the Securities and Exchange Commission and the Environmental Protection Administration, as well as telling them which regulations need changing.” Icahn has been buying up aftermarket auto parts retailers across the US. One of the changes he is said to be considering is a shift in regulation that could, “... make it easier for players like him to take big stakes in companies without informing other market participants.”

Activist investor Carl Icahn. A report notes that Trump has tapped Icahn to 'reform' a number of agencies oversee Icahn's investments.  
Activist investor Carl Icahn. A report notes that Trump has tapped Icahn to 'reform' a
number of agencies which oversee Icahn's investments.
 

 

- An eventual increase in Canadian interest rates is not expected to lead to a spike in mortgage book losses for Canada’s banks, according to Dave McKay, the CEO of Royal Bank. Some have worried that a rise in interest rates would see many Canadians homeowners default on their mortgages. The RBC CEO was careful to allay those fears last week. According to a report in the Financial Post, “... employment is the real driver of whether homeowners struggle with mortgage payments. Provisions for credit losses in the mortgage book are 'driven by job losses … not interest rate increases.'”

 

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