“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.

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

I TEST DROVE A KIA TODAY…

5/20/13

And why, one might ask, would I test drove a Kia Rio today?  It’s Kia’s smallest and least expensive car, what is called a B-body car, two sized down from my trusty 2007 Accord.  Why would I even consider what some might call such a drastic downsizing?

First, I don’t know if I’m considering buying a new car; in fact, I’m probably not.   But I am never completely out of the car market (back in the old days, when I was making lots of money and had far fewer financial responsibilities, I owned, consecutively, 4 cars in the space of 16 months.  I guess we all do dumb things, and if that were the dumbest thing I’ve ever done (It’s not.), I would be in good shape.   Dumber than owning 4 cars in the space of 16 months was that one of them was a Saab (“Sure ain’t a Buick,” as a guy who sold both Buicks and Saabs once told me), but I digress.

Second, I love to test drive cars.  It’s fun, it keeps me up to date on what’s going on in the car market, and, in the past when I traded car stocks with some frequency, helped me make some considerable money on those positions. 

Third, Kia offered me a small inducement to test drive one of its cars and I had the time on this beautiful afternoon to stop by my local Kia dealer (Gerald in Naperville) and take one for a spin.  Further, I did so during the week during the day, so the salespeople were not busy with customers, as they would be on a Saturday or in the evening; I don’t want someone indulging my habit of test drives for fun when they have actual, want to buy that day, customers, and the potential to make some dough, waiting for them.

Fourth, I am, as regular readers know, frugal beyond the point of fault.  And though the Rio is, by and large, an inexpensive car, the Kia Rio, in its most expensive guise, the SX, has most of the features I look for in a car…a manual transmission and some decent equipment; more on that later.

Fifth, as I wrote in my 4/3/13 post, “R-E-S-P-E-C-T, FIND OUT WHAT IT MEANS TO (KIM JONG EUN)”, I am a great admirer of the South Korean people and might want to indulge that admiration by buying a Korean car, to wit…

The South Koreans and, yes, their formerly authoritarian regimes under Syngman Rhee and, to a greater extent, Park Chung Hee, took the types of risks, and engaged in the type of hard work, that the North Koreans are too timid to undertake.   They are to be congratulated.   The North Koreans, and their pudgy ruler, are to be ridiculed.   Only they don’t appear to know it.

With that having been written, I think I’ll go out and buy a Kia or a Hyundai.

Roughly equivalent sentiments point me in the direction of a Volkswagen (BISMARCK’S DREAM, MERKEL’S VICTORY, 5/1/13), but that is another issue.

So what’s the point of this screed?

I was amazed at the car.  I wasn’t amazed so much at the car itself, but at what is available in new cars, even at lower price points, nowadays.   Yes, I keep up on the industry, and I know intellectually that x, y, or z is available in certain cars, but until you get in the car and drive it and experience all the gizmos (and, more importantly, the ride, handling, and driving experience), you don’t realize how far cars have come.

Here I was, driving a car for stickering for just under $20,000 (Rios can be had for a lot less money; I drove the fully loaded SX, as I said above.) that handles like a sports car of not too many years ago with a six speed manual and plenty of power.  The car has satellite radio, Bluetooth (I have only a vague notion of what “Bluetooth” is, not being a regular celphone user.), all kinds of gizmos for streaming music in the car, backup camera, navigation, power folding mirrors, one of those keys that enables you to not only start the car but also open the doors with the key only being in your pocket, eight air bags, stability control, hatchback utility, a 5 year, 60,000 mile bumper to bumper warranty, 10 year, 100,000 powertrain warranty, 28/36 city/highway fuel economy…again, for under $20 grand.   It is amazing how far cars have come in the six model years since I bought the venerable and trusty Accord.

Since I am sure some of readers will point this out, I, too, can remember when you could buy two fully loaded Cadillacs for less than $20 grand.  But by latter day standards, this Kia Rio is just an amazing achievement, testimony to how great and dynamic the world auto industry, and, more importantly, the competitive, free market system, is.

Not that I would want to trade-in the greatest, and, in at least one sense, most unusual car I have ever owned, my 2007 Accord EX-L manual.   Nor would I necessarily trade it in on the Rio; the Rio lacks a few things I would like in a car and could be quieter and have tighter steering.  But the drive I took today really opened my eyes.

“R-E-S-P-E-C-T, FIND OUT WHAT IT MEANS TO (KIM JONG EUN)”

4/3/13

I mentioned in my earlier post today (SOUTH KOREA:  “MR. PRESIDENT, WE CANNOT ALLOW A MINE SHAFT GAP!”) that the current bout of saber rattling by North Korea should be providing plenty of grist for the Mighty Quinn mill for some time to come and, sure enough, even today the story is bearing more fruit.

The Wall Street Journal put it succinctly in the continuation of page A8 of today’s (4/3/13’s) front page story when it reported

North Korea has repeatedly asked the U.S. and other major countries to recognize it as a nuclear-weapons state and negotiate with it as an equal partner.

As I stated in my post of a few days ago (KIM JONG EUN:  “I’M SMART, NOT LIKE EVERYBODY SAYS, LIKE DUMB.  I’M SMART AND I WANT RESPECT!”, 4/1/13), this craving for undeserved respect is the essence of this, and every, North Korean bout of bluster and bravado.  North Korea wants respect, and its new young leader needs respect not only from “the U.S. and other major countries” but also internally, especially from the military.   Hence the empty threats to nuke Seoul, Hawaii, Washington, and other places Mr. Kim can perhaps find on a map.  Being treated as “an equal partner” is impossible, given the military, economic, and geopolitical realities, but respect can indeed be achieved.

The problem is that getting respect the right way, by developing one’s economy, engaging the world, and giving one’s citizens a decent chance at a better life, the way that South Korea has done it, is difficult, expensive, and risky.  It takes time, patience, and investment.  Achieving respect in this manner also might lead to one’s citizens making outrageous demands for, among other things, a say in the way things are run.   People have a funny tendency to demand input into their own lives, and into their communities, when they have something at stake.  

Kim Jong Eun and the people who pull his strings cannot take the risks, or do the hard and expensive work, necessary to earn respect in an enduring way.   Developing a bomb and threatening to use it is far cheaper, easier, and less fraught with peril, from the regime’s standpoint, than undergoing the type of economic miracle that has been achieved by South Korea.  In fact, miracle is the wrong noun to describe what has happened in South Korea.  The South Koreans and, yes, their formerly authoritarian regimes under Syngman Rhee and, to a greater extent, Park Chung Hee, took the types of risks, and engaged in the type of hard work, that the North Koreans are too timid to undertake.   They are to be congratulated.   The North Koreans, and their pudgy ruler, are to be ridiculed.   Only they don’t appear to know it.

With that having been written, I think I’ll go out and buy a Kia or a Hyundai.