THE NATION’S BEST PARTY SCHOOLS—THE I’S HAVE IT…AGAIN!!!

8/15/15

I wrote the following missive to the Chicago Tribune; the Trib published it on Wednesday, 8/12 in slightly redacted form.   Their editing was largely mild and understandable, but they did drop the last sentence, which I thought was the best line in the letter.     

With all the bad news emanating from my alma mater of late, one would think the administrators at what remains one of the world’s great universities would have more to bewail than an award that should be far from a source of shame.

ILL--!

Thanks.

8/8/15

As a long ago graduate of the University of Illinois and a continuing financial supporter of my alma mater, I am bothered not a whit by the Princeton Review’s designation of the Big U as the nation’s Number 1 Party School.  The wailing and gnashing of teeth emanating from the school’s administration in response to the “award” is not only silly but also demonstrative of the pusillanimous attitudes that pervade modern day academia.

Who in the world thinks that my alma mater is “…a place where people can just goof off,” as a university spokesperson lamented after the Princeton Review’s pronouncement?   Illinois and its students consistently rank in the top five universities in the country by employers.  UIUC’s business, agriculture, and especially its engineering, math, and science programs, are among the best, if not the best, in the nation.  22 Nobel Prize winners are, or were, associated with the Big U as either alumni or faculty members.  If you are an Illinois resident, Champaign is perhaps the best bargain out there in higher education.  And if you a resident of South Korea or China, you know the U of I; much of the technological infrastructure of both countries, and of others, has been built by U of I alums.

Students at my alma mater work very hard under intense pressure just to keep up with their hyper-achieving colleagues.   Is it any wonder that they also play hard when given the opportunity?   Do we wish that some of the students would play hard in less destructive ways?   Certainly.   But kids are kids and temptation is temptation; attempts to keep our kids in cocoons can ultimately be as destructive as the activities about which the U of I administration is currently wringing its hands.  Part of going to college is learning how to deal with the stress and temptation that will be our near constant companions as we proceed through life.

Yes, students at the U of I work very hard and play very hard.   Is the latter so terrible?  The world is not run by people who spent their Saturday nights in college in the library, even so magnificent a library as those on the Urbana campus.

Mark M. Quinn

Naperville

TEN MANIFESTATIONS OF THE GLOOM AND DOOM THAT PERVADES OUR WORLD

7/30/14

Lest you have been enjoying your summer too much, here are some reasons to justify the gloom and doom approach to the world that characterizes many sage observers, including yours truly. Some of these have been very much in the headlines, some have been buried in the bowels of the news.  They are listed in no particular order:

1. The heat is being turned up on the Russians under the theory that we should have a bigger say concerning what happens on its borders than should Russia.  The Russians, and their leader, Vladimir Putin, are being backed into a corner with this newest round of economic and financial sanctions.  The major impact of these shrewd diplomatic moves has been to enhance Mr. Putin’s popularity at home (All governments, and especially authoritarian governments, like that of Mr. Putin, find foreign crises useful in rallying support among their populaces.) and to increasingly make the Russians see the entire Ukraine situation as evolving into a fight not for Ukraine but for Russia itself.   What could the consequences be?   One can think of many, but none of them is good.

2. The Israelis and the Palestinians in Gaza (for now) continue to go at it, with Hamas militants continuing to dig tunnels for sorties against Israeli civilians and military personnel and Israel bearing down militarily on Hamas military strongholds with predictable consequences for the civilian populations of Gaza.  Yesterday, the Israelis knocked out the only power plant on the Gaza Strip, eliminating electricity and water service for the entire area.   The situation is getting more desperate and the conflict threatens to spread at least to the West Bank and probably beyond.

3. An ebola outbreak is spreading through West Africa, having already claimed thousands of lives and probably destined to kill many more.

4. Western states in the Colorado River valley are tapping into groundwater at unprecedented rates.  Already, ground water levels are dangerously low and Lake Mead is at its lowest levels since it was built in the ‘30s.   Meanwhile, larges sections of California remain mired in drought.

5. Farm prices are down sharply, with December corn trading at $3.70 per bushel as I write this, far below the $4.00 widely regarded as the breakeven price for farmers who raise this most vital commodity.   That $4.00, of course, is a nebulous number and varies from farm to farm, but it’s still a pretty good indicator of the shape of farm finances…currently not good.   Not only does this hurt farm incomes, which would a bad enough outcome, but weakness in farm incomes quickly ripples throughout the entire agricultural economy…ag equipment manufacturers, seed and fertilizer companies, rural banks, etc.  And sometimes, but not always, weakness on the farm is a precursor of general economic malaise.

6. According to USA Today (not a good source, I know), one-third of Americans have debt in collection.  So much for Americans’ cleaning up their balance sheets; we just can’t stop spending money we don’t have for things we don’t need to impress people we don’t like.  This is not a formula for economic success, as much as the learned observers in the financial media cheer every indication of increased spending and lament every indication of financial prudence on the part of the American consumer.

7. There seem to be the makings of a shake-up in China’s leadership as Zhou Yongkang, former domestic security chief (a BIG job in China) comes under investigation for “serious disciplinary violations.”   China is a big, important place; what happens in China doesn’t stay in China any more.

8. The United States is seemingly under invasion by legions of illegal immigrants from Central America and doesn’t seem to know what to do with these new arrivals.   Our sense of humanity paralyzes us, perhaps understandably, making us a helpless giant in the face of this wave of new arrivals.

9. The Islamic State (“TIS”), a Sunni group I have described as Al Qaeda on steroids, continues to press for a caliphate spreading from Lebanon to the Iraq’s border with Iran.  Alawite (a branch of the Shia branch of Islam) President Bashar Assad continues fighting with Sunni rebels, including the TIS, in his country.  The United States is on both sides of this growing religious war that threatens to engulf the Middle East, supporting TIS in Syria and supporting the Iraqi government in its battle with TIS.

10. Terrorist attacks continue incessantly in China’s Xinjiang Province.  The Chinese government fights back with increasing, and understandable, ferocity.   Again, China is a big, important place; what happens in China doesn’t stay in China any more.

Yours truly does not make these observations in his occasional role as a financial/economic/stock market observer; our economy, if you believe the numbers, grew at a 4% pace in the second quarter and nothing seems to make this stock market go down.   I simply offer these trouble spots in my usual role as a curmudgeonly commentator who manages to find the cloud inside every silver lining.

There are several possible reactions to the above list of troubling developments.  One is to point out that things have looked bad at many points in history; 1929, 1933, 1940, and 1968 come immediately to mind as recent examples of low points on the world’s timeline.  And the world somehow survived and eventually prospered.  Another reaction is to say something like “This time it’s different” and conclude that the world runs inexorably and speedily toward hell in a hand basket.   While, given my general downbeat approach to life, I favor the latter, history teaches us that the former approach will not only probably prove more beneficial, both personally and generally, but will probably prove correct.  We somehow will get out of this…I suppose.

Meanwhile, yours truly continues to pray for another Great Awakening, this time on a worldwide scale.  This seems to be the only development that would save our nation, and the world, from the generalized suicide it seems bent on committing.

QUINN ON WRIGLEY AND FORMER ALDERMAN SMITH, CAR SALES AND FINANCIAL RESPONSIBILITY, AND AN HISTORIC ANALOGY FOR TODAY’S CHINA

6/6/14

Today is the 70^th anniversary of D-Day.  Last summer, we were in France (See my seminal travelogue, CLARK GRISWOLD, MR. PEABODY, AND ME, http://mightyquinnpolitics.blogspot.com/2013/08/clark-griswold-mr-peabody-and-me.html) and visited the beaches and the American cemetery in Normandy.  At the expense of sounding sacrilegious, if I don’t ever see Paris again, it won’t break my heart.  But Normandy is another story; if you can, please try to get there.   You’ll learn a lot, hopefully pray a lot, and maybe cry a little.  And you will appreciate what those guys gave us.  At the expense of sounding comparatively trite, the countryside and the villages of Normandy are also stunningly beautiful; I told our tour guide the farm boys from Iowa who landed at Normandy probably felt right at home.   I don’t think she appreciated the sentiment.

I thought I’d be able to write a lot more this week, but things got busy, though I’m not quite sure with what.  I did manage to write three posts on widely varying topics, however…

WRIGLEY AND THE CUBS:  A FORMER ALDERMAN ENLIGHTENS THE BENIGHTED RICKETTS FAMILY

http://www.rantlifestyle.com/2014/06/06/wrigley-field-and-the-chicago-cubs-a-former-alderman-enlightens-benighted-ricketts-family/

The politicians know everything, don’t you see?

HUGE MAY CAR SALES:  “I SAW A CADILLAC SIGN SAYIN’ ‘NO MONEY DOWN’…”

http://www.rantlifestyle.com/2014/06/05/huge-may-car-sales-i-saw-a-cadillac-sign-sayin-no-money-down/

The seemingly prescient Chuck Berry, the father of rock’n’roll, saw today’s car financing situation way back in 1956.

A "COERCIVE AND PROVOCATIVE” CHINA?   LESSONS FROM HISTORY

http://www.rantlifestyle.com/2014/06/02/a-coercive-and-provocative-china-lessons-from-history/

To quote a guy who was okay but who couldn’t carry the aforementioned Mr. Berry’s guitar case, I’m lookin’ at the man in the mirror when I read about China.

Have a great weekend, everybody, and say a prayer for the boys of Normandy.

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. 

INVESTORS: HERE’S WHAT TO DO WHEN THERE’S NOWHERE TO GO or…

6/20/13

The S&P took a 2.5% dump today.   The Dow and the NASDAQ experienced similar debacles.   Commodities all took gas.  And bonds got pounded.   Rough day for the longs, indeed, especially coming after a similarly rough day yesterday.  Fortunately for the home team, I had some effective shorts (long put positions) in my trading account, but, as I have said in the past, that account is so small as to be laughable; it exists only to focus my thinking for these posts and my usual discourse with friends.   Like everybody else, I took a beating today in the real money accounts, as did everybody else; there simply was no place to go to be long.

What was especially interesting, and somewhat painful for the home team, was that emerging markets stocks performed even more poorly than “domestic’ stocks, whatever the latter might be, but that is grist for another mill.   Some have speculated, in fact, that the cause for today’s worldwide stock market debacle was not so much the Fed as troubles in the financial system of China, the uber emerging market.   I like that theory, though, as I have said in the past, opining on why a market did what it did is nearly as foolhardy as calling the direction of markets.  

Whatever the reason, emerging markets got pounded today more heavily than U.S. markets and have been having a difficult time of it for a lot longer than the last few days.  As someone who has outsized exposure to emerging market equities (roughly 30% of my equities are in emerging market indices), yours truly is especially feeling the pain of the emerging markets.  My problems are being compounded by a relatively heavy exposure to gold and other precious metals, which have also been taking on water of late.  My far greater exposure to Treasury Inflation Protected Securities (TIPS) (See my 2/2/13 post, YES, I’M STILL HOLDING ONTO MY TIPS, only the latest post in which I expressed misgivings regarding TIPS but decided to hold onto them.), which aren’t getting beaten up nearly as badly as stocks but are showing some very stock-like downside, compounds the problem.

So what am I going to do in response to the market moves of late?   Regular readers know the answer to this question:   NOTHING outside my insignificant trading account.   No one knows what the market is going to do; as I said in my 4/16/13 piece S&P YIELDS VS. BOND YIELDS:  I’M YOUR MAN WHEN IT COMES TO STATING THE OBVIOUS.

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.

That point can easily be expanded beyond stocks to bonds and commodities.  So the only way to approach investing is, as I said in my 5/9/13 post OF 10 YEAR TREASURIES AND STEAMROLLERS:  RICH MARKETS CAN, AND DO, STAY RICH.

Calling markets, especially in the short term is, as I have said many times in the past, is very difficult.  There ratio of people who can call short term markets to those who think they can call short term markets is nearly microscopic.  So, at the expense of sounding like a broken record, the best approach to investing is a balanced approach.  Hold some stocks, hold some bonds, hold some precious metals, and hold some cash.  Dollar cost average if you can.  REBALANCE REGLIGIOUSLY.   Let the market do what it’s going to do.  Leave the trading to those who can do it…and those who think they can do it.   Let them provide the liquidity you need to function as a long term investor. 

Nothing that happened today, yesterday, or in the last month or year has changed my long term risk preferences or my long term perceptions of what types of investments would best meet my long term investing goals consistent with those risk preferences.   TIPS, emerging market stocks, high dividend paying domestic stocks, the broad stock indices, precious metals, and some cash all make sense for me and thus all have a permanent, or near permanent, place in my portfolio.    So I will hold them all and REBALANCE, RELIGIOUSLY, from those that are doing well in a given period to those that are doing poorly in a given period.   I will thus achieve my long term goals and save myself a lot of anxiety, of which I have more than enough in other aspects of my life.

Investing can be difficult if one wants to make it difficult by trying to prove how smart one is.  If one is happy staying out of trouble while making decent returns on one’s money and one can display even a modicum of patience, investing is not that difficult.   Remain calm, don’t chase your tail, take a balanced approach, and REBALANCE RELIGIOUSLY.  And if one is not in the business of investing, paying little or no attention to the financial media, at least as it relates to your portfolio, would not be a bad idea, either.

THE “SHIRTSLEEVE SUMMIT”: AN EXPECTED WASTE OF TIME AND MONEY, SOME UNEXPECTED THOUGHTS

6/9/13

The “shirtsleeve summit” between President Obama and Chinese President Xi Jinping in the blazing heat of Rancho Mirage, CA, has just concluded.  As with just about all these summits, a lot of money was spent and nothing was accomplished, but, hey, it wasn’t their money the politicians were spending.

Yours truly, however, did manage to derive some meaning from what some of the participants, or ancillary participants, in the summit were saying.

First, outgoing placeholder for Susan Rice, er, sorry, National Security Advisor, Tom Donilon, opined that cybertheft

“…really now is at the center of the relationship (between China and the U.S.).  It is not an adjunct issue.”

Mr. Donilon and Mr. Obama doubtless wish that cybertheft were at the center of the Sino/U.S. relationship, but that does not make it so.  What is at the very center of the Sino/U.S. relationship is that China holds, the last I saw, $1.17 trillion worth of U.S. treasury securities and hundreds of millions of dollars worth of other debt issued by U.S. entities.   We owe the Chinese big time, and that will always dictate the terms of our relationship.   And we can’t blame the Chinese for this; it is we who spent ourselves into oblivion with money we borrowed from the Chinese.

Second, President Xi asked a very profound question at the summit.  When describing the relationship between China and the U.S., he asked, then stated

“What will happen when a rising power and a great power encounter one another?  The U.S. is trying its best to maintain its status quo, in order to retain its hegemony.  China…is eager to become a world power under the rules approved by Western countries.”

This was not at all a kind statement; though the Obama team may have missed it in its ongoing efforts to have hope trump reality, whenever people use words like “hegemony,” they are not speaking favorably of the nation to whom they ascribe hegemonistic aspirations.  Further, that last phrase “…under the rules approved by Western countries” had to be dripping with sarcasm.    Note, however, that President Xi does not feel at all compelled to be nice to the United States for the reason outlined above; though Japan is catching up of late, China remains our largest creditor.   We owe them big time…and they know it.

But Mr. Xi’s statement was interesting for more than its backhanded slap at the United States.  What does happen when a rising power and a great power encounter one another?  Let’s take a look at that largely forgotten subject, history:

Rising Power                                        Great Power                 Winner

Persia                                                   Babylon                        Persia

Macedonia (Greece)                             Persia                           Macedonia (Greece)

Rome                                                   Greece                         Rome

Assorted Germanic tribes                      Rome                           Assorted Germanic tribes

Great Britain                                         Spain                            Great Britain

Prussia (Germany)                                Austria                         Prussia (Germany)

Prussia (Germany)                                France                          Prussia (Germany)

And, on a less belligerent note, after the first two skirmishes…

Rising Power                                        Great Power                 Winner

United States                                        Great Britain                 United States

Now, the sides line up as

Rising Power                                        Great Power                 Winner

China                                                   United States                ??????

Unless one’s jingoism, or the consumption of one’s time with such vital fare as “The Khardashians” and “Dancing with the Stars,” leads one to totally ignore history, it doesn’t look good for the home team.

CHINESE INFRASTRUCTURE PROJECTS: TYING CHINA MORE TIGHTLY TO NORTH KOREA…OR TO KOREA?

6/8/13

Yesterday’s (i.e., Friday 6/8/13’s, page A8) Wall Street Journal featured an article by Jeremy Page entitled “China Builds Up Its Links to North Korea.”  The article discussed Chinese construction of an extensive infrastructure network, including roads, railroads, an immense power cable, and a high speed railroad line, linking northeastern China with North Korea.  The article reports that the infrastructure program indicates a continuing desire of China to not only sustain North Korea but also to integrate North Korea even more deeply into the Chinese economy.   This massive undertaking contradicts China’s stated claims that it is cooperating with the  U.S. strategy of isolating and pressuring North Korea.   Such activity indicates, according to the article, that China not only believes that the Kim dynasty will remain in power in Korea but also that it is taking steps to insure North Korea’s vitality, or at least continued existence, as a buffer against what it considers U.S. encroachment in northeast Asia.

A thought occurred to yours truly as I read this piece, however…

Could the Chinese be taking these steps to integrate not the NORTH Korean economy with that of China but, rather, to integrate the KOREAN economy with that of China?  Perhaps the Chinese, being long range thinkers and having a firmer grasp on reality than most of the people who inhabit our government, are giving up Kim Jong Eun and the entire concept of Communist North Korea for dead and are anticipating a reunification of the peninsula with Seoul, rather than Pyongyang, in charge.   The Chinese are tying their economy into that of North Korea with hopes of being firmly wrapped up with the new Korean government.

Remember German unification.  After a very troubling decade, roughly coinciding with the calendar ‘90s, the Germans eventually integrated the former East Germany into the larger German economy, resulting in the second German economic miracle.   A reunification of the Korean peninsula would be at least equally troublesome at its start, but, eventually, one has to bet that the very resourceful, and very rich, South Koreans would integrate the former north into a vibrant Korea, creating a kind of Asian Deutschland, an economic juggernaut that, while not quite on par with Germany, would be a formidable force on the regional and world economic stages.   The Chinese would do well to be closely tied to the new Korea, just as countries like Poland, the Czech Republic, Slovakia, and Hungary have done well being closely tied to Germany.

Further, the Chinese always think politically as well as economically.   It would certainly be in China’s interest to be firmly tied to a unified Korea in order to counterbalance the influence the United States would have on the new power on the peninsula.

Anybody who thinks about the Korean situation at all carefully cannot believe that the North is sustainable.  North Korea in its present form is finished; its fall is assured and the only question is time.  And the Chinese have shown a remarkable ability to think in terms of longer periods of time than does the West.

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.

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”

5/23/13

I’ve said it before (CAR LOANS:   TAKE MY MONEY…PLEASE!,  5/6/13 and  IMPORTED FROM DETROIT:   MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8, 4/25/13), this car market scares me, even as we approach a 15 mm unit year for U.S. light vehicle sales.

What I have long referred to as Ben Bernanke’s War on the Elderly, but what most people call QE III or “unconventional” monetary loosening, has created plenty of bubbles, and not all of those bubbles are in financial assets like treasuries, corporate bonds, and dividend paying stocks.   One of the most dangerous, though not quite as salient, bubbles is car sales; nothing moves cars like cheap financing.   With the economy still just dragging along, and the prices of cars continuing to go up, especially as incentives are being reduced, affordability is only being sustained, and enhanced, through cheap credit.  It is this artificial affordability that is driving car sales.  All this talk of pent-up demand has some justification; the fleet is indeed old.   But, as I said in my aforementioned 4/25/13 post, just about all of that pent-up demand would stay pent-up if money weren’t so cheap; cars last, and run like new, a long, long time nowadays; yours truly knows this from personal experience.  And while all the latest geegaws are nifty, impressive, and nearly awe-inspiring (See my already seminal 5/20/13 piece, I TEST DROVE A KIA TODAY…), people can, and would, do without them if cheap money didn’t make them even more tantalizing.

With the “domestic” car companies ramping up production by canceling the longstanding Detroit tradition of summer shut-downs, it’s hard to be sanguine about the car business.  At some point, credit has to get more expensive and/or less available.  Even without Fed action, long rates are up; the ten year treasury is up 35 basis points (“bps”) since the end of last month and the five year, a more relevant benchmark for car loans, is up 22 bps.  Without all this cheap credit floating around, what look like tight inventories might suddenly become fulsome as people decide that what was a necessity at one monthly payment is a luxury at an even slightly higher payment.

This post concerns the state of an industry more than the relative cheapness or richness of the “domestic” car company stocks; I don’t follow the car company stocks like I used to, though I am considering starting to do so again quickly.   That having been said, most of the experts are telling us that Ford (F) and General Motors (GM), despite their rather stunning increases of the last few months, are still very cheap with forward price/earnings ratios (“P/E”s) of about 10 times while prospects in the black hole of Europe improve, Chinese sales remain strong, and there is so much upside in the United States.   While 10 times forward earnings certainly look attractive, especially relative to an S&P 500 P/E roughly 50% higher, I might want to challenge at least two, and probably all, of the assumptions behind the earnings projections that form the denominator of that P/E.  

As long as Ben Bernanke’s punch bowl, composed largely of the sweat and the blood of those (especially the elderly) who’ve been prudent, or, in the Bernanke bizarro world, foolish, enough to save, remains full, car sales in the United States should remain strong, or at least respectable.   But as soon as Obsequious Ben takes away the punch bowl, or the markets get wise to him, car sales have nowhere to go but down.

While I’ll leave, for now, ruminations on the attractiveness of GM and F to the self-proclaimed experts, I’m not enthusiastic about investing in an industry that is flying high on the economic and financial equivalent of crack cocaine.  You can see how this argument could easily be extended to the entire stock market, but, again, calling markets is, as I have said so many times in the past, nearly impossible.  

GM                  $32.84

F                      $14.86

S&P 500:         1,652

Dow:                15,308

AN AMERICAN MANUFACTURING RENAISSANCE; IT’LL TAKE MORE THAN CHEAP ENERGY

5/15/13

Appaloosa Founder and CEO Dave Tepper was on CNBC yesterday arguing that America’s increasingly abundant supplies of oil and gas could lead to an industrial renaissance.   While it’s usually not advisable to bet against the unbelievably successful and incredibly insightful Mr. Tepper, he might be getting carried away with his enthusiasm in this instance.

Certainly abundant and relatively cheap energy supplies are a huge positive when companies are deciding where to locate.  But if cheap and abundant energy were so decisive in determining a country or a region’s manufacturing base, Saudi Arabia, the United Arab Emirates, and Russia would be manufacturing juggernauts.  

There are many other things that go into the manufacturing soup…a favorably business climate, a skilled and motivated work force and the highly underrated physical proximity to markets are perhaps most salient.

A favorable business climate?  Despite all the very justified complaining some of us do in this country about the government’s hostility to business, the United States, on a relative basis, is a very favorable place to do business from a tax and regulatory standpoint if one looks at the entire picture.   Yes, corporate taxes are high, but no one pays them at the 25% top rate.   And, believe it or not, individual tax rates are low on a relative basis, and how much a company’s employees, and especially its management, who make the location decisions, pay in taxes is a major consideration when deciding where to do business.   American laws allow far more labor flexibility than do those in Europe or Japan.   All in all, this is a good place to do business…on a relative basis.   Of course, the White Sox are a good baseball team relative to the Cubs, and that is not a complete digression.

A skilled and motivated work force?   We may have a problem here.  Given the “everyone must go to college” mentality in this country (See my 5/10/13 post, STUDENT LOAN FORGIVENESS:   THE OBAMA ADMINISTRATION’S (?) ASSAULT ON THE RESPONSIBLE), our near disdain for anything approaching manual labor, and our failure to impart the basic math and reading skills that are necessary for skilled and semi-skilled jobs, we fall behind many countries e.g., Japan, Germany, Korea, and, to a growing extent, China) in worker training.  And motivation?   I invite those who wax enthusiastic about the motivated and eager next generation to spend some time in a college classroom.   While the spread among students is indeed wide and there are a number of very impressive kids among my and my colleagues’ students, observations don’t skew toward the “I’m hungry, eager, and willing to bust my hindquarters to make it big” end of the spectrum.   Let’s leave it at that.

Even if we have a skilled and motivated work force, ours is by no means a cheap work force.  Yes, it’s cheaper to hire a worker here than it is in Europe, Japan, or Canada, at least at first glance.   When one factors in health care costs, though, the comparison gets tighter.   Further, while labor is quite rapidly getting more expensive in China, Chinese workers are still far cheaper than American workers.   And there is all of south Asia and sub-Saharan Africa waiting in the wings.   Before you guffaw at the productivity gap or the capability of such workers, remember when it was said that Chinese workers could never compete with American workers?   And yours truly is old enough to remember when the expression “Japanese piece of junk” was more than an ironically humorous tag line.

Proximity to markets?   Some of the world’s fastest growing markets lie to our south, but the distance between the United States and, say, Brazil, is not as small as one might think.   Certainly, Brazil is closer to Brazil than we are.  More important, the fastest growing markets are in Asia and we are long way from Asia.   Shipping costs are high and will likely get higher, making proximity to those markets imperative, especially for heavy manufacturers.

Cheap energy is a big plus and will certainly be a positive for American manufacturing.  But there is plenty more in the mix that makes manufacturing here attractive.  And our country is, well, mixed in our relative attractiveness in those categories.  

SO WHAT IS SURPRISING ABOUT ALL THE REVENUE MISSES?

4/29/13

The most salient feature of this earnings season has not been the number of “makes” and “misses” on the bottom line but, rather, that half of the S&P 500 companies that have reported so far have missed their revenue forecasts.

Why should these revenue misses come as a surprise?   Why were the revenue estimates inflated in the first place?  Europe is essentially in the economic toilet.   China is slowing down with repercussions for all those economies, developing (e.g., Brazil) or developed (e.g., Australia) that provide it with raw materials.   Our tepid recovery has been hurt by a number of factors, the largest of which is the elimination of the social security tax holiday this year.   This last factor has drawn a lot of attention, but not nearly the attention it deserves.  The effective payroll tax hike has done more to hobble the consumer in this country than any other development in at least the last year.   Think about it; a guy making $50,000 has seen his tax bill go up $1000, or $83.33 per month.   Somebody making $100,000 gets hit twice as hard.   That’s a lot of money and it affects everybody who draws a pay check.

European nations’ measures to bring their budgets under control only exacerbate the problem.   Companies’ efforts to fortify, or at least maintain, their bottom lines through cost cuts when they can’t do so through revenue increases have the same effect, continuing a downward spiral that will lead to who knows where.

This is not to say that such efforts to save money, at the government, business, and individual level, are not necessary and ultimately beneficial.   Quite the contrary; if we are ever to get our fiscal houses in order, such measures are necessary.   And, despite our tendency to congratulate ourselves over how much we have “deleveraged,” we have a long, long way to go before we approach what was considered a strong financial position even a few decades ago; see my nearly instantly seminal 4/23/13 post, THE ATTACK OF THE McMANSIONS FOR SALE:  A SECULAR BRAKE ON THE HOUSING MARKET.

The important point to remember here is that these painful, yet necessary, adjustments were made necessary by the spending and debt binge of the last two decades or so.   We lost our fear of being in debt, “reasoning” that fortifying our egos by accumulating junk and living beyond our means justified abrogating financial, fiscal, and personal responsibility.   Modern financial thinkers, and politicians, told us that unprecedented levels of debt were no problem; we could always “grow out of it” or some such nonsense. 

Now we are bearing the pain, the hangover, if you will, of years of binging, and it will be a long, hard slog; what can one expect after such a long bout of financial revelry?   Some deep thinkers, unable to imagine any degree of discomfort, are counseling financial hair of the dog, which will only compound the problem…for our children.  My fervent hope is that, as painful as the economic adjustment may be, we will remember that this pain is simply what happens when we borrow too much money.  

Note that I used the noun “hope” rather than “expectation.”

ASIA HAS A CHOICE: GERMAN RESPONSBILITY OR AMERICAN SILLINESS?

4/22/13

This morning’s (i.e., Monday, 4/22/13’s, page C1) Wall Street Journal reports that consumer debt is exploding in Asia, primarily in China, Indonesia, and Malaysia.  Nonmortgage consumer debt in Asia outside Japan has risen 67% to $1.66 trillion in the last five years.  In Indonesia alone, such credit has tripled.   Consumers are lining up to pay interest rates ranging from 15% on secured car loans to 40% on unsecured loans.  No wonder lenders are rushing to Asia.

Why are the newly prosperous Asians borrowing so much?   Such expansion is typical, we are assured, at this stage in their economic development as people start to make decent livings and yearn to buy the things they manufacture for others.   And it is certainly understandable that, after years of having very little, and being inundated with media images of the prosperity of Japan, Europe, and the United States, Asians outside Japan would want to acquire lots of the same junk with which we are curiously so fascinated.   But when one listens to the explanation of one Wiwik Sugiarti, who lives in Indonesia, of why he borrows to buy such things as televisions and DVD players…

“I can buy two or three things at the same time and not have to worry about how to pay for it now,”

one who has seen such misunderstanding and misuse of credit and its consequences gets the urge to utter something like “Uh-oh.”

Again, one can understand Asia’s desire to buy stuff.   But it seems to yours truly that the people in that part of the world can make a choice regarding the development path they would like to follow and the attitude toward money and credit they would like to emulate.  They can be like we Americans, who, through some misplaced sense of entitlement, have decided we deserve everything we want regardless of our ability to pay for our heart’s desires.  Alternatively, they can be like the Germans, who only consider buying things they don’t absolutely need when they have the money to pay for those things and even then agonize over parting with their hard earned euros.   There are, of course, exceptions to these generalizations; I am sure there are some spendthrift Germans out there and there are plenty of Americans (Yours truly comes immediately to mind.) who are much more German in their spending and saving habits.  But there is little doubt that the overall American approach is quite different from the overall German approach.

So which will it be, Asian friends and brothers?   Spend like drunken sailors, eat through the seed corn, and expect, or hope, others will continue to lend you money…or act like mature adults in financial matters?   The choice is, presumably, yours.  

We in America had better hope the non-Japanese (The Japanese are apparently already lost, by the way; see, inter alia, my 4/9/13 post  THE NOT SO INCREDIBLE SHRINKING YEN.) in Asia pick the latter.   If they spend like us, who will pick up the tab for our childish spending?

KIM JONG EUN: “I’M SMART, NOT LIKE EVERYBODY SAYS, LIKE DUMB. I’M SMART AND I WANT RESPECT!”

4/1/13

The bravado and the shenanigans of North Korean tinpot Kim Jong Eun provide yet another instance in which the conventional wisdom is probably correct.   

Mr. Kim is not bent on a nuclear war, or even a conventional war, with South Korea and the United States.   He does not have the capability for a nuclear attack and probably has neither the authority nor the motivation for a conventional attack on the South.  He knows, or his generals know, that a nuclear strike would be his, and North Korea’s, last act in this mortal coil.  He also knows that a conventional attack on the South would bring similar, though probably slower, results; while North Korea’s military dwarfs that of South Korea, the technological disparity between the two is immense and, more importantly, the U.S.’s 30,000 (or so) troop tripwire would be tripped with consequences that the North Koreans would not want to contemplate.   Even if Mr. Kim is as crazy as he would like us to believe, and even if his generals are unwilling or able to bring a measure of sobriety to his deliberations, both of which are highly unlikely, China, North Korean’s big brother and lifeline, would never go along with a conflict that would potentially engulf at least Northeast Asia in an unpredictable, yet in any case horrible, military conflict.

So why is Mr. Kim doing this?   Largely for the same reasons that his father, Kim Jong Il, and his grandfather, Kim Il-Sung, engaged in similar saber rattling, i.e., doing so brought favorable consequences for North Korea.   Such threats in the past inevitably brought the United States, the South Koreans, and even, in some instances, the Japanese and the Chinese, to the table to negotiate more food and energy aid for North Korea’s cruel excuse for an economy.   Extortion has long been a lucrative racket for organized crime, and North Korea has been described, most recently by Representative Peter King (R., NY), as “an organized crime family running a territory.”  The problem is that Kim Jong Eun is no Carlo Gambino, and neither his father nor his grandfather was a Tony Accardo.   And there was never a North Korean Meyer Lansky or Sidney Korshak, though China has long played a similar role for the North Korean family.   But I digress.

Perhaps a better organized crime analogy than that conjured up by Mr. King would be to the fictional Fredo Corleone, the imbecile middle Corleone brother who wanted nothing more than he wanted the respect that he thought was due him but that he deserved only in his own fantasies.   Mr. Kim’s father had a similar problem.   Both men, and especially the latter, have been portrayed as puerile putzes, and this doubtless hurts.   So, Kim Jong Il rattled the nuclear saber to get some respect and the apple has not fallen far from the tree.   Young Mr. Kim, especially because he is new on the scene, feels the need to impress not only the North Korean in the street and the “international community,” but also the North Korean military who don’t yet know what to make of this young popinjay.

So what we have in Kim Jong Eun’s bluster is both a new chapter in a continuing successful extortion racket and a cry for respect, a respect that he needs more than even his walking, talking caricature father and far more than his grandfather, who did manage to fight the world’s greatest military power to a draw.  The conventional wisdom is correct; we are not on the verge of a nuclear war in the northwest Pacific.

One potential problem though, with the above argument is that Mr. Eun is, after all, probably (It seems no one is quite sure.) not yet 30.  I, like many of you, knew everything when I was in my twenties.   So we are dealing with a very young man with the misplaced confidence of youth who seems to have inherited some peculiar genes; consequently, we can never be entirely sure that the young man is not completely crackers.   Therefore, the B-2 flyover and the F-22 deployment were probably a helpful and inexpensive reminder to this scion of the Kim dynasty of the inadvisability of playing these games with undue vigor and enthusiasm.   On the other hand, a quick admonition that any overly spirited adventure would threaten the supply of Johnny Walker Black and blond, blue-eyed Western women might be equally effective; such realizations always gave Mr. Kim’s father pause when he ramped up the extortion game too steeply.