Posted by Ray on September 1, 2009 under Main | 
This question is being asked by many people, especially the media which I find interesting since they are supposed to be in tune with the experts. Clearly we are taking a breather and I suspect that the downtrend will continue as we were way overbought. There is a caveat to this, liquidity.
My primary thought has always been that liquidity was the primary driver of this parabolic rally that we have had. That liquidity remains the wild card in markets as some liquidity will be removed through, supposedly, the Fed reaching its limit on quantitative easing. However, money is definitely abundant and can continue to drive stocks higher, but, in my opinion, that just increases the danger of a steeper decline.
I do not think anyone is surprised by the ISM data today as the primary driver of the increase was artificial stimulus form the government, primarily the cash for clunkers program. Unfortunately the demand from this stimulus will be short lived and as the market is telling us the good news was already priced into equities. One must also remember that the ISM flipped positive in 2002 as well, but proved to be false as the pain continued for months afterwards.
Furthermore, sales reported by Ford and Chrysler today were not so hot as they missed estimates. This shows that these firms should not be boosting production as demand is still very lax and will more than likely not improve as unemployment continues to be a major problem. As I have said previously, unemployment is the primary problem we face now as this is a credit led recession, not an inventory recession.
Realize that the ISM number is good news, but I believe it to be completely supported by government intervention, which is bad. The government cannot intervene forever and when they stop, which they have to a certain extent, then we will have real demand data, which is pretty bad. I know you have been hearing the talking heads trumpet the good news as the end of the recession is over and everything is great now, but that may not be true. As I said above, the ISM had a very similar rebound in 2002, but the recession went on.
We are still having problems with real estate which is been a bit convoluted with the data that you have been presented with, but based on what we see only lower end homes are moving and prime mortgages are now defaulting. There is no question that the economy is in better shape than a year ago, but the problems are still here. Frankly, all that has happened is that banks have relaxed accounting rules and the government simply supported the whole system. If the support system was removed and accounting went back to where it should be the whole thing would fall apart and everyone knows that.
As far as real estate it is estimated that over 2 million new home sales are because of, drum roll please, the $8K tax credit! Take that away and there goes demand. My point is that artificial demand has created more of a problem than a solution because when real demand is figured out the market will retract significantly. Creating confidence in a system that is sure to disappoint when support is removed is just plain wrong, but that is what we have.
Yes, liquidity can drive the markets higher, but what we are seeing today is just the beginning. People have figured out that good news has already been baked into the cake and demand is not real demand so people are exiting stocks for safer investments. Today, gold, silver and short-term treasuries are doing fairly well, which is what I hold I might add, while riskier assets are getting hit pretty good today. Outside of precious metals and defensive names, like Wal-Mart or McDonald’s, I am not inclined to buy anything right now.
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Posted by Ray on August 30, 2009 under Main |
Just when you think the Big 3 learned their lesson they go and repeat the same things that got them in trouble to begin with. One would think that after 2 decades of bad decisions and one other major bailout from the government the industry would get its act together, but that is not the case. The only one of the Big 3 I have respect for is Ford, who told the government to pound salt over the terms of a bailout, but that makes me question why they went to the bailout table to begin with.
However, all three just made the worst decision of all time, well kind of. It appears that they bought into the whole ‘the economy is recovered’ and that the artificial demand for cars, through cash for clunkers, is somehow permanent. In fact, there is little demand left for new cars and all the pent up demand for cars was pushed forward to now through the very expensive government incentive. Unfortunately, the greatest recipients of the whole cash for clunkers deal were the Japanese car makers, not the Big 3.
Toyota has realized this and has recently cut their production by 10% and, for the first time ever, closed a plant down. However, the Big 3 has done the exact opposite of Toyota, which shouldn’t surprise anyone. GM and Ford recently announced the addition of more shifts, rehired workers and boosted output by 10%. All when traffic in dealerships is reported down 10% below Junes traffic.
I guess when you are backed by the government, except for Ford, you can afford to do this, but it is not reassuring to me to see that type of decisions being made. Especially since we are, more than likely, not out of the recession and the consumer is still not spending money. Not to mention that 25% of people buying cars under the cash for clunkers program have buyer’s remorse which goes to show they really never wanted to buy a car, but free money is free money.
What you can surmise from this is that the big 3 are living in a fantasy land while Toyota, Honda and Hyundai continue to clean the clocks of its US competitors. It makes zero sense that the Big 3 would ramp up production when the more successful Japanese makers are cutting back, perhaps GM and Ford know something we don’t, but I highly doubt that.
Based on this recent decision to ramp up production it is really no wonder why 2 out of the Big 3 failed, miserably I might add. Not to mention this is Chrysler’s third chance at survival after they were successful after the first bailout, but their second failure just illustrates how bad their business plan was to begin with. In my opinion, I think any car maker is far from a buy as I see shrinking credit and lack of demand driving car sales further down instead of up.
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Posted by Ray on August 10, 2009 under Economy, Main |
The much talked about cash for clunkers has always had serious drawbacks to it; it was robbing from future auto sales and it created a one-off increase in production for Detroit. There was no doubt that the robust sales generated from this program would sputter out as few consumers were willing to increase their debt loads during times of uncertainty. We are now getting a report from GM stating that sales from the program, in just one week, are starting to slow.
I guess they were the only ones who had no idea that this would be a one-off run with limited longer term appeal given people are losing their jobs at a rapid rate. Not only are the sales slowing, but this program, which was further boosted by additional incentives from the dealers of up to another $4,500, is robbing from future sales. In fact, one could argue that those who took advantage of this program were more than likely going to buy a new car anyhow. Regardless, it was a spectacular event which is sure to boost GDP for 3Q09, but do not expect this program to give a boost to GDP after that.
Not to mention that it is more than likely that this program, since it is removing older cars from the road, will have a ripple effect through other car industries. Firms like AutoZone or Pep Boys will likely have slower sales or, worse yet, mechanics might get laid off adding to the unemployment rate. There is also the obvious problem, Japanese models have a better reputation, even if it is not so much the case anymore, of being more fuel efficient and reliable which may have directed sales away from US automakers, even with additional rebates.
Essentially, this program along with cyclical restocking will add positive growth to the GDP in 3Q09, possibly to a positive figure, but there will be little carryover to 4Q09 unless unemployment drops. The other hindrance to the economy is the consumer who has been contracting their credit for 5 straight months which means they will spend less. Lending to consumers is still very slow and down significantly year-over-year and when added to consumers reducing their debt this means less there is less hope for the biggest portion of our GDP to comeback anytime soon.
I do not recall who said it, but I liked the quote. We are going to have jobless, revenue-less, profitless, income-less, and consumer-less recovery which would be a first. Of course, the media wants you to believe this is actually going to happen and maybe it will, but I highly doubt it. I think the best we can hope for is a stabilization of between 0 and 1.5% GDP growth in the near future. This also dispels the hype that cash for clunkers is some kind of miracle program when it is really government subsidized auto purchases.
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