Wednesday, September 7, 2011

Is it safe to come out from behind the sofa yet ?

Is it safe to come out from behind the sofa yet ?

Last week I took some short term and some longer term positions in the German Dax Index and individual German companies. The next day I felt quietly smug as the DAX Rallied a few percent outperforming the rest of Europe.

There is a saying that pride comes before a fall, well 'smug' comes before a really big fall.

At the close yesterday my recent German positions were as follows
ESX1 (DAX ETF) Down 9.4%
IFX (Infineon) Down 13.5%
UTI (Paris Listed European Utilities ETF including EOAN.F RWE.F ) Down 6.3%

Of the three positions IFX is the trade, I will be happy to hold onto ESX1 and UTI for the long term.

IFX is the stock ticker for Infineon a German manufacturer of chips and micro controllers. The company's chips are used in cars, industrial processes, payments cards and smart power applications. The stock is interesting because it provides leveraged exposure to the rest of the German industrial complex.

The costs for the German automakers BMW, Porsche, Daimler and Volkswagen to produce a car include -
  • Design
  • Tooling
  • Aluminium
  • Steel
  • Petrochemical based plastics
  • Rubber
  • Copper
  • Platinum for catalytic converters
  • Wood - sustainably sourced
  • Leather
Then there is
  •     Marketing the luxury lifestyle
  •     Sponsorship of motorsport teams and series
  •     The cost of dealership premises and staff
  •     The cost of transporting the finished cars to dealerships
  •     The labour to actually build the car

As the car manufacturers increase production so all of their costs tend to increase as they compete for the same resources however for a chip maker like Infineon the costs are largely constant regardless of volume. As every new car includes hundreds of microelectronic components Infineon is a direct beneficiary of the marketing, design, distribution and dealership network of the luxury car manufacturers without having to spend a single cent on any of these resources.

I have in the past held profitable positions in both BMW and Volkswagen, however in the longer run my concern is that these two companies are competing head to head for the same market segments. Its no coincidence that Audi has named its model series 4,6 and 8 in an attempt to get ahead of the BMW 3,5 and 7 series with which they compete. It doesn't seem such a far fetched scenario that the two automotive manufacturers will market harder, equip their cars with more technology and reduce profit margins in order to win market share, in this scenario there is only on winner - Infineon.

If it wasn't for the extreme volatility in the Infineon share price I would be considering the company as a long term way to play the German luxury auto industry without the resource, labour and competitive pressures facing the auto stocks. The stock is too wild for me to hold for any length of time, but for trading a rally in the DAX Infineon is about as good as it gets.

Getting back to the market, peeking out from behind the sofa I see that DAX Index has recovered 4%, the auto makers BMW, Volkswagen, Daimler and Porsche have all gained an impressive 6% but the winner by far with 8.59% is Infineon.

As my position in Infineon is still down 5% I will be looking for a few more days like today before cashing in and closing the position.
Long DAX, IFX and others, a bit sheepish and definitely not smug !

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