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Position: neutral - no current position (with a positive intermediate term TREND bias)

The trifecta of negative rear-view German fundamental data points recently rolled through a dynamic landscape.

 Here's what has come out over the last two days:

  1. The Federal Statistics Office reported that German exports declining 28.7% from a year earlier and dropped 4.8% from March, when they rose 0.3%.

  2. Industrial output declined 1.9% in April from March, when it rose 0.3% according to the Economy Ministry.

  3. Factory orders in April held steady at the March level of +3.7%, yet are down 37.1% from a year earlier, as measured by the Economy Ministry.

While the data is admittedly revisionist, April's numbers could squash our incremental German bullishness. Our better-than-bad outlook was founded on a sequential improvement in unemployment (decreasing 10 bps to 8.2% in May), a stabilization and marginal improvement in German and European business and consumer confidence numbers, a reduction in PPI and CPI numbers on a monthly basis that we believed would encourage the consumer to spend, and the month-over month improvements in the three fundamentals above from the March numbers. While we stick to our forecast that Germany will experience mild economic improvement this year with positive growth starting in early Q1 of next year, today's numbers confirm that the fundamentals are still bad.

As much as we're data dependent, three substantial changes in the German economic and political landscape have happened in the last 10 days, which we believe are important call-outs:

  1. On the first of the month German Chancellor Angela Merkel decided on Magna International Inc. as the buyer for GM's Opel division in Germany. The agreement was a heavily politicized event for Merkel who is running a reelection campaign in September. With thousands of jobs at Opel and from parts suppliers hanging in the balance the decision sparked much debate, from the importance of saving one of Germany's most important industries to not playing favor to one industry. Merkel had strong opposition from her newly appointed German Economics Minister Karl Theodor zu Guttenberg who believed that her approved bridge loan of 1.5 Billion EUR to prevent Opel insolvency before a buyer resumed operations was imprudent government spending. Further the choice of Magna, a Canadian-Austrian auto-parts supplier that is backed by Russian bank OAO Sberbank and carmaker OAO GAZ, created much consternation due to the historical tensions between Germany and Russia and the sizable 35% stake a Russian enterprise would have in the company.
  2. Over the weekend Merkel's Christian Democratic Union (CDU) beat the Social Democrats (SDP) in European Parliament elections according to preliminary results. Merkel's party (along with their Bavarian Christian Social Union-CSU sister party) received 37.9% over her incumbent Frank-Walter Steinmeier of the SPD, whose party garnered 20.8%. The victory signals German support of center-right parties. Additionally Merkel's preferred coalition partner, the pro-business Free Democrats (FDP), received 11% of the vote. Should Merkel's CDU-CSU party retain this support with the FDP as coalition partners, she'd very likely be at a margin to win a solid majority for the national vote in September.

  3. Today Arcandor AG, owner of Karlstadt, one of Germany's largest department-store chains, filed for insolvency after the German government decided not to come to its aid. Bloomberg cites Merkel as saying the collapse was "unavoidable after investors and banks offered too little to save the company."  In any case the decision is reverberating hard throughout the media today, with many questioning if a merger with competitor Metro's Kaufhof might still be a possibility. Again, in the balance hang many jobs, and general confidence if household retail names like Karlstadt go away.

The recent political decisions help confirm German aversion to state aid, a conservative view prizing low government debt to prevent hikes in taxes. For Germany, a country considered by many Americans to be profoundly socialist, for the moment it sure looks as if the tables have turned.  Despite April's poor numbers our bullish bias on Germany in the intermediate term remains. Fiscal conservatism when properly balanced will help keep the country's balance sheet at a manageable level. Such leadership can only promote investor confidence.  

Matthew Hedrick
Analyst