Making new highs
July 29, 2005
As I expected, the token revaluation of the renminbi
has had no material impact on any markets thus far. Nevertheless,
China and the renminbi remain key to the future of the US economy.
In the meantime, the US economy is chugging along nicely with many
stock indices making new highs this week on the back of better-than-expected
corporate earnings.
Strong corporate earnings are making the case that
the economy is on solid footing, according to the Wall Street Journal.
For some time now I have been making the case that the economy is
not on solid footing based on the automotive sector. Americans love
cars and they are not afraid to go into debt to buy newer and more
expensive cars. So when the auto industry suffers it tells me that
consumers are tapped out.
This week General Motors announced that its North
American automotive division lost $1.2 billion during the second
quarter. The company recently shook up the industry when it started
selling its cars to consumers for the same price it offers its employees,
forcing other car manufactures to do the same. Both Ford and Daimler-Chrysler
entered the price war by offering their cars at employee prices
as well.
While Ford Motor Company made a profit in the second
quarter, it was 19% less than last year because of a $907 million
loss at its (you guessed it) North American operations. Both Ford
and GM are suffering because higher gasoline prices have reduced
demand for their high-margin sport utility gas-guzzlers. As a result,
Ford is considering deeper cuts to its workforce: a third of its
white collar workers could lose their jobs. That would mean an additional
10,000 unemployed.
Meanwhile General Motors said it would end its “employee
discounts for everyone” promotion and cash rebates, and instead
just reduce sticker prices permanently. I don’t recall how
many times in the past eighteen months I have said that prices for
durable goods and luxury items will go down (as the economy falters)
while the prices of essential consumables such as energy and food
could increase. It is busy happening.
Were we not still riding on the tail end of one of
the largest economic expansions in history it might almost be tempting
to buy the downtrodden automotive stocks. Had we been in the trough
of a business cycle I would certainly have looked at it seriously.
But we are at the top of a mega-cycle that was created during the
Nineties, and that has not yet been corrected.
During the Nineties there was a lot of talk about
the wealth effect and its impact on stock speculation. While the
rhetoric has died down, the wealth effect has not diminished. Both
the real estate market and the stock market are still rife with
speculation. The major stock market indices (excluding NASDAQ) are
almost at their all time highs again and I have commented in the
past on real estate speculation.
Every business cycle expansion is followed by
a contraction during which assets change ownership and excessive
speculation is eliminated. We have not gone through that yet and,
until we do, a lot of risk remains in the stock, bond, commodity
and real estate markets.
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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