The older I get, the more I realize just how small our world really is.
I can now fly to Taipei, Tokyo, or Tianjin in less than 24 hours. Even here in Montana, I only have to drive 20 minutes to find a grocery store that carries soy sauce, seaweed, and dried squid.
But perhaps the best way to see our ever-shrinking globe is by looking at the business world: Our economy is very connected to what happens in the Pacific.
For this reason, I think you need to always look behind a company’s numbers, asking the question: Which side of the world is powering its profits? Or … driving its losses?
Take the auto industry, for example …
Ford Motors:
Stuck in Reverse
It isn’t a secret that domestic auto sales are slow — down 14% overall this year. Nor is it a secret that the Big Three U.S. auto makers are in crises.
But the latest news from Ford is downright horrible. The company revised its second-quarter loss from $123 million, or $0.07 a share, to $254 million, or $0.14 a share. That’s twice as bad as the company initially thought!
Let’s put this multi-million-dollar loss into context: Ford made $946 million, or $0.47 a share, in the same quarter a year ago.
In other words, business has fallen off a cliff. And it’s not getting better — sales plummeted by a staggering 31.7% in July.
Is the Worst Behind Ford or Is
This Just the Tip of the Iceberg?
The Wall Street crowd expects Ford to lose $3 billion in North America this year — roughly double the amount it lost in 2005. However, Ford’s own internal forecasts say it could lose as much as $5 billion. Sounds like the tip of the iceberg to me.
Business is so bad that Ford has already announced plans to close 14 factories and eliminate 30,000 jobs by 2012. It’s also hired Kenneth Leet, a veteran investment banker from Goldman Sachs, to assess operations and advise Ford on what underperforming operations it should sell off.
And it’s not just Ford. General Motors and DaimlerChrysler are both doing poorly, too. On a year-over-year basis, General Motors’ sales fell 19.4% and DaimlerChrysler’s declined 31.5%. Ouch!
Wall Street Blames Higher Gas
And Interest Rates … Wrong!
Something is certainly hurting the Big Three U.S. automakers. If you ask the pinstripe crowd, they’ll cite $3-a-gallon gas and rising interest rates.
Sure, those two forces aren’t helping, but neither one is the fundamental problem. In my view, Asia is primarily to blame for Detroit’s woes.
I’ll prove it: While Ford was bleeding red ink and General Motors and DaimlerChrysler’s sales dried up in July, Toyota was bragging that its sales rose 16.2% in July!
Moreover, the company just reported its first-quarter results last week. Toyota’s profits rose 39% on … get this … strong North American auto sales.
Meanwhile, for the first time in history, Honda sold more autos than DaimlerChrysler. For July, Honda’s sales gained 10.5%.
The Japanese automakers are taking away major market share, too. Toyota and Honda have both passed DaimlerChrysler in terms of market share. And just last month, Toyota leapfrogged Ford.
That leaves only General Motors still ahead of the pack. Overall, the market share of the Big Three fell to 52% in July — an all-time low — while the market share of Asian automakers hit 41.4% in July, an all-time high.
No matter how you slice it, Asian competition is killing American automakers.
If Detroit Thinks Japan Is Tough, Just
Wait Until Chinese Cars Hit Our Shores!
Sadly, things are going to get even worse for the U.S. automakers. If the Big Three think the Japanese are tough competitors, just wait until the Chinese start selling their cars in the U.S.
The Chinese auto market is growing — 47% more cars were sold there in the first six months of 2006 than in 2005. And now, Chinese companies are setting their sights on the biggest auto market of them all — the U.S.A.
Some names you’re going to hear a lot more about very soon: Chery Automobile, Shanghai Automotive Industry Corp., and Geely Automobile. All of these companies already have plans to enter the North American market.
In fact, Geely became the first Chinese company to exhibit at the Detroit Auto Show. It expects to start selling its China-manufactured cars in the U.S. in late 2008 or early 2009. That’s darn soon.
Thanks to low labor and manufacturing costs, the price of Chinese automobiles will be very cheap. According to the Chief Operating Officer of Geely USA:
“We’re very confident that we will have a five-passenger family sedan ready to import to the United States, fully in compliance with US emissions and safety regulations, that we can sell for less than $10,000.â€
Wow! The time bomb is ticking for Ford, General Motors, and DaimlerChrysler and owning their stock is one of the easiest ways I know to turn $10,000 into $5,000.
Likewise, I think it is a big mistake to have faith in any mutual fund that is heavily invested in the Big Three.
Big Ford Positions | Ticker | Assets Invested |
Sun America Multi-Cap Value | SFVAX |
2.69%
|
Columbia Global Value | NGLBX |
2.45%
|
Northern Large Cap Value | NOLVX |
2.31%
|
Hennessy Cornerstone Value | HFCVX |
1.62%
|
Big GM Positions | ||
Hennessy Total Return | HDOGX |
6.29%
|
Kelmore Strategy | KSOIX |
5.90%
|
Columbia Global Value | NGLBX |
3.74%
|
Longleaf Partners | LLPFX |
3.22%
|
Big DaimlerChrysler Positions | ||
ProFunds Europe | UEPSX |
3.27%
|
TIAA-CREF International Equity | TIINX |
3.23%
|
Oakmark International | OAKIX |
3.22%
|
ING International Value | NIVAX |
2.84%
|
I put together a table to show you what funds have been loading up on the Big Three. Some of them have major stakes — Hennessy Total Return (HDOGX) has 6.29% in GM, Sun America Multi-Cap Value (SFVAX) put 2.69% of its assets in Ford, and ProFunds Europe (UEPSX) has a 3.27% allocation to DaimlerChrysler. These are not the kinds of funds you want to buy.
Now, please don’t misunderstand me. I’m not recommending that you invest in any automaker.
Reason: I don’t like industries that require multi-billion-dollar capital investments every few years. In addition to big auto companies, that includes steel, airline, or semiconductor fabrication industries.
However, I am trying to emphasize my #1 investment rule for staying out of trouble over the next 10 years: Do NOT invest in any U.S. industry whose major competition comes from Asia.
That’s especially true if the competition is coming from China!
What other industries are marked by serious competition from Asia? Here’s a short list to keep in mind: Steel, clothing, shoes, consumer electronics, textile, furniture, toys, computers, semiconductors, wireless phones, and aluminum. Among U.S. companies, these should also be on your DO-NOT-BUY list.
One other thing: I’m not disparaging the U.S. I think we will continue to dominate many industries, including aerospace, alcohol, health care software, financial services, pharmaceuticals, agriculture, media and entertainment, defense, tobacco, gambling, environmental services, insurance, publishing, and biotechnology.
If you insist on investing in the U.S., these industries should be able to avoid the kind of competition we’re seeing in the auto industry today.
And never forget: We truly live in a global economy. So the most expensive mistake you can make is overlooking the impact Asia will have on your investment portfolio.
Best wishes,
Tony
For more information and archived issues, visit http://legacy.weissinc.com
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short blurb: This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://legacy.weissinc.com
From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.†We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.
© 2006 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478