Mark10r

Is It Time to Buy? What History Shows

The bond market is usually one of the best indicators of future direction for stocks. Right now, short-term Treasuries are selling at negative interest yeild. That means that the bond market expects further losses in riskier investments such as stocks. Remember, Treasuries are the "safe haven" investment where investors put money when other investments pose too much risk of loss. When investors are willing to bid Treasuries down to zero it means they feel that the best they can do in the next few weeks is hold onto the money they have.

I expect we'll see the Dow make new lows before mid-January. Come back and rate after Jan. 15th!

Don't Be Fooled by Bad News - Market Is Heading Up

Eventually, yes. But the 533,000 jobs lost in November is just a start. The market will go up, and beyond 10,000 when we can see that the economy will begin expanding within the next six to nine months. Right now, the only thing that is obvious is that more jobs will be lost, consumers will spend less, and businesses will cut both operating and capital spending. The new administration is on the right track in trying to stimulate the economy by creating jobs, but the projects mentioned thus far may take nine months before hiring in earnest begins. There will be an additional lag before the benefit of the added jobs begins to trickle through the economy stirring new growth in consumption and better capacity utilization.

The best way to gauge the potential of the economy over the next year will be to listen to forecasts and earnings revisions coming out from corporate America over the next few weeks. When the new forecasts are absorbed into the thinking on Wall Street, the downward earnings revisions will bring earnings more in line with reality. Currently, the street forecasts earnings of around $75 for the S&P 500 (down from mid-$90's a couple months ago). Reality is probably something less than $65 for 2009.

Investors pay for future earnings and expect growth not contraction when then pay high multiples. In other words, not only will the earnings part of the P/E equation need to be lowered but the multiple investors are willing to pay for less-than-expected returns will need to come down as well. At the trough of most normal recessions, P/E ratios are usually around 12 times earnings. The drop in the S&P being the third worst bear market in history already seems to point out that this may be worse than "normal." Also, the average post-war recession duration has been about 15-16 months. Since this recession started 12 months ago and has at least (in my humble opinion) another nine months to go we will record more than 20 months before seeing daylight. This has to be considered a severe, not normal, recession. Severe recessions usually find the market sporting a P/E within the 8-10 range. If you do the math, we're looking at another leg down before we can call the "real" bottom of this recession and the DJI average should get down to the 6,200 level before we see 10,000. It could go lower if the market over-reacts (as it usually does) in panic selling but I wouldn't get greedy. My buying starts around 6,500 just to be safe and I expect it happen sometime in late January or early February of 2009. Merry Christmas!

Nationalizing Detroit

The government continues to treat the symptoms of the diseases inflicting the economy instead of finding the cure! Giving money to poorly run companies that have proven their inability to compete for market share in the global economy only makes sense if we actually level the playing field and fix the "real" underlying problems. GM, Ford, and Chrysler compete more with each other than with Toyota and Honda. American companies continue to lose consumer loyalty due, in part, to their focus on higher margin SUVs, light trucks, and minivans. When the economy is growing and gas prices are relatively low, that focus makes some sense because it leads to greater profits. But it is a flawed strategy in that it assumes that a deep recession will never come. The real problem with U. S. companies in general, not just the auto industry, is the short term focus on profits. If an auto company wants to create a sustainable market strategy in this global market, it needs to address the needs of the many (fuel efficiency and affordability) that will carry it through both the good times and the bad.

The U. S. auto makers are also at a cost disadvantage even against foreign rivals that produce cars here in the U. S. Toyota and Honda were not as heavily into car production as the U. S. Big Three 40 years ago. The Big Three have much higher costs for retirement benefits compared to their Japanese competitors. Honda does not have onerous labor contracts that require 95% pay for layed off workers like the Big Three. When added into the cost of production, these benefits add about $1,500 per GM vehicle above what Toyota must pay. When benefits are included, hourly workers at GM receive about $70 per hour compared to $45 per hour for Toyota. This is a huge discrepancy and makes U. S. car manufacturers less competitive. It is also why they opt for higher margin vehicles even though they are more suceptible to slower sales in economic downturns or during times of higher gas prices. In essence, be it greedy management or greedy unions, U. S. auto manufacurers are being penalized for having been in the business longer and having been more successful in the past than today.

To level the playing field and make U. S. automakers more competitive going forward would require a significant "investment" by the U. S. government of between $150 billion and $200 billion. I suspect that such an investment would come with very long strings attached but that may be the price needed to reinvent America's auto industry. The first step would require government representatives to sit down with auto executives and union leaders. Each group would need to buy into any meaningful solution. The goverment would bring financial solutions. The auto execs would bring commitments to dramatically improve fuel efficiency in certain classes of autos to appeal to a broader consumer base in the U. S. and abroad. The unions would bring contract concessions to bring costs in line with competitors going forward, without requiring significant cuts to benefits by existing retirees.

What cuts, what solutions, what concessions? Well, to really level the playing field, the government would need to underwrite auto industry retiree benefits for a start. But ( and this is a BIG but), retirement benefits of future retirees would have to be changed in a big way. No more pay from auto companies to layed off workers. If the unions want to subsidize their out-of-work members out of dues collected, fine. The next concession needs to be a change from a defined benefits plan to a defined contribution plan (pay-as-you-go 401K plans accrue no future pension obligations). Such a plan conversion would need to "make whole" current employees under the old plan by guaranteeing earned benefits at current levels without further accruals. The conversion would not be voluntary. Work rules would need to be reconsidered so as to provide potential productivity gains (i.e., a forklift operator would perform other work as assigned instead of sitting on the forklift doing nothing when not needed. *note: this is a hypothetical example that occurs in other industries of which I am aware, not necessarily a perfect example for the auto industry).

Auto execs would need to make realistic but significant progress on the fuel efficiency front with mile stone requirements for continuation of funding for research assistance by the government.

Government, for it's part, would provide the funding of retirement benefits (the bulk of the $150-200 billion) and provide research money to improve fuel efficiency and alternative fuel applications. If a national infrastructure were needed to enable hybrid or alternative fuel vehicle sales adoption, the government would need to step up in guaranteeing loans to businesses willing and able to build out a network of stations for hydrogen, natural gas, compressed air or whatever they come up with that would reduce our dependence of foreign oil and make our autos more appealing to consumers.

$50-100 billion of the U. S. goverment investment in the ailing auto industry would need to come in the form of research, retooling credits, and infrastructure loan guarantees. The rest would be short-term cash infusions and assumption of retirement benefits obligations. In the end, I believe this would completely reverse the fortunes of the U. S. auto industry, reviving growth in an otherwise declining sector of the economy. Any other option leaves the fate of the auto industry to chance and in the hands of those who got us here in the first place. I favor capitalism, but believe also that the U. S. needs an auto industry for security and economic health reasons. We can't compete from where we are and strict adherance to free markets will winnow our weak entries from competing. If we are going to fix the problems, let' fix them right. If we don't do it now, the Big Three will be back again and again over the coming decades and the cost will be much greater than $200 billion.

Solar Grid Parity: The Great $1 Myth

Very good points about the variability by geography/cost, but you neglected (possibly intentionally) another significant point: if solar (and/or other alternative energy sources) were to provide as much as 20% of our electricity needs ( anumber bantered about as a possibility in the U. S.) demand for fossil fuels would be significantly lower. If the demand for coal/oil/natural gas drops by such a large amount the price for those inputs will also drop significantly because the world would then be awash in excess supply again. In that case, the cost to reach parity would be lowered due to the reduced cost of the fossil fuel inputs. Again, the cost would vary, as you pointed out in your article, by geographyic area, proximity to sources of supply, etc. My point is: the price of grid parity is not only varied buy it is also a moving target.