The Daily Reckoning - Fender Bender (Gary Shilling)

verfasst von Firmian, 28.07.2004, 18:59

-->Fender Bender

The Daily Reckoning

Baltimore, Maryland

Tuesday, July 27, 2004

---------------------

*** Stones and Gold...Dirt and Cash...

*** Fresh 10-month low for Nasdaq. Dollar down too...

*** Lunatic Asylums...the Democratic National
Convention...and more!

---------------------

Yesterday, Pater Familias took his family on a brief tour of
Southern Maryland. We drove by one subdivision after another,
the houses getting bigger and bigger. Each one had a grand
entrance and a bucolic address. Usually the place was
announced with curved brick walls, iron gates, and an
Anglican name such as 'Heathmont Downs.' You feel as though
you might be entering the grounds of a private lunatic
asylum.

"Wow," said one of the children, staring at an immense, ugly
house with white bricks, small windows and wooden decks
protruding from every wall,"those people must be very rich."

Either that, or very poor.

"Some of these places are 6,000 square feet and more,"
explained a cousin."And some of them are lived in by older
couples without children. They don't really need the space.
But it's a way to leverage the housing boom. A lot of people
think they should buy the biggest, most expensive house they
can. I don't know about anywhere else, but housing prices
around here have been going out of sight. They're right.
They're making a lot of money by buying expensive houses."

The housing market in this part of the country has gone mad.
People buy houses they don't want, don't need and can't
really afford - in order to get rich. They're all right...as
long as house prices rise. But if they go down, they'll be
stuck with a huge, expensive home...and a huge expensive
mortgage.

Yesterday, stocks went down again...bonds and the dollar too.
Real estate will be next...stay tuned. First, the news...then
the views, below...

---------------------

Eric Fry, our man on Wall Street...

- The stock market ALMOST gained ground yesterday, but
didn't; the Dow Jones Industrial Average fell less than one
point to 9,962. The Nasdaq, meanwhile, set a fresh 10-month
low, slipping half a percent to 1,839. The dollar, gold and
bonds all followed the stock market lower. The greenback
slipped about half a percent to $1.214 per euro and gold
slipped 20 cents to $388.95. Treasury prices also dropped,
pushing the yield on the 10-year note up to 4.48% from 4.43%.

- The poor lumpeninvestoriat can't seem to catch a break.
Almost everything is falling almost every day. Only cash is
producing a positive return...and yet no one is holding it.
Folks are still buying houses, it seems, but not much else.
The National Association of Realtors reported that existing
home sales rose 2.1% in June to a new record high.

- Meanwhile, stocks have become about as coveted as a week-
old bowl of oysters. But there's a new initial public
offering (IPO) in the wings that might change all that...an
event that might just jostle the market out of its malaise.
The Internet search engine, Google, is readying a massive
Internet-era-style IPO - a gaudy $3.3 billion affair that
would value the company at a whopping $32 billion. For
comparison, Yahoo is valued at $37 billion. Or to put it
another way, Google's market cap would be about 65% of
eBay's, at $48.6 billion, and more than double Amazon.com's
$15.3 billion market cap.

- The stock will not make its Wall Street debut until a
couple of weeks from now, but the Google brass is already
talking up the offering in a road show that begins soon in
Manhattan. Will the mere buzz of a hot Internet IPO lift the
market out of its lethargy? Will it spark buying interest
through the entire stock market? We wouldn't rule out the
possibility.

- Also weighing in the bulls favor is the fact that the VIX
Index of option volatility is showing increasing levels of
fear among option buyers. The higher this index rises, the
more likely a rally is to appear. For now, however, the path
of least resistance in the stock market still seems to be
down. Problem is, the index has not quite reached the levels
that typically indicate an imminent rally. But if stocks keep
sliding for a few more days, they will be primed to rally by
the time the Google IPO hits the dance-floor.

- Despite increasing levels of anxiety reflected in the VIX
readings, most long-term sentiment gauges still show record,
or near-record levels of bullish sentiment, which is not a
good thing for stocks.

-"Advisers are significantly more bullish today than they
were earlier this year when the stock market was at levels
similar to today's," observes Mark Hulbert of Hulbert's
Financial Digest."[which] increases the likelihood that the
correction that began four weeks ago has further to go..."

-"Advisers are becoming less and less concerned about
downside risk," says Hulbert. I base this assessment on
readings of the Hulbert Stock Newsletter Sentiment Index
(HSNSI), which reflects the average equity exposure among a
group of very short-term-oriented market timing newsletters.
As of Thursday night's close, for example, the HSNSI stood at
23.1%...much higher than where it stood at other times,
earlier this year, when the Dow stood at current levels.

-"For example, on May 25, the Dow closed at 10,118, some 68
points higher than where it closed Thursday. Yet, as of that
trading session's close, the HSNSI stood at minus 14.8
percent, or nearly 40 percentage points lower than its
current level."

- In other words, the lumps are not nearly as scared as they
ought to be. Most of the stock-buying masses still prefer
stock-buying to most other investment activities. Here at the
Daily Reckoning, we prefer investment inactivity. We prize
the tedium of cash to the intermittent terror of buying
overpriced tech stocks. Come to think of it, our favored
investments are more likely to appear in the Periodic Table
of the Elements than in the Wall Street Journal.

- Our Paris-based editor cherishes stones and gold, while the
blue collar crew here in the States prefer dirt and cash. We
still like stocks, of course. But only when they are as cheap
as a first date with a teetotal-ing vegetarian.

---------------------

Bill Bonner, back in Maryland...

*** We listened to a bit of the Democratic National
Convention last night and tried to explain to Henry the
significance of it.

"The parties get together before each election in order to
select their candidate," we said, plausibly.

"But I thought they had already decided on John Kerry," the
14-year-old protested.

"Well, yes...but they need to choose him officially. And they
need to figure out the party platform."

"What's that?"

"Well, that's where they tell the nation what they're going
to do if they're elected. So people know what to expect."

"I thought you said that Bush was elected because he promised
to be a conservative...but then he turned out not to be a
conservative at all. Didn't he spend a lot of money...and
start a war? And I thought you said politicians never keep
their promises anyway. So what difference does it make what
they say they're going to do?"

"Well, that's right...they've usually already selected the
candidate...and it doesn't seem to make much difference what
they say...still, sometimes you can get a better idea of what
kind of people they are and what they think."

We were listening to the speeches on the radio. Al Gore,
Barbara Mikulski, Jimmy Carter...and then the Clintons.

"Dad, they all say the same things," noticed Henry.

"What's that?"

"That Americans are good and that everything was fine until
the terrorists attacked. And...oh yeah...we need to get rid
of George Bush."

According to Democratic Myth, America was a paradise when
George Bush walked into the White House. Then, the terrorists
attacked and all of a sudden it was a new world. Hillary
Rodham Clinton told the crowd that she immediately marched
downtown to the site of the attack and thought she was
staring into the gates of Hell. America is now engaged in a
serious war with serious opponents, say the Democrats.

But even the destruction of the World Trade Center towers had
its good side, according to the party of Carter, Johnson and
Clinton; it brought people together. Uniting people was a
major theme among the Democrats. They seemed almost
pathological about it. Hillary's husband made a point of it,
as did almost all other speakers. He thought that every major
crisis was merely an opportunity to 'build a more perfect
union.'

After a while, we began to wonder if America already had too
much union. Why shouldn't people think different things...do
different things...and go their separate ways? But the
Democrats all seemed to want to get people together and get
them all thinking alike and working towards the same goals.
Meanwhile, one of the convention's themes was supposed to be
'strength through diversity.' It didn't seem to matter that
the two ideas are contradictory.

As they say on Wall Street, when everyone is thinking the
same thing, no one is thinking. No one seemed to be doing
much thinking at the Democratic National Convention. We
looked at the delegates in their stupid hats, with their
insipid signs and vacant faces. We wondered whether any of
them had ever had a thought in his life.

The American union was near perfect when Bill Clinton left
Washington, according to the speakers. Then, the Republican
President misled the nation on Iraq, and bungled the war
against terror in order to attack Saddam. He squandered the
nation's treasure and its honor...and allowed greedy
lobbyists for the rich, who have Republicans in their hip
pockets, to eliminate vital social programs so millionaires
could get a tax break.

None of the speakers mentioned that their man Kerry had gone
along with the war and practically everything else. In fact,
hardly a single cockamamie scheme has made its way through
Congress, since he's been there, without getting his
signature on it.

None mentioned the consumer debt bubble...the dollar...the
trade deficit...or seemed to care how the federal government
was going to make good on its promises. None worried that
democratic voters got poorer, not richer during the Clinton
years. Except for getting along with other nations
better...and stealing more money from the rich...none
mentioned anything their man would do differently.

Nor did anybody bring up this little item, showing that the
Democrats are as deep in the pockets of rich lobbyists as
Republicans. Maybe deeper:

"...The study also found that Republicans raised more than
Democrats from individuals who contributed small and medium
amounts of money during the 2002 election cycle, but
Democrats far outpaced Republicans among deep-pocketed
givers."

"Republican candidates and parties topped their Democratic
counterparts, $68 million to $44 million, in fundraising from
individuals who contributed under $1,000 in itemized
contributions for the 2002 elections. Among donors giving
$1,000 or more, Republicans again beat out Democrats, $317
million to $307 million.

"But the trend was reversed among individuals at higher
giving levels, from whom Democrats raised far more money than
Republicans. Among donors of $10,000 or more, Democrats out-
raised Republicans, $140 million to $111 million. Among
donors of $100,000 or more, Democrats raised $72 million to
the Republicans' $34 million. And among the most generous
givers - those contributing $1 million or more - Democrats
far outdistanced Republicans, $36 million to just over $3
million..."

*** More from Alexis de Tocqueville:

"Democracy in America" by Alexis de Tocqueville
Volume 2, Section III, Chapter XXII

"No protracted war can fail to endanger the freedom of a
democratic country. Not indeed that after every victory it is
to be apprehended that the victorious generals will possess
themselves by force of the supreme power, after the manner of
Sulla and Caesar; the danger is of another kind. War does not
always give over democratic communities to military
government, but it must invariably and immeasurably increase
the powers of civil government; it must almost compulsorily
concentrate the direction of all men and the management of
all things in the hands of the administration.

"If it does not lead to despotism by sudden violence, it
prepares men for it more gently by their habits. All those
who seek to destroy the liberties of a democratic nation
ought to know that war is the surest and the shortest means
to accomplish it. This is the first axiom of the science."

---------------------

The Daily Reckoning PRESENTS: These days, the big U.S.
carmakers resemble large financial service conglomerates. Is
this just a reflection of the credit bull market and the
manufacturing bear market...or is there something else at
stake? Investing legend Gary Shilling shares his views...


FENDER BENDER
by Gary Shilling

Ever since 9/11, U.S. auto sales have been relatively flat at
a 16.9 million average annual rate. To maintain those sales
levels, automakers have been forced to offer a steady and
increasingly expensive array of inducements that may continue
to be necessary, even after concerns about terrorism, high
gas prices and other negatives have receded into the mists of
history.

The goodies started, of course, with the zero-interest rate
financing deals initiated in October 2001. The idea, of
course, was to tempt frightened Americans into dealer
showrooms post-9/11. Sales that month shot up more than 30%.
The auto companies originally planned those concessions as
one-shot deals, but continued them because they worked so
well and because they became necessary to sell cars at a time
when the pockets of consumers had been stuffed with tax
rebates and two rounds of tax cuts.

Then incentives became bigger and better. Soon, triple-zero
financing with no money down, no interest on the auto loan
and no payments for six months or a year, hit the scene. The
alternatives offered for cash purchases - namely rebates -
have only grown over time.

Consumer spending has been robust in recent years and this
favors big discretionary purchases like vehicles. And new car
prices have been rising less rapidly than the CPI for four
decades, making them more attractive, price-wise, than the
average good or service. Another factor that might appear to
favor strong vehicle sales over time is the increasing age of
existing cars. The older the auto, the more likely that it
gets junked and replaced by a new one.

In the face of all these incentives to buy, what does the
flatness of vehicle sales in recent years tell us?

For one thing, light trucks, mainly SUVs and minivans, have
been sold in such great numbers that the average age of those
trucks, already on the road, is falling. This works against
new sales. More importantly, the key reason that vehicle age
has been rising since the mid-1970s is that the quality of
cars has been increasing. Cars don't rust out after only a
few years any more. No more Pinto-quality cars being made in
Detroit. As a result, the U.S. cars, as well as foreign
automakers' products, are often reliable for a decade or
more.

With fewer cars being junked, demand for new ones is reduced.
This, no doubt, has a lot to do with the subdued level of
sales in recent years, and will continue to do so in the
future, as quality and longevity continue to improve. In
addition, the number of vehicles per household has flattened
in the past 25 years after doubling in the earlier postwar
years. Now, with 2.14 vehicles per household and 2.62 people
per household - including children too young to drive -
further gains are unlikely and saturation is now a permanent
feature in the auto industry. While households maybe able to
afford multiple cars per person, and rising incomes over time
encourage this, there will only ever be, however, finite room
in the garage and driveway.

Much of the long-term demand for vehicles will rest on the
growth in households. But the Census Bureau projects annual
growth of 1.0% in the years ahead, less than half the rate of
earlier decades and even below that of the muted 1990s.

With the outlook for demand unsure, it looks like the need
for big incentives will continue long after the recent
recession and high fuel costs have passed. Furthermore, car
buyers have grown accustomed to rebates and may not be
willing to purchase without meaningful concessions. Which
automaker is really going to have the gumption to announce an
end to big rebates and other popular incentives?

This presents an especially difficult challenge for domestic
producers, and in the future, their stocks may under perform
the general market. Domestic automakers dominated the U.S.
auto market from inception through the 1960s and, as a
result, developed a cartel mentality that they have not been
able to break. In the 1970s, imports poured in and, rather
than meet them head-on, Detroit rationalized their
penetration by arguing that imports were mainly of small cars
and that it didn't mind losing the sector to European and
Japanese producers, since it wasn't profitable anyway.

When those foreign producers started to build auto plants in
this country, Detroit welcomed them, reasoning that these
foreign-owned automakers would be saddled with the same
oversized costs and inefficiencies that had infected the U.S.
companies. But the transplants soon proved that they could
utilize American workers efficiently and pay them much less
than the United Auto Workers' scale.

Today, the big Japanese producers are making many more
vehicles in the U.S. than they import. But that doesn't mean
that imports are no longer a threat to domestic producers.
The world has the capacity to make about 80 million cars a
year, but global demand is only about 60 million. And the
U.S. is the prime target for excess auto production just as
it is for most of the world's surplus goods and services.
Furthermore, China and other developing countries expect to
greatly increase their auto-capacity and auto-exports, and
they have America in their sights.

Since most of the materials that go into vehicles are
internationally traded and priced, the biggest cost-
disadvantage pressing Detroit is labor expenses. With wage
and benefit costs around $80,000 per year, UAW members are no
match for the lower wages of workers making imports and
transplants. At GM, health care costs, alone, exceed steel
costs per vehicle. This has given Detroit tremendous
incentive to outsource to cheaper suppliers and move assembly
to Canada and Mexico, and to promote productivity vigorously.
In combination with U.S. producers' lost market share, these
forces have slashed UAW membership from 1.5 million in 1979
to 624,000 at the end of 2003.

With global excess auto production capacity, limited growth
in U.S. demand and Detroit's oversized labor costs and
lingering image problem, American producers will probably
continue to lose market share. The days when GM had 50% of
the U.S. market are long gone, and the current 27% share may
soon slip to 25% or lower.

Regards,


Gary Shilling
for The Daily Reckoning

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