The Barnard Observer

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Home  Picks  Figures  Great Investors  Vault  OpEd Contact   c2003-04 Thomas Barnard

The expansion is winding down. Signs and portents are everywhere. The auto business will soon be gasping for oxygen. General Motors has already sold off $55 billion of GMAC’s loans, making the profitable end of GM just that less profitable, and Ford sold off Hertz. Also, GM sold off its interest in Fuji Heavy Industries. They’re trying to raise cash against the storm.

SUVs are in free fall, CNBC reports that you can take something like $3,000 off the top of used SUVs, and new ones are sitting in lots. GM and Ford have played every card in the book to keep people buying. Used to be zero percent interest rates, now its employee discounts for everyone. But the public is worn out, and they quit buying in September even though the employee discounts still had weeks to go.  American automakers, a disaster since the passing of Alfred P. Sloan, have seen loss of market share all of my adult life. They have been behind the curve just about every inch of the way.

A big problem is the leveling of costs worldwide.  GM has apparently gotten some concessions on health benefits from the UAW, but there's still the huge pension obligations.  And did he get enough of a concession on health benefits to compete against European carmakers, whose health benefits are covered by national plans. And wages? Delphi, the auto parts maker which just declared bankruptcy, says that very few jobs will stay in the U.S. where wages cannot compete with the China price.  It had offered to keep the pension plan if the union would agree to wage cuts of two-thirds.  They didn't.

I think GM is also likely to end up in the soup, though the UAW concessions look to make this a long and agonizing process. The ratings guys, Standard and Poor’s and Moody’s, have reduced their chances of getting to the debt markets, and they have the same pension and benefits problems to deal with.

But wages and benefits can’t hide the fact that American automakers have never caught on to making high mileage cars that are sexy and enjoyable. Their idea is: we’ll do it if you force us. Hence, the Pinto.

Let me place the blame clearly on management.  I would be an unhappy guy to be working at an SUV plant, which I knew from the start would never make it into the world of tight oil.  Meanwhile, Toyota is working on its third generation of hybrids.

San Diego has seen the inventory of existing homes for sale go from 2,916 units to 13,204 in the last 18 months.

The New York Times reports that in the 3rd quarter, the average price of all types of Manhattan homes is down almost 13% to $1.1 million from a record $1.3 million in the 2nd quarter. Median sales price also fell by 3.2% to $750,000.

Hardest hit were luxury home prices (condos and co-ops), where the average price dropped a significant 26%.

I am thinking by now we have seen the top of the housing market. It will take a while for the air to leak out of the balloon, but I think that’s what’s in store.

In the crosscurrents, housing starts rose 3.4 percent to an annual rate of 2.11 million in September, the third-best month on record, as reported by the Census Bureau.  Building permits were also strong at annual rate of 2.19 million, up from 2.14 million in August.  A decline had been forecast.  All of which throws a monkey wrench into any easy forecast of what's coming up.

No one is talking about recession yet.  There is still the appearance of strength, but I think this will recede drip by drip over the next year. Delphi is going to lay off a lot of people, so will GM and Ford when they scale back the SUV lines and close plants.

Layoffs will continue throughout next year. 10,000 here, 20,000 there. Energy driven inflation will keep interest rates high, and this will also serve to slow the advance of the housing sector.

Budget deficits and balance of trade deficits will start to sink in. People will start to save more, and that will not do consumption any good.

It looks like things will be tolerable through Christmas, although GM and Delphi could certainly dampen things, but Greenspan’s term ends in January, and then the non-stick surfaces, the Teflon, will wear out for sure.

Great companies like Microsoft are seen as just keeping pace with the economy with growth in the single digits. And Intel’s sheen is dulled by superior chips from AMD. Oracle can only seem to grow by acquisition. But some of the junkers are pretty cheap. I’m talking about Gateway (GTW, 2.71), for example, which is now run by Wayne Inouye whose leadership Ted Waitt got when he bought eMachines, and I’m impressed with this guy. All the Gateway-branded stores are gone, he’s secured a foothold in the most effective retail line for this kind of thing, Best Buy. He’s pared costs so that he is not so far from Dell, which I understand is going to exit the low-end part of the business.  Employee roster is down to 1,900 from 24,600 in the year 2000.  92% of the employees are gone.  Such cuts have to have a good effect on productivity. 

Also interesting is Lucent (LU, 3.08), which should turn up its first profitable year since the stock market debacle. It is getting contracts, and poised to benefit from the continued wireless growth.  It also is down to 31,800 employees from 150,000 at its zenith.

JDSU Uniphase (JDSU, 2.06) is down from $150 to $2.06.  It is premier in optical electronics, and may be worth a shot.  Same for Sun Microsystems (SUNW, 3.89) with its big Google tie-in, which ultimately makes sense.  Google does all its computing on its computers, and delivers it on yours.  Sun provides a lot of servers for Google, and will provide them for others who may end up doing your computing on their computers.  Perhaps you will end up writing your letters and papers on line because its more convenient.  It's always there ready for you to continue your work.

These companies are all lean and mean, and could bounce even 100% in three months.  But these are not necessarily long term buys.

Suncor (SU, 49.96) has fallen back, and can be bought because there is no glut yet; however, stay tuned. The Saudis are bringing on capacity and so are the majors, so there may be some relief in oil prices, but probably not until 2007. Jim Cramer of CNBC’s Mad Money claims Suncor's reserves are valued at $5.4 per barrel, which he says is cheap.  There could be trouble, though, if the momentum players decide to sell their shares.  Some investor sold a huge amount of Exxon last week.

My favorite choice is in the VOIP (voice over internet protocol), and I will save that for those who wish to invest with me through the Barnard Partnership.  It's the next big thing, making telephone calls from your computer.

Hey, how about that Konerko grand slam?  Sox have a chance at winning the World Series.

October 23, 2005

Amended October 24, 2005