Playing The Auto Sector

The Financial Times is out with its U.S. econo-stat of the day and it's rather interesting: "vehicle purchases by consumers alone accounted for 30% of all GDP growth in the last two quarters. Motor vehicle output is less than 3% of GDP. But its standard deviation is more than nine times the overall GDP's standard deviation. So in the world of growth rates, the auto sector will tend to punch well above its weight in expansions (and below during recessions)." It's something we all probably knew, but it is nice to have the data. And with U.S. leading indicators showing signs of a slowdown and other nations slowing as well, it may be time to look at the auto sector from the short side.

First, we could just outright short the CARZ ETF (NASDAQ: CARZ). This ETF tracks the NASDAQ Global Auto Index and its largest positions include Hyundai, Toyota, Ford (NYSE: F) and Harley-Davidson (HOG). The only downside to using this ETF as a play on the U.S. auto market is that it's 82% invested in international stocks. Yes, most automakers derive lots of revenue from North America, but there are some plays that are more exposed to U.S. market than others.
 
The obvious choices are Ford and GM (NYSE: GM). The two publicly traded of the big three have a large footprint in the U.S. and would thus sell-off as the economy weakens. However, a less obvious and potentially less crowded trade would be to look at auto-parts suppliers. For example, Lear Corp. (NYSE: LEA) supplies electrical systems and seats. Most of its contracts lead it to be susceptible to economic fluctuations, as they state price and not quantity, and thus make it vulnerable to demand shocks. If automakers don't have demand for cars then suppliers don't have demand for parts. Another supplier to look at is TRW Holdings (NYSE TRW). The company specializes in safety systems and is susceptible to the same shocks as Lear.
 
Take this as you will, but it is clear that these stocks are great ways to play macro trends. Good luck and good trading.

By Matthew Kanterman