“OOH, OOH SUBARU…THERE’S SO MUCH THAT CAR CAN DO…”

5/31/13

Subaru’s parent, Fuji Heavy Industries, made some relatively big news yesterday when it said that its sales have been so good in this country that, as Fuji CEO Yasuyuki Yoshinaga put it,

“If this situation persists, we’ll face a supply shortage.”

Mr. Yoshinaga may be too late in his prediction.  Inventories of Subaru products as a whole constitute 40 days sales, up from a low of 18 days’ sales at the end of 2011, but a level for which just about any other car company would kill.  “Normal” inventory levels are 60 days in the industry, on average.  Subaru has almost never seen inventory levels that high.

These strained supplies are the result of an amazing record of success, to wit

• April U.S. sales were up 25% year over year.  (Half of Subaru global sales are in the U.S.)
• Year to date U.S. sales for the first four months of 2013 were up 17% year over year.
• Sales have increased for five straight years.
• Operating profits reached record levels in the fiscal year ended 3/31/13 and are projected to set another record this year.  (But see my 5/23/13 post  THE CAR SALES BUBBLE:  “JUST TELL ME WHAT YOU WANT AND THEN SIGN THAT LINE AND I’LL HAVE IT BROUGHT DOWN TO YOU IN A HOUR’S TIME” on the sanguinity of people’s opinions about car sales overall.)
• Fuji’s stock is the best performing Japanese auto company stock.

An anecdotal story might be in order here.  My local Subaru dealer is Gerald in Naperville; Kias are sold out of the same store.  (See my already seminal 5/20/13 post I TEST DROVE A KIA TODAY…).   I talk to a lot of the salespeople there as I walk our dog across their lot and peruse the inventory.  The other night I talked to one of the Kia salespeople who looked ruefully toward the Subaru side of the store and said something to the effect of

Those Subaru guys have it made; their product sells itself and all they have to do is take the orders.

And Kia is no slouch in the sales, or any, department.  But I digress…perhaps.

Fuji’s success is simply a case of defying conventional wisdom by, mirabile dictu, making a great product that people want to buy, pricing the product reasonably, and not getting caught up in megalomania.   It has long been taken as holy writ that car companies have to be big in order to “succeed in the global marketplace” or some other such drivel we hear in management classes and in the financial media, the type of schlock that is accepted without question.  But Subaru is the smallest of the Japanese carmakers.   (See my 5/24/13 post JAPANESE CAR EXPORTS TO JAPAN:   VALUE AND QUALITY TRUMP POLITICS for some background on the outstanding Japanese car industry.) And two other highly profitable global car companies, Honda and BMW, are also relatively small operations.   This notion that size is necessary for prosperity, or even survival, does little but feed the megalomaniacal egos of the people who run major corporations; it doesn’t seem to enhance profitability, at least not in the car business.

And, since I love cars, a note on the product, which may pale in importance compared to the point made in the last paragraph.

I am an inveterate Subaru fan, and not just because of the great commercials they used to have during the football games when so much of my life centered around drinking beer and watching football.  But I have never owned a Subaru.  Why?  Because I have no need for all wheel drive (“Symmetrical all wheel drive (“AWD”)”) is the most salient of  Subaru’s several distinguishing technologies.) and therefore am unwilling to sacrifice the gas mileage necessary to have AWD.   While Subaru has vastly improved the reported gas mileage of its products with its continuously variable transmissions (“CVTs”), I still have what my friends call my manual transmission fetish.  And the gas mileage is much worse in Subaru products with manual transmissions than it is in Subies equipped with CVTs.

The especially hot vehicle for Subaru this year is the new Forester (pictured), a perennial standout in the small SUV category.   This new model is, supposedly, better than ever, with more room, better gas mileage and, according to most people, a better, quieter ride than its wildly successful, but aging, predecessor.  I drove a new Forester and was very disappointed, but only because of one attribute…the steering.  The steering is very loose, akin to that on a 1978 Buick.   And I HATE loose steering and had a hard time seeing past it.   To the extent I could see past the steering, though, the car seemed to be at least as good as anything with which it competes, but remains a non-starter for yours truly.

Further, I, like a lot of people who have admired Subaru through the years, am getting concerned about Subaru’s deliberate drive to move beyond its quirky past and make vehicles more appropriate for America…larger, more gizmoed up, softer, more mainstream.   Subaru has not lost the things that made it Subaru, but many, including yours truly, fear it might. 

However…

Car companies are in the business of selling the most cars, not of making the most cars that appeal to yours truly.   AWD is a great technology, and those who have had it will rarely go back to front or rear wheel drive.   AWD is great in the snow and rain, of course, but can also improve handling in all conditions.   “Symmetrical AWD” is Subaru’s calling card, and the company does AWD better than anyone else, even “premium” car companies that sell cars costing twice or three times as much as what anyone who is not obsessed with image would consider the comparable Subaru.  And most people don’t care about the steering on their small SUVs; they want comfortable, roomy, somewhat fun vehicles that can get the job done, and Subaru obviously delivers with the new Forester.

I’m not recommending Fuji stock; I don’t know enough about the company to do so.  But I am recommending Subaru vehicles.   And maybe one day when they put automatic climate control and satellite radio in a car with a manual transmission, I will fulfill my nearly lifelong wish to own a Subaru.

CASINO EXPANSION IN ILLNIOIS: WHAT’S THE POINT?

5/30/13

We’re nearing the end of the legislative session in Springfield.  Among the other things, including pension reform (See my 5/8/13  piece THE CULLERTON PENSION PLAN:  “THE (PUBLIC EMPLOYEE UNIONS) FAMILY DON’T EVEN HAVE THAT KIND OF MUSCLE ANY MORE”??? and my 5/2/13 post MIKE MADIGAN’S PENSION REFORM PLAN:  “THE BEST THAT (WE) CAN HOPE FOR IS TO DIE IN (OUR) SLEEP.”), gay marriage, concealed carry, and a McCormick Place Arena (DEPAUL AND THE McARENA:  WHERE’S THE RETURN ON DEPAUL’S INVESTMENT IN CLOUT?, 5/17/13 and AN ARENA FOR DEPAUL AND ELEVATING CHICAGO:  “FRAU BLUCHER, ELEVATE ME!”, 5/16/13) coming to a head will be a huge expansion of casino gambling in Illinois.

I have expressed my feelings about casino gambling on 5/2/13 in ILLINOIS GAMBLING EXPANSION:   “A LADY DOESN’T WANDER ALL OVER THE ROOM AND BLOW ON SOME OTHER GUY’S DICE.”, but, since this seems to be the issue which is garnering, and undeservedly so, the most attention, a summary of my feelings is probably apt.

Legalizing gambling doesn’t especially bother me, though I often wonder why it was such a bad thing when run by groups of enterprising young immigrants and first generation Americans during most of the last century but is suddenly so salubrious now that government is in charge and/or gets a big piece of the action.  But I remain opposed to this gambling expansion, including a Chicago casino, four more casinos peppering the state, and slot machines at the airports and race tracks.  Why?  

I don’t see any upside to this further expansion of gambling.   Giving politicians more money to spend doesn’t solve anyone’s fiscal problems, and this will certainly be the case in Illinois.  Already, with a $100 billion pension hole and state vendors waiting months, or longer, to get paid, our esteemed legislators are finding ways to spend the new casino money on “depressed communities,” “Latino development funds,” the state fairgrounds, and that  catch-all for pork and sleight of hand, “education.”   Give these guys more money, they’ll just spend it…and more.  And who knows what brobdingnagian spending projects these poltroons can come up with in a bill that will, of necessity, be voted on with only at most a day and a half for review and consideration?  The jog to financial ruin which Illinois is taking will become a sprint.

So what’s the point?  Even the most effectively regulated, cleanest gambling operation in the world would only exacerbate our fiscal problems, so why put up with the attendant social problems?

See my two books, The Chairman, A Novel of Big City Politics and The Chairman’s Challenge, A Continuing Novel of Big City Politics, for further illumination on how things work in Chicago and Illinois politics. 

IF YOU WANT TO GET PEOPLE CHARGED UP, WRITE ABOUT TESLA (TSLA)

5/30/13

Writing about and/or commenting on Tesla (TSLA) is a lot like writing or commenting on Apple (AAPL).   Neither of these appears to be a stock; both instead appear to be religions.   People have decided they love one (or maybe both) of the company’s products, and therefore the stock, and no one can talk them out of that position.   Not surprisingly, then, my 5/23/13 post TESLA (TSLA):  THE GREENIES ARE CHARGED UP, BUT… in which I questioned (Some who aren’t used to reading my material said “bashed,” but I thought I was quite balanced in my assessment.) the Tesla Model S and expressed my misgivings about the stock at a much lower price ($92.71) than that at which it closed today taught me that if you want to draw attention to your writing, write about TSLA. 

The big announcement today from Tesla Chairman Elon Musk, the announcement on which people had been anticipating for weeks, was that Tesla will triple the number of supercharging stations by the end of next month.  Within six months, Tesla will have covered most of the country’s major metro areas with superchargers and will enable people to cross the country diagonally from New York to LA without fear of losing power…and all, presumably, on Tesla.  By a year from now, the whole country should be covered…no more range anxiety.   Also, the charging network will have some kind of solar backup so Tesla owners will be able to charge their cars even if the electrical grid goes down.

A supercharger, by the way, enables drivers to, within twenty minutes, charge their cars to the point at which they can be driven three hours.   Twenty minutes is longer than it takes to fill a conventional gasoline tank (about four times longer), and if I fill my tank in five minutes, I can drive five or six hours before having to stop to refill.  But Tesla’s getting close to being practical with their supercharging systems…and that’s impressive.  And, lest I draw even more brickbats than I anticipate, I will also add (again) that most of the buff books, especially Motor Trend and Automobile, and Consumer Reports LOVE the Tesla Model S.  Yours truly has not driven it; despite my love of test driving (See my already seminal 5/20/13 post, I TEST DROVE A KIA TODAY…), I cannot in good conscience go into one of the few showrooms in the area and test drive a car I could not possibly afford.

The first reaction of the suitably skeptical and cynical investor (or car buyer) should be to question whether Tesla can pull off such a feat.  A nationwide system of superchargers that can be conveniently accessed would be a titanic accomplishment.   And even if it can be achieved, 20 minutes for three hours of driving, while impressive, still adds a lot of time to long trips and renders the Model S not the vehicle of choice for anything but driving around town.  At $70,000 (Okay, $62,500 after tax credits.), one would like to not have to buy a second car for long trips. 

A few more questions.

According to reports, the juice that Tesla owners get from the superchargers will be free, provided by Tesla.  That can’t be right, can it?   Why not charge the drivers for the relatively cheap electricity?  It would seem that people who are rich, and/or silly, enough to shell out $70,000 for a car should have no problem paying for the electricity necessary to power their status symbols.   But if Tesla is indeed picking up the charge for the charge, if you will, how much will that cost Tesla?  A wise guy answer would be something like “at the volumes TSLA is looking to sell, not much,” but it is something to think about.

And, on a broader scale, if I am wrong and this electric car fad really catches on with the Tesla, the Nissan Leaf, and various other pure electrics capturing the American imagination, how will our electrical grid handle it?   One could answer that if we reach that point, Tesla will have been a resounding success, but not only do stocks discount the future but also the country will have to do something about increasing electrical supply, in a relative hurry, in a nuclearphobic world.  No mean task.

Even if we assume that TSLA can fulfill its promise of covering the country with superchargers by a year from now, which is quite a brave assumption even for someone as widely and justifiably admired as Elon Musk, questions remain.  And it still looks like TSLA is a company selling cars that use a transitional technology, cars that only a few people want and even fewer can afford.   And, yes, I realize that TSLA is a luxury car maker (Its lower priced models, which still won’t be cheap, aren’t supposed to come out until 2017 (See today’s announcement.) and, right now, at least, TSLA doesn’t have the money to develop and produce them (See my aforementioned 5/23/13 post.)) and not everyone can afford luxury cars.  But TSLA is a luxury car producer, indeed, a boutique luxury car producer, aiming to sell 20,000 cars this year in a 15 million car market, with a market capitalization of $12 BILLION!   By contrast, other car companies’ market caps are as follows:

Ford                             $61 billion

GM                              $48 billion

Daimler                        $67 billion

Toyota                         $191 billion

Honda                          $70 billion

Nissan                          $47 billion

Volkswagen                 $76 billion

The comparisons are not perfect, but they are a lot more apt than the comparison the bulls are throwing around to AAPL’s $426 billion market capitalization.   Does it make sense that a company that might sell 20,000 cars this year is trading at ¼ of the value of GM, which sells ten times as many cars, in the U.S. alone, in a month?   Again, this is not the best metric around, but just think logically here.

Is this the time to sell TSLA?   Though I’ve taken a small put position, just to focus my thinking, I don’t know.   And to prove that I don’t know, I bought my July puts on May 21 when the stock was trading at $88.24; it’s now trading at $104.95 and I am down well over half on my position.  The stock has doubled in the last month and has tripled in the last six months.  Somethin’s gotta give.  But, as I’ve said before, markets, and stocks, can stay rich a long, long time.   See my 5/9/13 post, OF 10 YEAR TREASURIES AND STEAMROLLERS:  RICH MARKETS CAN, AND DO, STAY RICH.  And perhaps stepping in front of this freight train is not advisable; note how TSLA has defied, so far, the old “buy on rumor, sell on fact” adage in the wake of today’s supercharger announcement.

As for yours truly, I’m going to wait around a little while before I dump my puts.   Even trading, like investing, should be done with patience, understanding the relative nature of that term.   And, as a further warning, I am a far better investor than I am a trader; accordingly, I have so little in this trade it won’t make much difference one way or the other.

TSLA:              $104.95

S&P 500:         1,654.41

Dow                 15,324.53

GM:                 $34.64

F:                     $15.90

AN ALTERNATIVE TO STOCKS?: CAPTAIN OBVIOUS AT YOUR SERVICE

5/29/13

Even after today’s 70 basis point (“bp”) declines in the Dow and the S&P, the stock market has had one heck of a run this year.  The Dow and the S&P are up 16.7% and 15.6%, respectively, year to date and 3.1% and 3.2%, respectively, this month.    Even the bulls, who can make a case that stocks are still cheap based on the approximately 16 P/E ratio on the S&P, and because they are confident about the projections underlying that multiple, are admitting that the market has run awfully far, awfully fast and might be in for a breather.   I, of course, don’t know; as I’ve said before, even if the market is rich, it can stay rich for a long time.  See, inter alia, my 5/9/13 piece OF 10 YEAR TREASURIES AND STEAMROLLERS:  RICH MARKETS CAN, AND DO, STAY RICH, in which I said I thought bonds looked rich but one can never be sure, when it comes to the markets in the short to intermediate run, even of something that looks obvious.

But financial commentators, like Maria Bartiromo on CNBC yesterday, and even long time, experienced investment pros continue to ask what the alternative is.   Even if one thinks stock are rich, or only due for a temporary correction due to short term exhaustion, where do you put the money?

In filling my role as the Captain Obvious of the investment world (See my 4/16/13 piece S&P YIELDS VS. BOND YIELDS:  I’M YOUR MAN WHEN IT COMES TO STATING THE OBVIOUS.), I might have an answer.

The ten year treasury yield, after poking its head through the 2% soil on May 22 for the first time since early March, reached a yield of 2.17% yesterday in the wake of the stock market’s rally before falling to 2.12% today, is up 36 basis points (“bps”) year to date and a nearly astounding 45 basis points this month alone.  Thus, treasuries and similar high quality debt instruments might be looking attractive to people whose memories extend back more than a few years.    

In the wake of the stock market debacle of 2008-2009, lots of people would have loved to be earning 2% on their investments.   I’m not saying I would be buying the conventional 10 year at 2%, but such a yield probably looks attractive to a lot of people, certainly more attractive than the 1.38% low reached late last July or even the calendar year low of 1.67% reached on the closing day of last month. 

So, yes, with yields having gapped up, there is a viable place to go if one wants to get out of the stock market.   You might not like bonds, and I don’t like conventional bonds (Though with everyone who is anybody saying that it is so clear that bonds HAVE TO GO DOWN FROM HERE, maybe, and only maybe bonds are more attractive than yours truly thinks.)  But it doesn’t matter what we think; it is enough that there are (probably plenty of) people out there who would be happy with a 2% yield on their 10 year treasury bonds.  Perhaps that is one of the reasons the stock market had a tough time today but, again, no one can say with any certainty why a market did what it did, let alone predict where a market is going in anything remotely resembling the short run.  As I said in the aforementioned 4/16 piece

My important point regarding stocks is that no one knows where stocks are going in any run but the long run and anyone who tells you s/he knows where stocks are going hasn’t been around long enough, or been sufficiently humbled by his or her hubris, to be entrusted with your money.   But I digress, sort of.

The overriding point of today’s piece is that it’s time the learned commentators stopped parroting the line “Where else is there to go but stocks?”

SAVING FOR RETIREMENT, PAYING FOR EDUCATION, AND TALKIN’ ‘BOUT MY GENERATION

5/29/13

I heard Christine Benz, Morningstar’s Director of Personal Finance, on CNBC this afternoon.  Ms. Benz’s topic was balancing paying for one’s children’s educations with saving for retirement.  One of Ms. Benz’s themes was that there are plenty of alternatives for financing one’s kids’ educations.   As she put it (paraphrasing; I was driving while listening to Ms. Benz and do not possess a photographic memory), you can borrow to send your kids to college, they can do work study, go to a less expensive college, or go to community college for a few years.  But there is no way to borrow for your retirement (much to the chagrin of my generation, for whom borrowing is as natural as breathing, but I digress) and thus there is no alternative to saving for your retirement other than foregoing, or postponing, retirement.

Despite my deep aversion to all things connected with Morningstar (This origin of this antipathy is another entertaining story, but I digress again.), Ms. Benz observations are probably correct as far as they go.  And I especially congratulate her for pointing out the less expensive college and community college alternatives; it seems like, as our kids and their peers head off to college, “prestigious” institutions are replacing Lexi and McMansions as status symbols.   And I have had it up to my keister, as Ronald Reagan would have put it, with people whining and complaining that their kids “had to” go to my alma mater, the University of Illinois, because they couldn’t get into a “better” (read more expensive) school.   A lot of kids, and their parents, would give their right arms to go the U of I and, speaking of appendages, you can count on one, or maybe two, hands the number of schools, anywhere in the world, that are genuinely “better” than the University of Illinois at Champaign-Urbana…ask the engineers, the scientists, the mathematicians…and, perhaps especially, the hiring managers in just about any field.  But I digress…again.

So Ms. Benz is probably onto something when she advises people to put their retirements ahead of, or at least on an equal footing with, paying for our kids’ college.  But I have to disagree with Ms. Benz on at least two points.  

First, as a parent, it is my first and most important job to provide my kids with the things that they need, one of the most salient of which is a college education if they choose to follow that path.  It is my duty to send them through college without saddling them with debt.  Sure, if they have some time, can work to help, and want to do so, that’s fine, but it’s not their job to sacrifice their studies so I can shirk my responsibilities as a parent.  And note that I said that is my job to provide them with what they need, not what they want.  So I am under no obligation to send them to some frou-frou, fancy pants private university for some silly reason, like a great program in Medieval Gender Expressionism, proximity to a nice beach, being situated in a warm weather part of the country, or some other such nonsense.  But I do feel an obligation to pay for my kids’ educations, in full, at the school they choose…within reason.

That obligation, which would exist naturally, is reinforced by a deal of sorts I made with my dad.  He paid for my college education at the U of I.  Admittedly, it was really cheap back then…tuition was $350 per semester, less than my tuition at St. Ignatius, the high school from which I graduated and, even in inflation adjusted dollars, far less than I am paying for either of our daughters at the reasonably priced, especially after the academic scholarships the kids received, out of state Big 10 institutions they attend.   Nevertheless, my dad, who didn’t go to college himself, did pay for a college education at one of the finest universities in the world. (Well, maybe the U of I had not yet achieved the status it has of late, and certainly the admission standards back then were far lower, as should be self-evident. but it was, even then, a great institution of higher learning...and partying…another digression.) And, had I been able, or wanted, to make the case for a more expensive school, he would have paid for that, but I neither could not wanted to make such a case; I was honored and delighted to go to Illinois.  The deal was that I would pay him back by paying for my own kids’ education.   By the grace of God, I have been able to fulfill, so far, my end of that deal.   But I would feel the same obligation even without making that deal with my dad.

Also by the grace of God, I have been able, so far, to save for my wife’s and my retirement while still paying for college.   But if I hadn’t been able to do so, or can’t in the future, I can figure out retirement when it comes, delay retirement, and/or throttle back my lifestyle even further.  I can deal with those kinds of problems; my kids would have a much harder time dealing with life without a college education in today’s world.  And I am, after all, the parent here; I’m supposed to provide for my kids, not the other way around.

Second, I know my generation well enough to be alarmed at Ms. Benz’s advice.  When she says that there are other ways to pay for your kids’ education but that it is imperative to save for retirement, most of my generation will NOT say something like

“Oh, good.   My kid can go to community college for a couple of years, get a part time job, or go to Illinois, Illinois State (or a SUNY school, Rutgers, another state school etc.) so that I can put away more money for my retirement, as I should.”

No.  What most of my generation will say is something like

“Oh, good.   My kid can go to community college for a couple of years or go to Illinois, Illinois State (or a SUNY school, Rutgers, another state school, etc.) so that I can buy another Audi or build onto the McMansion or buy the latest generation of television (which I simply cannot live without) or get season tickets to the local sports team or eat out more frequently and at better restaurants.”

Mine is not a generation, as a whole, that suffers from a surfeit of concern for the next or the prior generation.  Mine is a generation that thinks it is looking out for itself when it spends money, even ostensibly on others, in a crazy, misguided attempt to fill inexplicable voids by spending on geegaws and gimcracks for people to see.  

So while Ms. Benz means well in pointing out that there are ways to save on education so that one can retire more comfortably, most of my generation, which knows nothing of saving, sacrifice, or otherwise acting responsibly, will hear something else, to wit

I can scrimp on my kids’ educations so I can buy more crap for myself so that the neighbors will be impressed and I can enhance my self-esteem

or some other such self-serving nonsense.

SHANGHUI BUYS SMITHFIELD: A LITTLE PORTFOLIO ADJUSTMENT ELICITS JINGOISTIC SCREAMS

5/29/13

Chinese food company Shanghui today announced that it will be acquiring Smithfield Foods for $4.7 billion.  Smithfield may not be an American icon, but several of its brands, including Armour, once near and dear to the family of yours truly, are.

One can already hear the jingoists screaming about the Chinese taking over yet another great American company, a part of our American heritage, much as they did when Chinese oil company Cnooc tried to buy Unocal in 2005.   The cries of the self-styled patriots were successful then.   But I have news for the jingoists now, much as I did in 2005:   You’re too late.

When the Chinese buy companies, they are merely shifting their portfolio of dollar denominated assets from treasury securities to private companies.   They are exchanging, if you will, financial assets for hard assets, ultimately.   The time to get all excited about the “Chinese taking over America” is not when the Chinese rearrange their American assets but, rather, when they accumulated those assets in the first place.  They acquired those assets by running huge trade surpluses with the United States when we bought all their toys, electronics, clothes, etc.  Did we think they would be satisfied to meekly put such assets into financing our huge public deficits and our brobdingnagian private acquisitiveness?   Did we think there would never come a day when the Chinese would want to own the very productive sinews of our economy, our iconic American companies?   Did we even realize what was going on when we let our desire for cheap goods trump our sense of perspective?

I have no public policy solutions here; as a free trader, I would not advise erecting tariff walls around our country.   And given our dependence on Chinese capital, building such barriers is now impossible.   But perhaps a little personal perspective, and sense of responsibility, would have been in order starting, oh, about twenty or so years ago.   It’s too late to get all hot and bothered about the “Chinese conquest of America” when we willingly gave them the money to conduct that “conquest.”

Two more things…

First, is it all that much more dangerous for the Chinese to be owning American companies than to be holding their enormous proportion of our public debt?  One could easily argue that it is not.

Second, this problem may take care of itself as the Chinese become less competitive on the wage front and/or the Chinese focus shifts toward building a consuming middle class at home.   Or maybe the Chinese will adopt the Japanese custom of becoming big spending top-tickers, get discouraged, and leave the field.  Let’s hope so, if only to avoid the addle-brained screaming we hear when the Chinese merely want to diversify the portfolio we have provided them.

RUSSIAN ARMS TO SYRIA: THANK YOU, COMRADE?

5/29/13

U.K. Foreign Secretary William Hague, commenting on the EU decision effectively clearing the way to ship arms to the Syrian rebels (but probably not before August 31), stated

“We would only send arms to anybody in carefully controlled circumstances…with other countries and in accordance with international law.”

The French, meanwhile, are considering Gen. Salim Idris, leader of the Supreme Military Council, the latest Middle Eastern potentate disguising himself as a “moderate” in order to get on the receiving end of the Western aid sluice (perhaps Mr. Idris is  a distant cousin of Hamid Karzai, but I digress.), as a possible channel for western arms shipments.

The Western urge to help the citizenry of Syria is understandable; no one wants to stand by while the citizenry is being slaughtered by its own government.   The Western search for a “moderates” to arm to fight the Assad regime is also understandable; no one wants to arm Al Qaeda and Al Qaeda wannabes and have doing so come back to bite the benefactor; think the United States, which virtually created Al Qaeda to fight the Soviets in Afghanistan.  

While these impulses are understandable, they are as silly as U.S. guarantees to Russia of their naval base in Tartus in a post-Assad Syria.  See my 5/17/13 post, AMERICAN ASSURANCES IN SYRIA:  A RUSSIAN GUANTANAMO IN AL QAEDA’S COURT?   The West cannot control events in Syria and there are no “moderates,” whatever that means in this context, to arm.  We have three choices in Syria:   support the thuggish, or worse, Assad regime, support the radicals who compose virtually all of the Syrian resistance, or stay the hell out of the whole conflict.   The third is the only logical course of action.  See, inter alia, THE SYRIAN CIVIL WAR:  A FRIGHTENING HISTORICAL ANALOGY, 5/24/13 and WHAT IF BASHAR ASSAD WINS IN SYRIA?, 5/21/13.

Ironically, but not for the first time in history, the Russians may be doing us a favor by intervening actively in Syria.  They may not be doing the right thing for themselves;  they, too, should probably stay out, though their interests in Syria are more vital than outs.  Again, see my 5/17/13 post.   In the wake of the EU talk of arming the rebels, the Russians have reaffirmed their determination to send, among other things, the S-300 air defense system to Syria, which is sufficiently sophisticated to quash any Western ideas of air raids or no-fly zones in Syria.   As Russian Deputy Foreign Minister Sergei Ryabkov put it,

“Such steps in many ways restrain some hotheads.” 

And we know who Mr. Ryabkov has in mind when he speaks of  “hotheads.”

Going further, the Russians may be doing us a larger favor by keeping the Assad dynasty in power.   Beyond Syria’s being the Russians’ only friend in the Arab world and containing the only Russian base outside the former Soviet Union, the Russians have a third great interest in Syria, i.e., containing the spread of radical Islamism that is causing the Russians fits in its southern Republics of Chechnya and Dagestan and which we got a taste of in Boston earlier this Spring.   If Assad is overthrown, it isn’t going to be done by the “moderates” we in the West fantasize about.  Syria will become either a radical Islamic republic or, more likely, a lawless no-man’s land, like Afghanistan, a veritable agar dish for radical groups.  

Given Syria’s physical proximity to the southern reaches of Russia, the Russians are understandably very concerned about Syria’s becoming a breeding ground for terrorist troublemakers.   And even though we have the luxury of distance, we should be equally concerned.  Again, the Russians may very well be doing us several favors in Syria.

MARCHIONNE’S MERGER PLANS: THE SPEED AND MUSCLE OF AN SRT 8, THE AGILITY OF A GIULIETTA…AND PLENTY OF FERRARIS FOR WALL STREET

5/25/13 

This weekend’s (i.e., 5/25-5/26/13’s, page B1) Wall Street Journal featured an article “Fiat Chief Pulls Out the Deal Wrench,” on a topic I’ve been dealing with extensively for at least the last month or so, to wit

CHRYSLER’S QUARTER:   HOW DO YOU SAY “POOR MOUTH” IN ITALIAN? 5/1/13

and

IMPORTED FROM DETROIT:   MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8, 4/25/13

The Journal emphasizes the complexity of Chrysler and Fiat CEO Sergio Marchionne’s plan to merge Fiat and Chrysler and take the company public on a U.S. exchange.  Indeed, this is a complicated deal.   In grossly simplified terms, Mr. Marchionne and his colleagues must

• Buy out the voluntary employee beneficiary association’s (“VEBA”’s) 41.5% stake in Chrysler.  Estimates on the value range from $1.75 b to $4.27 b.   Not only is that quite a spread (and probably serves as a useful proxy for the bid/asked), but final determination hinges in part on an upcoming court ruling.
• Arrange financing to do the above, or use cash.  But if the company eats into its $14.4 billion cash pile to buy out the VEBA, it imperils it credit rating and strains its development budget; designing and building cars isn’t cheap.
• Merge the operations of the two companies; this step is for the most part completed
• Do an IPO of the merged company on a U.S. exchange to raise cash but, more importantly, to establish a higher market valuation (largely because U.S. car companies trade at higher multiples than European car companies) and thus afford the new company greater financial flexibility.
• Raise some money from the IPO and as a result of the heightened financial flexibility to refinance the $2.9 billion in debt Chrysler incurred to repay the U.S. government and $3.2 of other bonds.  These issues must be refinanced because they both contain covenants restricting the transfer of cash from Chrysler to Fiat.  Any debt used to buy out the VEBA would also be refinanced, presumably at or about this time.

Phew!  And that’s a SIMPLIFIED explanation.

As I have argued in my 4/25/13 post, however, at least as daunting as the deal’s complexity may be its timing.   If Mr. Marchionne moves in the very near future, he may be buying into what has been a very ebullient market for U.S. car company stocks.  (See my 5/23/13 piece, THE CAR SALES BUBBLE:  “JUST TELL ME WHAT YOU WANT AND THEN SIGN THAT LINE AND I’LL HAVE IT BROUGHT DOWN TO YOU IN A HOUR’S TIME” for further elucidation on this topic.)   If he buys rich, he will have to move very quickly to do the IPO to avoid selling cheap; to use two trite analogies, he appears to be playing a game of hot potato or musical chairs and wants to avoid getting burned or being left without a chair while holding an expensive Chrysler stake.  If many of the Street analysts are correct, however, and the U.S. car stocks are cheap, as they appear to be based on those analysts’ earnings estimates, there is no concern here.   Gulp.

Further, if Mr. Marchionne is unable to talk down the value of the VEBA stake in Chrysler (See my 5/1/13 post.) and goes ahead and buys rich, not only will he have to move quickly with the IPO, but one would think he would like to make the IPO larger than a symbolic, price establishing issue in order to reap the benefits of a rich price.   Doing so, however, would make it difficult to make the new shareholders happy.

Then we still have the issue of Chrysler’s product line; see my 1/31/13 piece, CHRYSLER’S PROBLEM:  IT’S (MOST OF) THE PRODUCT, STUPID!, which will take plenty of skill, and money, to get up to the standards set by Chrysler/Fiat’s competition.

So Mr. Marchionne’s plans require skill, speed, timing, and luck.  Doubtless Wall Street will get rich on these plans.  But enriching Fiat’s shareholders, and Chrysler’s new shareholders will strain even the formidable skills of Sergio Marchionne, the auto industry’s current man of the hour.

THE SYRIAN CIVIL WAR: A FRIGHTENING HISTORICAL ANALOGY

5/24/13

How about a scary historical analogy to put the Syrian Civil War in perspective?

 (See my many posts on that conflict, mostly written from the perspective of U.S. policy, the most recent of which is WHAT IF BASHAR ASSAD WINS IN SYRIA?, 5/21/13)

The Assad family is of the Alawite branch of Islam, which is closely related to the Shiite branch of Islam.   One might go so far as to say that the Alawites are a branch of the Shiites, but experts in these matters might consider that too simplistic.  The Assads are backed in this civil war by Shiite led Iran and it clients in Lebanon, including Hezbollah, and its clients in Iraq, a majority Shiite country once run by the Sunni Saddam Hussein until the American occupation, which at least temporarily resulted in the Shiites regaining shaky control of that country which itself is riven by what is not yet, but soon will be, called a civil war.

The opposition to Mr. Assad is composed of Sunnis, largely Al Qaeda related groups and Al Qaeda wannabes, and is backed by Sunni dominated regimes, primarily in the Persian Gulf, the most salient of which in the Syrian endeavor is Qatar.  

So what we have in Syria is a civil war, but also much more.   Syria appears to be a smaller theater in which the larger, cooler Sunni-Shiite conflict, which spans at least the greater Middle East, is manifesting itself in much hotter form.

Think back to the late 1930s and the Spanish Civil War.  In that conflict, the Nationalists, most of whom were genuine nationalists but many of whom, including their leader, Francisco Franco, also had Fascist tendencies, were backed by Nazi Germany and Fascist Italy.  The Republicans, many of whom were genuine republicans but many of whom had Communist tendencies, were backed by the Soviet Union.   The Nationalists eventually prevailed and Franco remained in power until his death in 1975.

The Spanish Civil War is largely seen by historians as something of a trial run, or a dress rehearsal, if you will, for the larger European conflict to follow, or perhaps even a first round in the fighting on the eastern front of the European theater in World War II.  The Fascists and the Communists, it is speculated, were just readying their weaponry for the big one to follow.

Could we be seeing the same thing in Syria?   Could we be seeing the Shiite powers, led by Iran, and the Sunni powers, led by the Gulf States, just testing their weaponry, their influence, and their wealth for the big one to follow?

To say we hope not is to understate the case.

JAPANESE CAR EXPORTS TO CHINA: VALUE AND QUALITY TRUMP POLITICS

5/24/13

It looks as though Chinese car buyers have gotten over their politics spawned aversion to Japanese cars.  (See my 10/10/12 post in the now defunct Rant Finance entitled WE’VE FOUND THE ULTIMATE VALUE INVESTOR!, reproduced below for your convenience.  And, no, I didn’t buy a bunch of TM, HMC and NSANY stock, which have since surged, after writing that now immortal missive, even after seeing the buying opportunity, which demonstrates one of the reasons I don’t trade nearly as actively as I once did.)   Japan shipped 16,000 vehicles to China in April, 2013, up from 4,417 units in October of last year, the low reached at the height of the tensions surrounding the, depending on whom you are talking to, the Senkaku or Diaoyu Islands in the East China Sea.  Last month’s 16,000 units were still below April, 2012 levels, but the more than three fold increase in shipments from the bottom is a sure sign that things are turning around.

One knew that Chinese consumers would be buying Japanese cars again despite the nationalistic whoop-whoop that dissuaded them from doing so for a time.  First, we had intrepid consumers like Mr. Zhou San, the ultimate value investor, who, quoted in the aforementioned and below reproduced post, said

“I won’t buy a Japanese car unless it is very, very cheap because purchasing a Japanese car is dangerous now.  People would beat not only the Japanese car, but also the car owner, when something goes wrong with Sino-Japan relations again.”

So Mr. Zhou would risk being beaten within an inch of his life if he could get a good enough deal on the car; I must have Chinese cousins, but I digress.

Then we have Mr. Yan Ke, a 33 year old Shanghai information technology project manager (Talk about stereotypes!), who is quoted in the Wall Street Journal as saying, after buying a sharp Nissan Qashqai (pictured…not Mr. Yan’s Qashqai, but a representative Qashqai),

“I wanted to buy this car a year ago.  I’ve been saving money for it.  (Saving money for it!  What a concept!  But I digress.)  I don’t give a damn about the Sino-Japanese tensions.”

Mr. Yan is not at all unique; his habit of actually saving money in order to buy something may seem as foreign to Americans as his name and the brand name of his car, but he is not unique.  He simply, like most people, doesn’t give a damn, as he puts it, about silly squabbling of politicians over islands that may or may not have much value beyond their ability to satisfy jingoistic impulses.  Whether one finds that sentiment admirable or not, it reflects reality; people want to live their lives, make a living, get the most for their buck (or yuan), and take care of their families.  The games politicians play matter little to them; apparently, though, the pols didn’t get the memo, but I digress once again.

And speaking of value, one knew that Chinese consumers would still be willing, indeed in line, to buy Japanese cars.  For all the catching up U.S. “domestic” companies have done, and for all the (largely, but not always) baffling appeal that overpriced European (often, but not exclusively) troubleboxes have for consumers in, among other places, China and the United States, the Japanese still make the best, most reliable, most value laden cars for the broad range of consumers.   And competition from places like Korea (See my already seminal 5/20/13 piece, I TEST DROVE A KIA TODAY…) only make them better…and more desirable.   Consumers like Messrs. Yan and Zhou, and Smith,  Jones, Kowalski, and O’Brien, continually affirm that sentiment…or fact.

PROMISED REPRODUCED POST FROM RANT FINANCE

WE’VE FOUND THE ULTIMATE VALUE INVESTOR!

10/10/12

Value investors, as most readers of Rant Finance know, are people who like to buy stocks, or any investments, that they consider cheap.   Cheapness can be determined in terms of price/earnings (“P/E”) ratio, dividend yield, or other factors.   The overriding point seems to be that, while no investor wants to buy a lousy company, value investors are not necessarily looking for great companies.   They are looking for good, or at least passable, companies that are undervalued by some metric the investor deems important.  This is an old, tried, and largely true approach to investing that appeals to, among others, yours truly, at least to a certain extent.

With that background, consider what is going on with the Japanese auto companies in China.   Since China and Japan, among others, are squabbling over ownership of some islands in the East China Sea (See my 8/23/12 post in Rant Political entitled EXPANSION OF MISSILE DEFENSES IN ASIA…PROTECTING OUR INTERESTS OR PAYING BACK THE “DEFENSE” CONTRACTORS?), and the Chinese and Japanese politicians are, like politicians anywhere, concerned primarily with keeping their jobs, nationalist fervor has been whipped up throughout east Asia, but perhaps especially so in China.  One of the manifestations of this fervor is a near blanket refusal on the part of Chinese consumers to buy Japanese branded cars.   Not only will they not buy Japanese cars, but the irate Chinese have taken to street demonstrations that involve the destruction of Japanese cars and, in some cases, their drivers; last month, a driver of a Japanese car in Xi’an was beaten into partial paralysis by an angry mob.  From the coverage we see of these near riots, one wonders why no one has been killed yet.  

How much sense all this makes is a valuable point of digression.   These “Japanese” cars are built in China by Chinese workers using mostly Chinese parts.   Chinese industrial policy dictates that few cars, and mostly only very upper end luxury models, are imported.  So the cars that are being trashed, in some cases, are really Chinese cars; just as the Toyota Camry, for example, is the most American car an American consumer can buy, the “Japanese” cars that are now being used as flaming party favors by rioters on a lark are really Chinese cars.   So who’s hurting whom?  I digress, but I do so valuably.

Into this fray steps Mr. Zhou Shan, a Chinese citizen who works for Baidu, who states

“I won’t buy a Japanese car unless it is very, very cheap because purchasing a Japanese car is dangerous now.  People would beat not only the Japanese car, but also the car owner, when something goes wrong with Sino-Japan relations again.”

So there you have it; Mr. Zhou is aware that it is physically perilous to buy and drive a Japanese car, that doing so might result in his being beaten to within inches of his life, but he would do so if it is “very, very cheap.”  Ladies and gentlemen, we have found the ultimate value investor.

Many of you doubtless started to read this thinking that yours truly, as a guy who has made a dollar or two trading and investing in car stocks at various points in his career, would offer advice on Japanese car stocks at these levels.  All I can say at this stage is that I’m getting interested because it appears that the stocks are starting to reflect overly dire consequences from their Chinese exposure for the likes of Nissan (NSANY), Toyota (TM), and Honda (HMC).   But never (okay, rarely) wanting to try to field a falling knife, or getting between China and Japan when they decide to mix it up (a position nearly as perilous as getting between Jesse Jackson, Sr. and a television camera, but I digress), I think I’ll watch a while before getting interested in these stocks from the long side.

TESLA (TSLA): THE GREENIES ARE CHARGED UP, BUT…

5/23/13

In the interests of full disclosure, I am effectively short Tesla (TSLA); I am long the July 85 puts, which I bought a few days ago when TSLA was trading more than $4.00 cheaper than it is trading today.  So I am talking my position, and, so far, it is a losing position.  Certainly, I don’t think it will ultimately prove to be a losing position or I would have dumped it.  And I’m not writing this in order to provide a better opportunity to dump it.  Further, as I have said ad nauseam on this blog and in other forums, markets and stocks are notoriously difficult to call, so I never put any kind of real money into trades such as this TSLA trade.  I do it for the intellectual challenge, for fun, and to focus my thinking, largely so that I can write more effectively and entertainingly on such topics.

A lot of, but certainly not all, the “experts” love TSLA because, among other things…

·        Motor Trend and Consumer Reports love the Model S, the company’s flagship electric powered sports sedan

·        The company, using some of the proceeds of a $1 billion stock deal, paid back its $452 mm federal loan, making it the only U.S. car company to have, as Tesla puts it, “fully repaid the government.”

·        In some people’s opinions, electric power is a promising, if not the promising, propulsion system for cars in the future.

Some analysts have come up with ratios, such as market capitalization per vehicle produced, that show that TSLA is wildly overvalued relative to any other car company on earth.  But even these observers, who are usually, but not exclusively, bearish admit that these are irrelevant, perhaps even foolish metrics.   Yours truly does not like TSLA for a variety of even simpler reasons.

The Tesla Model S combines the downside of all electric powered cars (range anxiety and the negation of the automobile’s perhaps most attractive attribute, freedom of mobility (See my 5/9/13 piece, NISSAN LEAF:   WHY GASOLINE?  I’LL TELL YOU WHY GASOLINE!) with a $70,000 base price tag.  Thus, TSLA produces a car that few people want that even fewer can afford.  This is a recipe for success?

A less expensive Tesla model is planned, but not for launch until three or four years from now.  Further, after paying back the government, TSLA doesn’t have the cash to develop the more, but not quite, popularly priced car.  Unless it sells a lot more cars, produces a lot more cash flow per car (which would perhaps involve increasing the already astronomical price), or can convince more investors of its vast potential, TSLA may be a one or two (if it comes through with its planned Model S based SUV, as seems likely) product, boutique car company.   And even if it could do another big stock deal, or co-founder, Chairman, and CEO Elon Musk comes up with more equity, would such dilution be good news for existing holders?

Bullish analysts point out that Tesla is a supplier or potential supplier of electric car technology to other car companies.  Great…TSLA can sell technology for a car that few want and/or can afford to companies who will find few customers to buy such cars.   There is also the argument that someone could buy out TSLA, which is always a possibility.  But one wonders about the business case for buying a company that produces a car few want and fewer can afford.   Maybe a GM, Ford, Toyota, Nissan, Honda, or VW can make better use of the TSLA’s technology than can TSLA, but does anybody really think TSLA knows something these guys don’t?   Still, I don’t completely discount the possibility of someone buying out TSLA; investment bankers can be awfully persuasive when selling their M&A services, especially when trading profits are harder to come by.

One can’t help but believe that much of the appeal of TSLA to Wall Street is that the Street is inhabited by people who can afford to spend $80,000 and up (Who wants a mere base model at $70,000?) to trumpet their green bona fides.   The rest of us have better sense.   And that sense tells us not only that even an “extended range” (200-265 miles at a steady 55, a concept with which not only yours truly is completely unfamiliar) car like the Model S makes no sense, but also that we couldn’t afford it even if it did.

The same common sense tells us that a stock that has more than doubled in just over a month’s time (On 4/17/13, the stock closed at $45.45; it closed today (5/23/13) at $92.73. Exactly a month ago, 4/23/13, it closed at $51.01.) is discounting a LOT of good news, probably a lot more real good news than TSLA is providing.

TSLA:              $92.73

S&P 500:         1,650.51

Dow                 15,924.50