The A&O Letter

Exclusive Investment Research

The

September 22, 2015

Letter

Where We Are
The economy is weak and is
expected to weaken further.
This is what the market is
saying via extreme weakness in
the automobile sector, the
steels and many chemical
stocks. A rally in the euro
looms larger than ever and this
may support domestically
oriented companies through
lower import prices. The
German economy needs an
export surplus of ca. 220
billion euros annually to
produce about 1.5pc growth.
The German export business
largely rests on three markets
and the vulnerability to a firm
euro plus problems in France
is huge. That said, the risk is
that Germany will itself in a
severe recession sooner than
the consensus expects. - The
DAX is now heading for a test
of the August lows. Ideally, it
should drop below 9,300 on
bullish divergences in our
short-term technical indicators.
Seeing is believing, though.

Stocks
You are out. Stand aside.

Bonds
You are long. Set a stop at
BUND Future 149,.
Copyright Advice & Opinion, 2015

Standing On One (half) Foot

The talking heads, the journalists, the experts, and
certainly the politicians watch the seemingly everexpanding German trade surplus with the same glee that
teenagers watch splatter movies in which heads are
blown up by the dozen. What differentiates the latter
from the former is that the movie goers know what they
are watching will be over once the lights are turned on.
Robert Redford once quipped in a press conference,
You cant trust what you see on film. The illusion - as
thrilling as it may be - will be over once the lights are on.
Now, if we turn on the lights on German foreign trade, so
to speak, we are confronted with evidence that the
illusion of an ever expanding German trade surplus is
nearing its terminal stage. At least since the introduction
of the euro Germany has followed a mercantilist business
model promoting exports at the expense of its domestic
market. Germanys wage dumping did the trick. Its trade
partners in the EMU were throttled by the German strateAll Rights Reserved

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The A&O Letter

Exclusive Investment Research

September 22, 2015

gy of gaining international market share and left

defenseless because they were unable to devalue their
currencies. This is not the case in markets outside EMU and
it looks as if the exchange rate mechanism will begin to
brake German exports to the U.S. and the UK.
The chart on page one shows EUR/USD as top graph and
at the bottom the German trade surplus with the U.S. and

Lets Talk Tactics

Our focus remains firmly on stock
picking using the Stage Analysis
tool. Focus on Stage 2+ stocks
only!

the UK as a percentage of its total trade surplus. Both

countries currently account for (an annual average of)
42pc of Germanys trade surplus. Toss into the pot France
and you will end up with three countries accounting for (an
annual average of) 58pc of Germanys trade surplus.

The stock market is far from

monolithic. The cyclicals are
under severe pressure
forecasting a recession. The
FIRE sector (except banks) seems
to be the safe haven. However,
this may change once the DAX
violates significant support
making it obvious that something
is utterly wrong with the
economy. Ince sentiment
changes the outperformers will
get sold, too. That said, risk
control via tight stops are a must.

Germany is highly vulnerable not only to a setback in its

We would put cash into German

government bonds and dollarhedged U.S. Treasuries. Place
trailing stops according to your
own risk preference.

deviations from the fundamentals. That said, recent trade

export business, but it is more or less dependent on just

three customers. Its economy is therefore not only
standing on one foot (exports). It is only a half foot given its
focus on these three international markets.
The ratio shown in the chart has only recently broken its
well defined uptrend and, as history shows, such reversals
have coincided with major turning points in EUR/USD and
EUR/GBP for that matter. The ratio has reliably tracked the
trade-related trend behind the EUR/USD exchange rate
and kept you on the right side in spite of all its sizable
data (thru June 2015) confirms our notion that the euro is
establishing a base vs. the dollar (and others). A broad
euro rally will brake Germanys export boom and be part
of a general recession. Notice that in the below chart,

Advice & Opinion

Demographics & Markets
Inh. Dipl.-Kfm. Rdiger Braun
Wildenbruchstrae 82
D-40545 Dsseldorf
Contact:
aodemographics@me.com
Fon: 0211 6400113
Cell Fon: 01525 8705859
Web: www.aodm.eu
Copyright Advice & Opinion, 2015

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Questions? Call 0211 6400113

The A&O Letter

Exclusive Investment Research

September 22, 2015

which shows the combined trade balance

(Hugo Boss, Gerry Weber, Tom Tailor),

for the U.S., UK, and France as a percentage

retailers (Metro) etc. On the positive side

of Germanys total trade surplus, the moving

anything related to the FIRE (except banks)

average line is already trending down albeit

sector continues to look mostly okay.

slightly. This may be seen as an explanation

Given the extremely split nature of this

why the October 2014 stock market rally

market our stock selection discipline (Stage

was unable to last. Pressure on stocks should

Analysis) continues to produce outstanding

increase once the trade surplus starts to

results. Please call/mail to subscribe, as the

actually shrink.

coming months will be extremely tricky.

The practical implications are that the stock

The bond market looks like getting ready for

market is unlikely to recover any time soon.

a major up move. The Bund Future should

German cyclical stocks have been under

close above 155.41 very soon. Moving

severe pressure and are about to break

above 155.81 would constitute a major

long-term support levels. Examples include

technical buy signal.

the automobiles (VW), automobile suppliers

(Elring Klinger, Grammer) , chemicals
(BASF), machinery (Deutz, GEA), textiles

Copyright Advice & Opinion, 2015

Capital preservation remains our top

priority. *****

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