Market Rout, Volkswagen Fiasco, China Sink German IPOs

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Are US markets next?

Germany is ahead this time, rather than behind. German stocks have plunged. The DAX was down another 2.1% today. It’s down 23.5% since its Draghi-QE peak in April, and sinking deeper into a bear market.

The Volkswagen fiasco didn’t help. Its shares plunged 7.5% today to €99.30, the biggest loser in the DAX, and the first time since 2010 that they dropped below €100. Back then, Volkswagen was recovering from the Financial Crisis. Today, there’s no recovery in sight. Shares are down 61.4% since April.

Bottom-fishers beware: This scandal continues to metastasize with new revelations bubbling up on a daily basis about just how long this has been going on, who has warned about it in 2007, and who knew about it among current and former executives and board members of Volkswagen and among current and former politicians who have a revolving-door relationship with the German auto industry, and with Volkswagen in particular. This is going to fester.

But Volkswagen was in trouble before the scandal.

About a third of its revenues come from China, its largest market. But its sales in China plunged 10% in August. It’s losing market share in an already shrinking market, despite big price cuts, and amid a massive investment in yet more assembly plants to build yet more vehicles for the Chinese market.

As this is turning into an investment into overcapacity, all hopes are now riding on new SUV models. But the Chinese don’t like to be cheated and lied to by a car company any more than Americans do.

Its bonds are in trouble too. Prices have plunged, yields have jumped. Currently, it can’t raise new money at a reasonable cost. It has to rely on its own cash and bank loans. But it faces billions in costs related to the scandal. It faces plunging sales. It faces a daunting marketing challenge. And forget “clean diesel” as a motto.

Unless a miracle happens and this scandal goes away, and its sales in China and the US suddenly surge rather than plummet, it might look to the government for a bailout. But given what Volkswagen has accomplished, in terms of pissing off tens of millions of German consumers and taxpayers, such a bailout could be politically very unpalatable – and thus, if it happens, punitive for stockholders.

The other big automakers also got hit. A special mention is due Porsche Automobil Holding. It plunged 7.2% today and is down 60% since April. Like Volkswagen, it has plummeted 40% since the scandal broke. It owns 52.2% of the common stock of Volkswagen (don’t even get me started about Volkswagen’s screwed-up ownership, voting rights, and government control).

But it’s not just the automakers.

The number two loser was scandal-infested Deutsche Bank, down 4.7% for the day and 29% since April. In third position, K+S AG. It’s into fertilizers, salt, and potash. It got hammered down 4.5% today. Industrial conglomerate ThyseenKrupp dropped 4.3% today and is down 41% since April. RWE, one of the largest utilities in Europe, fell 4.1% today. Its shares have plummeted 63% since May and are down 90% from their peak in 2008.

So it’s not just Volkswagen. And it’s not just this week. This is a major stock market rout:


Timing is a bit unfortunate: The year of Draghi’s QE was supposed to be the IPO year in Germany, not of startups, mind you, but of big industrial companies.

Three Big IPOs were supposed to be happening right now.

Bayer’s Covestro became a separate unit just this month and was to be set free via an IPO. The company makes plastics, coatings, adhesives, etc. And the auto industry is a big customer. It was supposed to raise about €2.5 billion, which would make it Germany’s largest IPO since the bubble of 2000.

But investor demand has been tepid. Reuters reported that the books for the IPO “scheduled for Friday are still not fully covered, two sources familiar with the transaction said.” One of the people told Reuters, “In this market environment, investors are holding back. The deal will likely be pulled together at the last moment.”

Bayer had hoped that by selling Covestro it could raise some desperately-needed cash to pay down its mountain of debt after its $14-billion acquisition of Merck and Co.’s consumer-health business.

Shipping group Hapag Lloyd already scaled down its IPO from the originally rumored €1 billion or so, given the enduring bad weather in the stock market. The global container carrier is now planning to offer about €450 million in shares, “sources familiar with the deal” told Reuters today.

“Caution was the imperative. Hapag’s shareholders opted to float the smallest possible stake to avoid offering more than investors are willing to buy and having to scrap IPO plans,” one of the people told Reuters.

But the pressure is on to get this deal done, one way or the other. Europe’s largest tourism operator TUI Group owns 13.9% of Hapag and wants to dump these shares, some of them via the IPO, and the remainder via follow-on offerings.

“You can never catch the perfect time for an IPO,” explained Hapag CEO Rolf Habben Jansen. He named three critical reasons to move forward, among them: “We need the money for further growth…” – in an industry that is being eaten up by a to-the-death price war fought by building overcapacity to wipe out weaker competitors, at a time of lousy global trade.

And family-owned auto component maker Schaeffler AG was planning to go public on October 5. But given the debacle in German stocks and in auto-related stocks in particular, the IPO has been delayed. The company was supposed to announce the IPO price range today but has now postponed the announcement until the second half of this week, sources told Reuters:

“We lost two days last week as investors were only asking questions on VW,” one of the sources said, adding that volatile markets had not helped in promoting Schaeffler shares.

But this week, the stock market isn’t starting out any better. And due to the mess in China, Schaeffer had already cut its outlook for the full year. The company is also a major shareholder of the German auto supplier and tire maker Continental, a result of Schaeffler’s failed effort to swallow Continental during the Financial Crisis; what’s left is a pile of debt.

“But we never had a rigid time table, the timing can be adjusted to the market environment,” the person added. “Investor demand remains high.”

Ah yes, and Volkswagen is one of its largest customers.

Eventually, these IPOs will happen. Investors might lose money, as is happening more and more. But future IPOs will struggle as that window that only opens fully during stock market booms is about to close.

Funny how reality keeps intruding into the markets these days, after years when central banks had banished it. Germany is rarely ahead in these things. But this time, it is. A market rout in Germany isn’t going to stay in Germany. This is likely to spread to the US – and by the looks of things, it already has.

But stocks are the smaller end of the capital markets. The bond market is far larger. And now there’s the rising toxic miasma of “distressed debt.” Read… This is When Bonds Go Kaboom!

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  11 comments for “Market Rout, Volkswagen Fiasco, China Sink German IPOs

  1. lg
    September 28, 2015 at 10:37 pm

    Get your fortune cookies and run for cover! A hard landing is about to begin.
    PPT was at full force at noon, but the rout just kept on.

  2. September 28, 2015 at 10:39 pm

    The automobile industry is dying, it will never come back.

    It needs mass-sales in order to justify its enormous capex layouts; bottomless debt subsidies and cheap fuel; it needs trillion$ in military expenditures and a police state to keep the peons in line as well as steal the needed fuel … these things are all fading from view, just out of reach, not to be had in the future.

    The customers have been bankrupted by the absence of any return on driving other than evanescent ‘pleasure’. Broke customers cannot retire the fuel- and manufacturing industries’ debts. These industries are insolvent … and so are their lenders.

    Cheap fuel … the price is too low for Shell to continue to battle protesters and waste more billions on arctic drilling, the last petroleum frontier. This leaves not enough fuel to subsidize the necessary infrastructure which is right now falling apart — the roads and freeways, the sprawling suburbs and monstrous towers in Blade Runner cities, the giant banks and bloated, venal governments, the inept militaries and their apologists; the REITs, insurance companies, rigged ‘markets’ … all that has built up over the past 7 decades so that a handful of thieves can become ‘rich’, have bigger numbers than some other thieves …

    … and so that peons can waste time and pretend they are doing something useful while they sit on their rear ends. VRRROOOOM!

    Shell should have listened to the protesters, they would have saved shareholders a lot of money, maybe kept it out of liquidation.

    • Debravity
      September 28, 2015 at 10:58 pm

      Love your work, Steve. How does ‘conservation by any means’ end?

    • CrazyCooter
      September 29, 2015 at 12:20 am

      One of my favorite data points with regards to cars is the number of moving, and thus wearable, parts. ICEs are extraordinarily complex in this regard. To be clear, I am no fan of EVs by any means, as I don’t see battery capacity being anywhere remotely close to a suitable replacement for ICE’s (at least on their current scale). Just do the math with V many cars on the road, W many miles driven, and X battery capacity required. Then work backwards to Y mass of materials required to make those batteries and give them Z life span before they need to be recycled. Match that up to either raw material supply, industrial manufacturing capacity, and/or recycling capacity (and don’t forget the enviro-laws unless you do it all in China). That said, consider how many moving parts on in an EV and if one stripped it down, it would be an order of magnitude (if not two). This is a really, really big deal to the long term viability of big auto as the cars have very few wear points which could be easily mitigated by the secondary market (i.e. you could drive a car for life ex crashes and similar).

      That is a really big supply chain that isn’t needed any more, a ton of existing cap-ex that isn’t needed anymore (the real reason the big autos hate EVs), and most importantly the emissions game, which is the primary tool to turn markets into oligarchies, is right out the window.

      Unless there is a truly new breakthrough in batteries, the reliance on rare materials, which are horribly toxic to mine and refine, won’t go away and EVs are not nearly as friendly, in terms of a total footprint, as people want to believe. Couple that with the source of charging power, albeit more efficient that ICE use of FF, and it still has a strong reliance on FF anyways.

      I highly illusionary rearranging of deck chairs IMHO, unless we are talking new sources of power for our electric grid (another subject all together) and I don’t mean wind or solar which are a joke (multiple orders of magnitude short).

      The point being is that the big thing I think folks are missing today is where their electricity really comes from and if they can still get it in 20 years at anything close to what they think is an “economic” price.



    • Peepot
      September 29, 2015 at 3:03 am

      THE PERFECT STORM (see p. 58 onwards)

      The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

      But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

  3. MC
    September 29, 2015 at 2:26 am

    We have a big problem here, and I am not speaking about the emission scandal.

    Since 2009 the German economy has effectively given Europe that tiny hedge that gave the impression (to statisticians at least) we were not mired in a neverending depression.
    You see, export-geared German companies effectively extended their chains of supply all over Europe to take advantage of conditions that allowed them to save a lot of money: they bought gaskets from France, cylinder blocks from Italy, hydraulic lines from Spain… the German export machine, which accounts for a share of the GDP similar to that of the Merchantilist powers of Asia, has effectively spread the wealth that tiny bit to avoid things in Club Med countries to become even worse than they already are.

    Now that export machine is suddenly in very serious troubles.
    Debt loads are staggering and if this emission scandal isn’t put to rest soon servicing it for the largest manufacturing industry in Germany will become a whole lot more expensive. In turn this will affect other sectors, such as industrial machinery manufacturers, which have an intimate and vital connection with car manufacturers.
    And exporting is becoming a whole lot harder. Not only Beijing central planners are running around with their hair on fire due to every single sector of their economy showing signs of strain, but Germany faces formidable competition from an ancient foe: Japan.
    If Mario Draghi has thrashed the euro, Haruchiko Kuroda has been destroying the yen with undisguised enthusiasm. This means that potential customers paying in US dollars can save even more money by opting for Japanese goods over German ones.
    Life for the ordinary Japanese has become a whole lot harder, but the big keiretsu are as aggressive as they haven’t been in decades. I can honestly say I don’t remember companies such as Hitachi pitching their goods as aggressively as they are doing right now.
    This is a race to the bottom which ultimately aims at a single target: the US market, seen as the only island of stability left and with the advantage of relatively stable currency.

    But problem is the legendary US consumer has lost a lot of his luster. He still shops, but not with the same enthusiasm he had before 2008.
    US companies know they can squeeze German and Japanese machinery and part manufacturers as hard as they want to get those sweet US dollars: Boeing had been losing $45 million on each 787 Dreamliner they sold until the end of 2013. Given most of the aircraft components are manufactured in Japan and shipped to Seattle for assembly, the yen’s downfall has been a major boon for them and the aircraft is moving towards profitability faster than originally expected.

    But relying on a single consumption-based economy which shows some concerning signs of stress may prove a very fatal mistake…

  4. hidflect
    September 29, 2015 at 3:02 am

    I worked in 4 banks in Tokyo and out of all of them Deutsche Bank stood out as the sh1t show. There was no sense there at all that you were working in a bank. No tone, no professionalism, no camaraderie, nothing. Just d1ckheads who would rather shout than talk. Funnily enough, I never met one German in the whole time I was there.

  5. rich black
    September 29, 2015 at 5:20 am

    Is VW the only auto manufacturer that is cheating on its EPA tests? Can there be only one cockroach? Perhaps there is another shoe to drop, and VW is only the Bear Stearns of the auto world. Is there the equivalent, out there in the auto manufacturing world, of a Lehman Bros or an AIG waiting in the wings to be discovered?

    • CrazyCooter
      September 29, 2015 at 10:28 am

      RB, this is EXACTLY why I felt the timing of the story break was questionable. If I was going to break this story, I would get my publishing company to throw some cash at some test gear and test drive the s**t out of new cars. I don’t follow car mechanics/mods much anymore, but it sounds like most other products on the market use urea in the exhaust system to combat the NOx and the VW engines don’t go that route (a hint). If there are others that do the same, that would be the first place to look.

      I have always felt the EPA, at least in more recent times, was more about raising the barrier to markets than actually accomplishing the good of protecting the environment. That said, this issue isn’t specific to the EPA, I believe the broke everyone’s emission rules, at least the countries that have them.



  6. jim
    September 29, 2015 at 8:53 am

    Our goverment spends billions on EPA and what we get is red tape and thousands of EPA specialist sitting on there ass doing nothing but collecting checks. Might as well shitcan the whole system along with the SEC our attorney general and 90% of our politicians. American Spring might be in order here.

  7. Julian the Apostate
    September 30, 2015 at 4:42 am

    My curiosity about Steve’s one note samba about cars notwithstanding, fact is FF is an old technology and I don’t see how a new prime mover can work its way through this disaster of a police state entrenched status quo cronyism. Even if the thing gets built it will face hurricane force headwinds. Free enterprise may not be completely dead but it’s close. I see a collapse of the current system as the only way forward and that will be decades in the rebuilding in the aftermath.

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