June 1, 2009

As they say down here in the south, y’all best hang on cause it’s gonna be a bumpy ride! This economy of our isn’t responding like some text book case the administration studied in Harvard or any of the other fine universities that helped shape their thinking. This may be your Great Grandfathers recession.

Since the 1930’s we lost a bunch of car companies and no one seemed to care. DeSoto, Plymouth, Imperial, Oldsmobile (Ransom E. Olds (REO Trucks)) and we will lose Pontiac and Hummer and GM is desperately trying to sell Saturn and SAAB and OPEL (it’s foreign brands). Saturn was originally started from scratch by GM to be the new business model for the future. It was exactly the right thing to do. What happened? The power of the Status Quo in GM eventually crushed it until it just became a Chevy with different trim. We lost entire companies like Tucker, Studebaker, Packard, Willys and American Motors which was formed through the merger of Nash-Kelvinator and Hudson in 1954. Nash pioneered unitary construction (1941), also a heating and ventilation system whose operating principles are now universally utilized (1938), seat belts (1950) and the manufacture of cars in the compact (1950), subcompact (1970) and muscle car (1957) categories.[1]. Why? One mans opinion is that they wanted to do what needs to be done in the automotive world, innovate. The powers of Status Quo crushed them. Tucker had innovation galore. Headlights that swiveled in the direction you were turning, for example. Just now coming on stream in high end imports. The Tucker was introduced in 1949. The demise is attributed to negative publicity put out by the big three (Chrysler, GM and Ford). Studebaker began in 1902 in the auto industry and lasted until 1966. They collapsed because they offered smaller, more economical cars of advanced design. In 1954 the Studebaker line had small V8’s available with an electric overdrive, making them much more fuel efficient than their competitors. They had rear seat heating when no one in the industry was offering such a system. They went away in 1966 just a couple of years before the first oil crisis, which would have made them the hero’s of the auto industry just as the Prius did for Toyota recently. Timing, they say, is everything. Packard was around from 1899 until 1958 when it succumbed after introducing the first Ultramatic transmission with locking torque converter, the forerunner of today’s automatic transmissions. The Hudson which was around from 1909 until 1955 and was retired after being a racing champion for years due to its light weight construction techniques and powerful, reliable motors. Kaiser-Frazer was born in 1945 and reorganized in 1953 as the Kaiser Motors Corp. shortly before it acquired the assets of the Willys-Overland Corporation the makers of Willy’s cars and, pay attention here, Jeep products. So Jeep stated out as a Willys, got bought by Kaiser, got bought by American Motors, got bought by Chrysler who in turn got bought by Daimler Benz who spit them out like bad wine, got bought by a private investors group who went broke and will now be run by Fiat of Italy.

The pattern I’m trying to establish is that (except for the big two GM and Ford) car companies come and go. They have since the invention of cars. Ford is still OK, not needing Government intervention. Let it be the survivor. Let GM survive if it can and die if it can’t. Chrysler now belongs to the Government and the Italians (FIAT). I sincerely wish them all the best of luck. That is going to be one interesting marriage. GM is in negotiations with FIAT to off load OPEL. FIAT wants OPEL because, with Chrysler, they will be large enough to be a world player (6.5 million cars per year).

This country has been the birth place of businesses and product innovation simply because we allowed people to try. Ebay, Skype, Google, Sightspeed, Twitter, Tesla Motors and so many more. Whether they fail or succeed, they had the opportunity to try. There are several that are trying right now. Tesla, www.teslamotors.com has a great all electric sports car. It is developing a sedan. Why aren’t we helping them? Daimler (maker of Mercedes Benz and Smart) has begun to work with them on an electric version of the Smart Car and bought a 10% interest in Tesla Motors. We’re throwing Billions of tax payer dollars at companies with failed business models. Zap is another all electric car company. Why aren’t we helping them? Didn’t these guys and gals in the administration learn anything at Harvard, the school that invented case studies, or any of the other fine institutions of higher learning attended by various members of the administration?

The debt the Obama administration has already piled up has the dollar down to $1.41 to the Euro (5/29/09) a drop of 6% in a month. You can measure inflation any way you choose. But when a dollar buys 6% less oil, gold, or imported car than it did a month ago it is time to get very worried. And the stimulus package crafted by Congress (not the administration) doesn’t seem to be stimulating much of anything. Maybe its because it was full of “re-elect me” pork instead of true stimulus programs.

GM will file bankruptcy and when it does the dominoes of company failures in the auto parts industry will be dramatic and far reaching. It will leave the administration at way less than ground zero after a mere six months in office. Government debt is now massive, having something like doubled since they took over and unemployment is still rising with 631,000 more people filing for unemployment this week. Bringing the total new unemployment claims to over 12,968,000 people. If and how many of them have found new jobs I don’t know. How many started up little businesses of their own or simply filed for Social Security and gave up I can’t tell. The economy is continuing to shrink. No wonder, our economy is 70% consumer driven. When the consumer is out of work or afraid they may soon be, they don’t spend. Even a small decline in 70% of the economy translates to big numbers.

By way of an update, have you noticed gasoline prices? Current wholesale markets, (real or manipulated) are now at $1.93 per gallon. Add between $.80 and $.90 per gallon for transportation, retailer margin and state and local taxes and you can see what the price of regular will be in a week or so. Average price here locally I think is about $2.339. So look for another 25 – 30 cents in the next week or three.

As I said in my opening commentary, y’all best hang on cause it’s gonna be a bumpy ride!

Is the recovery here?

Today is the 20th day of the 5th month. I just came back from Las Vegas and the idea of what happens in Vegas stays in Vegas aside, it was not very busy. There were people visiting but it was not crowded. They are feeling the effects of the recession up close and personally. There is some good news! We are less than halfway through the year and we are beginning to see some small positive signs that the market is trying to bottom out and return to prosperity, pushed largely by the desire we all share to return to the “good old days” of growth. Unfortunately, the small signs also show that the bottom is tenuous. It is at risk. The Obama administration has made some aggressive moves that, if Congress approves, will see some real progress on energy. The cost will be in marked price increases in new cars and trucks by 2016. The price of gasoline is vindicating my previous predictions that we would be at $2.50 in May. We may yet see $3 per gallon by August. The good news is that it will likely retrace in the fall and winter months. How far back gasoline will retrench depends on the strength of the recovery. The stronger the recovery the less prices will fall. Worldwide consumption is rising. Available oil is fixed for the next two years at least. As always, Supply and Demand will dictate price.

Based on this we can sense how fragile any recovery may be. This says to me that the recovery will be very unsmooth. Up a little, down a little. Jobs will be VERY slow to return and the outlook for real estate value is for very slow growth once the existing inventories are absorbed.

Also of concern is the leading edge of the baby boomers who are filing for social security early, many forced into it by job losses caused by the recession. For those who were highly compensated, even recovery generated jobs won’t give the government dollar for dollar income back, as newer employees will be paid less. Simple math, 15%of less is less. Lifting the top amount of income subject to payroll taxes is the only way to recover some of the lost revenue and that is politically unpopular (those folks are where the big campaign contributions come from), as are higher payroll taxes on everyone. That means that the decline in revenue and added claims will force the government to dip into the social security trust fund. Oh, wait, the “trust fund” is IOU’s from the government who has already used that money for other things. To make cash available to the social security system it will have to generate more revenue (higher taxes), borrow more (increasing interest rates and cost) or cutting benefits to older Americans.

The rest of the western world and Japan has the same problem. We have spent and now the bill has come when we are least able to pay it. Increased taxes will restrain the recovery. Increased government spending (health care, etc.) must be funded.

So the recovery is likely to take quite a while (years) but at least early signs suggest that the recession is coming to a close and that is, indeed, good news.

May 10th

OK, so the market has been up for two weeks and there are some glimmers of hope that the market is beginning to see a little stability. Specifically, pending housing contracts are up two months in a row. Two dots make the meager beginnings of a trend line. We need more you say. Well despite the bad news we hear everywhere the housing market, new and existing together, is beginning to stabilize although the trend is still slightly down and this is typically the best time of year. Auto sales, although still in the basement, have been stable at approximately a 6.9 million unit annual rate. So the indicators are beginning to suggest a bottom is forming. Retail, although erratic, have been in positive territory for the past four consecutive weeks in the weekly Red Book(1) report.

There has been a bit of a run up in transportation stocks, typically a leader in recovery. Still, there is talk about the next banking crisis being credit card defaults and commercial real estate. It’s hard to imagine that we have too many Malls and Strip Centers…isn’t it? And then there is the government stress test that points out potential banking problems if the economy continues to worsen. They used 10.5% unemployment among the factors. Current unemployment is reportedly 8.9%(2) . The most current statistics suggest that the rate of job losses is slowing, so 10.5% may be a worst case scenario, but we aren’t out of the woods yet on that. Employment is a lagging indicator of recovery. Technically the recovery will be well underway before employment begins to pick up.

With Oil holding stubbornly around $50 and gasoline about to soar as driving season arrives we can expect to pay more. Let me be up front here. I predicted $2.50 a gallon by early May. The highest we have locally is $2.07 so I was premature. We’ll just wait, the $2.50 is coming. We may see a little pull back in the consumer spending and a delay in germination of any recovery seeds that are being spread right now when it does. That 20% more on the monthly gasoline bill has to come from somewhere. Once recovery does get started, watch out. Pent up demand and recovering credit availability will team up to send prices of everything skyward. I predict that this won’t happen until 2011 or maybe even 2012. The consumer will not readily forget and regain their confidence even after they get another job. But history suggests that Americans believe in their very soul that they are entitled to have their wants. Spending will regain its previous levels unless regulations prevent it.

President Obama is still campaigning. Unfortunately the anti-freedom forces in Pakistan and Afghanistan and even Iraq are not. They are doing what they do best. They are busy creating havoc and mayhem. The Pakistani government has just learned the lesson that appeasement doesn’t work as the Taliban broke its cease fire with the government and took the Swat Valley by force. And we continue to spend Billions in these places instead of at home where it is needed. Iran continues to send money to governments across the middle east to assure that they stay “friendly” to the Iranians and will help dissuade the Israeli’s from attaching their nuclear factories. The Israeli’s won’t allow Iran to have nuclear capability and I’m not sure that we can afford to support them with troops and armament if they decide they must act. We are stretched too thin.

Locally, the city of Wilmington has found a way to bridge it’s budget gap. Annexation. Need more loot? Just annex unincorporated county areas and charge them city taxes. That increases the size of the pie without increasing costs commensurately. A budget gap filler for sure. I suppose that sustainability of that approach isn’t unlimited but it will work for quite awhile. In Ohio the city of Columbus actually annexed property in surrounding counties. Eventually the city encompassed more land mass than Franklin County in which it was located. Seemed odd to me then and still does. Seems like annexation should be approved by both sides of the transaction. Maybe not one man, one vote. Maybe based on the quantity of land involved or some other basis. But somehow both sides should have to agree. In eminent domain actions some compensation is paid and litigation is available to assure fair and equitable prices. Shouldn’t there be some quid pro quo when taking money from people especially without their consent? Consent suggests that both sides agree that the action is desirable. With consent the market place has determined that there is value adequate exchanged.



(1) Red Book Tuesday May 5, 2009
(2) Bloomberg May 8, 2009