A cooling economy? Thoughts on the automobile sector and a review of negative thinking.

For a while now, I've been convinced of two things:

1) The economy is destined for a slow down.
2) The big 3 automakers are going to get hit, particularily General Motors (GM)

In December of 2005, I wrote that a recession was on it's way. I also wrote about the possibility of a bankruptcy at GM, which the doom and gloom crowd thought could cause a collapse in the derivatives market. In May, I wrote about the financial shenanigans at GM that caused them to misstate income.

I became convinced that Ford (F) was undervalued because of the problems at GM. Four months later, I decided I had been totally wrong as conditions at Ford deteriorated and it's stock price suffered. My initial "buy" idea was at a price of $7.88. In July, it fell to $6.56. Today, it is back up to $8.64. 6 months ago, it looked like GM was in more trouble than Ford. Today, it looks like just the opposite.

Obviously, I have been the victim of short term thinking and have fallen for the "bear case". US unemployment recently hit a 5 year low at 4.4%. Inflation may or may NOT be in check. The housing market has cooled considerably, yet the effects have not seriously impacted the US economy (yet). Oil prices, particularily the end user price of gasoline, have dropped.

From looking at the most recent 8-K filed by General Motors ("OCTOBER 2006 GM SALES") it sure looks like the better results are partially being driven by an increase in sales of light trucks and SUVs.

"Silverado, up 107 percent; Tahoe, up 104 percent; and Suburban, up 83 percent."
"triple-digit increases for the entire Escalade lineup"
"a 338 percent increase for 9-7X."

For the month of October, light trucks sales were up 38.5% over a weak 2005. Car sales were up 2.5%. It also now appears that the Delphi Bankruptcy obligations are about to be settled in the neighborhood of a predicted $6B - which has already been recorded.

Joseph B. White wrote in an article titled "A Comeback for SUVs? Not Really" in the November 6, 2006 edition of the Wall Street Journal "Nothing makes a monthly or quarterly result look better than having suffered a debacle the previous year. Add a generous helping of new models and pump up the cash back and discount financing offers, and a mediocre month can masquerade as a good result. In reality, it looks like the car business is in for some rough sledding going forward" (I can't link as it requires a subscription).

I still must be a sucker for the bear case, since I currently believe the following:

1) Gas isn't going to get cheaper unless there is a major drop in consumption.
2) Trucks and SUVs are on the decline due mostly to consumer preference.
3) The Big 3 still rely on SUV sales.
4) Interest rates aren't going lower in the near future. They may very well increase.

I still think the economy as a whole is in a pickle. So much potential for inflation, so much government issuance of new debt, and the possibility of the Euro replacing the Dollar with the central banks really concerns me.

Ford is definitely in big trouble, but I think they will come out of this mess stronger in the long run - due to cutbacks, restructuring, and retaining it's finance company. General Motors, on the other hand, seems to be making a lot of insipid changes. They aren't cutting back production much. They sold their finance company. They may be working to restructure some of their long term problems, but it sure seems to me that they aren't making the moves that need to be made.

I still the negative thinking problem. And I still think there will be a readjustment. So in another year, I will recap again, and show what an idiot I was once more. For entertainment purposes, here are a few predictions:

Dow - Now: 12,109.71, Nov 2007: 10,292
Nasdaq - Now: 2,369.49, Nov 2007: 1,900
S&P 500 - Now: 1,380.67, Nov 2007: 1,100
Ford - Now: 8.64, Nov 2007: 6.50
GM - Now: 34.61, Nov 2007: 20.00