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

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.”

CZAR BERNANKE’S DIKTAT: BONDS MUST BE RICH, STOCKS MUST BE CHEAP

2/26/13

As I’ve said on numerous occasions in the past, trying to discern the direction of the stock market, or any market, for that matter, is a fool’s errand.   One’s probability of being right is approximately 50%.   Years of toiling in the financial markets, as yours truly has done, might improve that probability to, say, 51%.   On the other hand, it might reduce that probability to, say, 49%.   As I told one of my fellow faculty members at a dinner at Elmhurst College last night, I’ve spent much of the last twenty years or so trading a small portion of my portfolio like a scalded dog.  The results have been no better, indeed, they’ve been worse, than the results I’ve achieved in the larger portion of my portfolio that is emotionlessly invested in a balanced portfolio of index and index like products.  The point is that, despite the millions, and probably billions, invested by the financial sector in trying to call markets, doing so is basically a crap shoot.   However, since those who populate the financial world, and especially the financial media, ceaselessly are flapping their jaws telling us which way stocks will go, doing so is great sport, and the opinions of these estimables are no better than mine, or yours, I will indulge in this rather pointless pursuit, not so much for the sake of direction as for illumination of a larger point.

Over the last few weeks, or months, really, pundit after pundit has been telling us that stocks are cheap because, with the 10 year treasury at 1.87% and corporate spreads tight, or at least not wide, where else is there to put one’s money?   In other words, stocks are cheap relative to bonds so we have to buy stocks.   But, with a Fed engineered bubble to end all bubbles in the bond market, EVERYTHING is cheap relative to bonds.   That they are cheap relative to a hideously inflated bond market is no reason to buy stocks.  

There are, of course, other reasons to buy stocks, but all those reasons have a counter.  Yes, profits are quite good…right now.   But it’s hard to see how they will stay good if the domestic economy remains moribund, China and Europe are having trouble, and consumers are getting hit with the double whammy of high gasoline prices and a big increase in the payroll tax in an environment still characterized by too much debt.   Then we have the potential political time bombs out of Europe and Washington.   How these balance out, no one knows.   But the only reason for buying stocks that is more or less unanimously agreed to is their cheapness relative to bonds.  And buying a house was cheaper than renting in 2007, or so it seemed.  The analogy is not perfect, but you get the point.

What is genuinely scary about the “stocks are cheap relative to bonds,” and the real point of this post, is not whether that argument is correct.  What’s really scary is that stocks have been made cheap relative to bonds as part of a conscious, deliberate, and relentless Fed policy to make stocks cheap relative to bonds.   The Fed has transcended its customary role as custodian of the nation’s monetary supply to become a kind of economic czar, determining what levels are appropriate for various asset classes, where capital should be directed, and what segments of the economy are worthy of the succor loose money can provide.   That a quasi-government agency has vested itself with so much power, with little or no resistance from the governing class, which is always eager to cast off responsibility, is what is truly frightening, and not only for the stock market, but for our financial system, our economy, and the very notion of a free market and a free society.

TRADING WITH EUROPE AND “WHAT’S THE POINT IF THE GOVERNMENT CAN JUST DESTROY IT?”

2/14/13

For the last few semesters, I’ve taught an MBA course in business economics at Northern Illinois University (“NIU”) known as Finance 500.   While I like exercising my pedagogical skills at any course, I probably enjoy this class the most because of its wide-ranging discussion of topics that matter with input from students from a wide variety of career, educational, ethnic, and national backgrounds.   One of the greatest compliments I’ve received was a comment on an anonymous student review of the class a few semesters ago:

“I learned a lot of practical economics in this class even though I didn’t think I was.”

While the English could have been better, the sentiments could not have been.

I require my students to get a subscription to the Wall Street Journal (which students can get for about $30 for at least the duration of the semester) and regularly assign articles that illustrate concepts we discuss in class or that I otherwise find interesting.   I expanded a bit in today’s article assignment and thought my readers, in addition to my students, might find my comments interesting:

FINA 500:  PROPERTY RIGHTS AND TRADE

2/14/13

Today’s (i.e., Thursday, 2/14’s) Wall Street Journal features two front page articles that are especially relevant to our discussions during the last few class sessions.

“Broad Trade Deal on the Table” discusses the efforts of the U.S. and the European Union to reach a sweeping trade deal that would eliminate, or come close to eliminating, all tariffs and trade restrictions between the two entities that already have the world’s largest trading relationship.

One would think that this deal should be easy, or about as easy as a trade deal could get, given the relative similarity of the two economies, their nearly identical stages of development, the cultural affinity of the two areas, and the comparatively small disparity of wage rates in the U.S. and Europe.   Those supposedly in the know, however, think it might take two years to iron out a deal.  I would be betting that it will be agricultural issues that will bog down the talks, hopefully not to the point of breakdown.

The other page A1 article worth reading is “Tensions Mount as China Snatches Farms for Homes.”   The article illustrates the desultory impact government corruption has on growth, as we discussed last week.   It also highlights the importance, the necessity, really, of the enforcement of property rights for economic development.  Note especially a quote in the article’s fifth paragraph:

“(Mr. Fu) has no heart to start another business.  ‘What’s the point if the government can just destroy it?’”   A stark real world example of a concept we discussed in a very real world class, eh?

I think I might make this announcement a post on my blog.

Have a wonderful Valentine’s Day.