Wednesday, March 26, 2008


When you hear the word recession, chances are the worst of the down turn is over and the stock market is ready to soar. The R-Word Recession Index is a count of the average number of articles in the New York Times and the Washington Post. This index runs up high about the time historical data shows that the economy slowed 4 or 5 months ago, also about the time the stock market is ready to climb.

Dr. John Rutledge reports that one of his favorite economic indicators is the used car report posted at Manheim Consulting. This report shows that used car prices are falling. Indeed they are now down to the level last seen at the market turn in 2002-2003. This report works much like the Recession Index and much like the front cover of Business Week works. Business Week has already had its "Recession on the Front Cover Issue". This event is the "ringing of the bell". It means that the news will continue to be "bad" for a while but that stock prices will "climb the wall of worry".

Ford and GM ready for a big turn. Yes, Toyota sells more cars in the US than Chrysler (one of the supposedly "big three") and yes, Toyota will soon take Ford's spot as number 2. However, Toyota sells for $107 per share, not for $6 per share. Ford has offered all 54,000 employees pension fund buyouts. Ford hopes that 8,000 workers will accept. If they do, Ford will hire new workers at half the payroll cost. The dumping of the health care benefits on the Union will cut Ford's cost per car by $1,000. With the dollar at extreme lows, Ford can export cars at a nice profit. Over the next several years, Ford will continue to replace old workers with new at half the price. GM and Ford are making the cuts that will lead to higher profits. Capacity in the USA has been cut by 4 million units.

Mexico now restricts imports to 10 year old cars. You can see the price bubble on used cars that are 10 years old.

Over the past 15 years, the price of Ford shares fell by 63% while the price of TM shares rose by 246%. During that time, those who bought Ford at the right time in the cycle made money. Now is the time.

The R-Word is all over the place, screaming the word BUY to those who are listening carefully. Many other indicators are saying the worst of the slowdown is over. For example, the housing affordability index has jumped 30% in the past 8 months. The average family now has 130% of the income needed to buy the average house. Yesterday, the Case-Shiller home index made the news by reporting the biggest drop in home prices ever. Of the twenty cities included in the survey, Miami and Los Vegas homes dropped by 19% and Phoenix homes dropped 18%. The average of this 20 city index was an 11% drop. Down South, Atlanta saw declines of 4% and Charlotte saw an increase of 1.8%. People continue to move to North Carolina (a right to work state that has a steady flow of new job opportunities).

A technical indicator, the open interest on OEX PUTS is screaming BUY!

The asset value of America, including the net 57 Trillion Dollar Net Worth of Individuals is upwards of 200 Trillion Dollars. The recent paper write downs of a few hundred billion has made the news daily and has scared the public out of the markets, at low prices. These paper loses are the minor relative to the wealth of the nation, they are concentrated in just a few major brokers and most of these losses will disappear once the market rebounds. Of course, those who sell or who are forced to sell close to the bottom will have little chance of a quick full recovery.

Hearing the R-Word is a BUY SIGNAL, NOT A SELL SIGNAL.