Tuesday, December 30, 2008

Go Honda Go!

In the past year and two years respectively Honda Motor Corporation shares went down 37 and 47%. Some pretty awful numbers until compared to their competitors. Toyota shares went down 40 and 52%; Ford went down 67 and 70%; Nissan went down 67 and 71%. GM wins the prize as best of the worst, down 86 and 88%!

Since December 5th, there has been a bounce in the Japanese shares. The numbers are HMC +14%, NSANY + 12.5%, and TM +9.6%. GM and F went down 12.4% and 16.5% respectively.

On the other hand, if one measures from November 24th GM shares are up 17.6% and Ford shares are up 55.2%. The average move of the Japanese shares from this date is flat. One of the points to be noted is that when a stock price is very low, it only takes a small price move to achieve a high return. Another obvious point in the numbers is that Ford and GM took the early hit and have actually been bouncing along in a bottoming process for the past year.

This morning, Honda announced a November sales increase in China of 8.7%! Also, as expected, GM is now offering zero down, zero interest on selected cars and truck models, just after receiving the first 5 Billion Bailout Dollars from the government. GM is in effect passing along the very low rate financing the government is giving to GM.

Six months ago, there were virtually worthless 6 thousand pound heaps of metal parked in driveways and car lots all across the country. These heaps of metal were giving the owners negative utility. The owners continued to pay property taxes to own the vehicles but they could not afford to drive them. The cost to operate those vehicles has fallen sharply, dramatically increasing their intrinsic value. The invisible hand of the market is at work. Most buyers are replacing big cars with smaller fuel efficient cars while the old cars are gradually being "consumed". Some of the least fuel efficient vehicles will be around for years to come but there will be a dramatic increase in number of miles driving in fuel efficient vehicles. My good friend, who is planning to speculate on the price of oil, perhaps appreciates the return of value to these piles of steel, but I don't believe he appreciates the magnitude of the turn or the "big sale" on auto shares.

The IRS allowances to those who drive their cars for business hit 58 cents per mile this year before dropping to 52 cents for the next 6 months (these numbers were read last week and posted from my old and beaten up memory). There is a lag in these allowances; business drivers lost money year after year as the price went up, but they are making money at 52 cents. My friend is correct in believing demand for gasoline, from business and personal driving will pick up. As detailed in other letters, there are many reasons to believe that it will be many years before new demand for oil catches up with new supplies of oil and alternatives.

Regardless of the payments for driving, Americans are now saving about ONE BILLION DOLLARS PER DAY on gasoline! GM just received a $5 Billion bailout check. Five billion dollars sounds like a lot of money until you consider that consumers are saving that much in 5 days. Furthermore, savings on gasoline are only the very visible tip of the iceberg. Consumers will save more on food in 2009 than on gasoline. The wholesale price of the corn, wheat and soybeans have all collapsed. The price of milk, eggs, steak, chicken and pork chops will all fall as the result of falling "input prices".

World wide, consumers are saving 9.5 Billion Dollars per day on oil and at least as much on food. These 19 Billion Dollars per day are not an increase in taxable income but an increase in spendable dollars. In addition, to the savings on food and energy, individuals are locking-in 30 year mortgages and corporations are buying back long-term bonds; locking-in huge compounded annual savings on the cost of money. Despite the announcements of gloom and doom, real retail sales are rising. I don't have the numbers but I suspect the 8.7% increase in Honda sales in China was composed of a stronger than 8.7% increase in unit volume. The price of steel has fallen off a cliff. It is possible for Honda to sell cars at lower prices and increase profit margins at the same time.

Consumer cyclical stocks are early leaders in the Bull Markets that follow recessions. Bank stocks normally start their rise long before recessions are over and consumer cyclical stocks tend to start moving up at least a few months before recessions are over. While the pundits who say the economic recovery will not start until the second half of 2009 are probably correct, but the time to buy financial shares, consumer cyclical shares and high yield corporate bonds is now!

Buy a basket of auto companies if you wish. Those who would not tough GM with a 10 foot pole might buy a few shares as part of a basket or even better, they might buy high yielding bonds.

401-K Accounts! Many companies have at least temporarily stopped matching 401-K account distributions. If your company has done this, move your savings contributions from your 401-K to a self directed discount brokerage account. You will enjoy many benefits, including avoiding a 10% penalty should you have to tap the accounts before retirement. You will also pay taxes at today's rates rather than at higher future rates. You will get the benefit of capital gains rather than paying at ordinary income tax rates. Warning: as an amateur investor, I only offer ideas, not investment advice.