Rick’s Picks

Monday, November 1, 2004

For investors who’d rather be smart than lucky

By now, most of us grasp the economically suicidal nature of the pact that sustains trade between America and Asia. They send us everything we need to live the good life, and we send them worthless slips of paper in return. Free lunch for America? No sirree. We’re just running a tab, as Gary North has written, delaying payment for SUVs, flat-panel TVs and such until some later date. Asia’s banks, meanwhile, continue to take our IOUs because we Americans are the best hope they’ve got for keeping their factories busy, even if we can no longer afford the merchandise.  It may seem like win-win at the moment, but there is no way Asia will be able to avoid getting stiffed somewhere down the road. Judging from what I read in newspaper and magazines, most economists and pundits still can’t see this coming. No surprise, since such delusional thinking has a solid grip on the world’s most influential economist, Alan Greenspan.

We wonder how the Fed Chairman views the auto industry these days. Its most recent troubles occupied a prominent spot on the front page of Friday’s Wall Street Journal. “Big Dealers Pressure Car Makers to Cut Production” was the headline, with this sub-hed: “Higher Costs, Thin Margins Are Forcing Major Sellers to Keep Inventories Lean.” As if we didn’t know this already. My 12-year-old, like the rest of us no stranger to in-your-face Chevy commercials, was working the numbers the other day to see if he could come up with a way to buy a Hummer. It’ll be another five years until he can drive it, of course, but the way he figures, GM’s mother of all shopping carts will never be cheaper than it is now. Don’t bet on it, I told him. As long as a gallon of regular is hovering above $2, the odds of his buying a Hummer at distress prices will only get better.

Until I read the story in the Journal, I harbored some illusions myself about the current state of the automobile business. I had assumed that those in-your-face, $6,000 discounts we see every time we turn on a television were geared toward moving 2004’s leftovers off the lots. But as the article makes clear, GM and Ford factories have been spitting out new cars even though the dealers practically have to give away the ones they’ve already got in inventory. But the balance of power may at last be tipping toward the dealers, led in revolt by the giant AutoNation, Inc. They are demanding that the factories reduce overproduction, undoubtedly because few dealer expect 2005 to be a banner year. Neither, probably, do the manufacturers. But because the latter’s profits come mainly from auto financing, GM and Ford may have become somewhat desensitized to the dealer problem of – so to speak – having to ram new cars down customers throats.

The article alluded to the possibility that factory cutbacks could raise the price of cars next year. But try to tell that to the Japanese, who will be building more and more cars in China. Toyota must be salivating thinking about the market share it will pick up if GM tries to start selling Suburbans for more than it costs to make them.  Meanwhile, I’ve told my son to hold out for an unbeatable deal on a Hummer – one that we may see if gas should hit $4 a gallon: “If you can fill the tank and drive it away, it’s yours!”

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December T-Bond (113^27)
The futures gained against strong stochastic headwinds on Friday after GDP stats for Q3 came in weaker than expected. A rally target at 115^20 remains viable but the bonds will continue to be under pressure this week from overbought indicators that need at least a few days to correct. Looking at a somewhat bigger picture, it would take a decline to beneath the 109^05 low recorded on September 3 to send the long-term bull into hibernation.

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2004, Rick Ackerman. All Rights Reserved. www.rickackerman.com