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Monday, December 12, 2011

The Resilient U.S. Economy

If the stock market is the pulse of the American economy, the outlook might be better than expected.
In a conversation I had with noted Wall Street analyst and international trader James Vena, he asked a very interesting question: “Where was the Dow a year ago?” Answer: About 12,000. “And where is the Dow today?” About 12,000.
Vena pointed out that the economy has withstood some serious challenges this year, including:
  • A debt crisis that would threaten the European economy and the Euro currency itself.
  • A significant cheapening of the U. S. dollar.
  • A disruption in oil supply from Libya caused by a series of uprisings in the Middle East and a corresponding spike in fuel prices.
  • An earthquake and tsunami in Japan that would disrupt world trade including components for global auto production.
  • Flooding in Southeast Asia that further disrupts the global supply chain.
  • An attempt by a U.S. political party to hold a lifting of the country’s debt ceiling resulting in a lowering of the credit rating.
  • The bankruptcy of a major legacy U.S. airline.
  • Continuing U.S. housing foreclosures and a further decline in home values.
The U.S. economy is far from out of the woods. But it has withstood a serious assault in the past year and not slipped into a double-dip recession. Will the upcoming election year bring about new challenges, or will the economy get a break?
Mike Smitka as devil's advocate: but it's housing prices that are weighing down household balance sheets, not the stock market. Until you get into fairly high incomes shareholdings are primarily indirect, through retirement plans -- are Americans really going to cut back on their contributions further in order to buy a new car???? And sitting at 9%-plus unemployment for 2 years is "resilient"?
The Ford-GM Stock Equation
As with the economy, the stock market will continue to evolve. So far this year, though, auto stocks, specifically, have hit some hard times.
Surprising to many is the fact that the stock of General Motors has dropped to about $21 per share from its $35-per-share post-IPO high a year ago. Even more surprising is that Ford’s stock has dropped to about $11 per share from $18 in the same time frame. This decline, despite impressive sales gains and profits, and improved fixed costs, now that both companies' VEBAs have capped legacy costs while their UAW contracts have removed the threat of strikes and wage hikes.
Of course, in the past year there have been headwinds: high oil prices, the Japanese tsunami, and the debt crisis debacle, to name a few. Both companies have taken hits on quality, with GM experiencing bad PR due to some Chevy Volts that burst into flames during crash testing and Ford being slammed in a J.D. Power quality survey.
Despite these obstacles, the two companies have stood firm. GM announced the reopening of the old Saturn plant in Spring Hill, Tenn., to build the Chevy Equinox. Both companies continue to increase volume, marketshare, and profits. They have both been reducing incentives while maintaining sales momentum.
Once GM’s stock price gets to a certain level, expect the Treasury Department to sell quantities of the taxpayer’s GM stock. The outcome: a somewhat depressed price.
So what is your prognostication for the upcoming year? Buy? Sell? Hold?

GM recently began paying a dividend on preferred stock while Ford just announced a 5 cent per quarter dividend, its first since 2006.

David Ruggles has spent his career in every phase of the retail side of the auto business, new and used, sales and management, including consulting and training in both the U.S. & Japan. Ruggles has been a dealer for Mercedes-Benz, Chrysler, Dodge, GMC, Ford, Mazda, and Subaru, and has consulted for one of the world’s largest privately owned Toyota dealer groups located in Japan. He blogs here at blogspot and writes regular columns for several publications.