Powdering The GDP Pig – There Was No Escape Velocity Inside – David Stockman’s Contra Corner 10-30-15

Salient to Investors:

David Stockman writes:

The global economy is in deflation and the US economy is stalling and within months will be in recession and the market in panic. The Fed cannot prevent the US economy from sliding into the global slump. Since 2000, the Fed has twice before pushed on a string with the economy while inflating the Wall Street casino, with bad results.

The Commerce Department’s GDP deflator showing 0.9% inflation during the last 12 months understates true inflation.

Nominal GDP is the single most important macro variable in a debt-driven economy. Nominal GDP growth is down to 2.9% and headed towards zero – it has been decelerating since Q2 2012 – which last occurred in the 1930s.  During the 1990s recovery, nominal GDP grew at a 5.6% annual rate, during the Greenspan housing/credit boom after 2001 it grew at 5.3%, and since the pre-crisis peak it has gown at only 3.0%, even less since June 2009. Despite this, the Federal budget assumes 5.2% per year growth for the next 10 years.

If the GDP growth trend continues, federal tax collections will drop far below current projections and cause budget deficits and the national debt to soar.

Q3 2015 business plant and equipment spending rose just 0.6% from a year ago, while Q3 goods exports are down 7.8% from a year ago, due to the ending of China’s infrastructure building spree, and Q3 services exports have slowed to a 3.9% annual rate. Global deflation inherently means a strong dollar so service exports will start falling soon.

Nominal Federal consumption and investment spending is down to near Q2 2009 levels, removing another prop under the post recession recovery.

Business sales are rolling over, while the inventory correction has just started – the inventory to sales ratio is at October 2008 highs.  Auto sales have peaked due to the exhaustion of subprime customers.

Read the full article at http://davidstockmanscontracorner.com/powdering-the-gdp-pig-there-was-no-escape-velocity-inside/

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It’s Not Over For Volkswagen; Deutsche Bank Downgrades ‘Polluted’ Stock – Benzinga.com 09-23-15

Salient to Investors:

Tim Rokossa at Deutsche Bank said:

  • Uncertainty related to Volkwagen’s emission scandal will persist and its impact poses even higher risks for VW’s future cash flows.
  • The history of recalls shows that the first ‘confessions’ are rarely the end of it.
  • Legal fees will be manageable as their effect is usually spread over several years.
  • More concerning is the impact on volumes, residual values, pricing and costs.

Read the full article at http://www.benzinga.com/analyst-ratings/analyst-color/15/09/5859512/its-not-over-for-volkswagen-deutsche-bank-downgrades-pol?utm_campaign=partner_feed&utm_source=marketwatch.com&utm_medium=partner_feed&utm_content=analyst_ratings_page

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Volkswagen emissions scandal could be just the beginning, Wall Street says – Wall Street Journal 09-23-15

Salient to Investors:

Barclays said car makers face more pollution control expense in the wake of VW’s scandal.

Stifel said the Intl Council on Clean Transportation has found questionable diesel emission results across several unnamed makers and more widespread vehicle recalls pose significant near-term risk for European car makers.

Morgan Stanley expects VW to face fines and compensation expenses from $9bn to $27bn and its earnings could be meaningfully affected, and maintained a Hold rating on the stock, citing insufficient clarity to rule out further downside risk. Morgan Stanley said VW’s global sales continue to be much weaker than many of its peers and the EPA disclosures could exacerbate this weakness.

Read the full article at http://www.marketwatch.com/story/volkswagen-emissions-scandal-could-be-just-the-beginning-wall-street-says-2015-09-23

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What Turned Warren Buffett Into a Car Guy? Economics – BloombergBusinessweek 10-02-14

Salient to Investors:

  • Warren Buffett has said he likes industries that come with barriers to entry. Many publicly traded dealers own 60 to 100 stores, so would be attractive acquisitions to Buffett’s automotive division, with the type of recurring revenue streams from service and parts that Buffett likes.
  • Morningstar said the 10 largest US auto dealerships account for less than 10% of new vehicle sales.
  • Meyer Shields at Keefe Bruyette & Woods said dealers selling auto insurance to car buyers would be a key policy shopping juncture.
  • Greggory Warren at Morningstar said Buffett may be attracted by the dealer sector being the best part of the automotive supply chain from a competitive advantage perspective, with all the publicly traded firms having developed narrow economic moats around their operations.
  • David Whitson at Morningstar said more stores bring economy of scale and pricing of inventory.

Read the full article at http://www.businessweek.com/articles/2014-10-02/what-turned-warren-buffett-into-a-car-dealership-guy-economics#r=rss

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American Automobile Glut? Unsold Cars Are Piling Up – Bloomberg Businessweek 07-31-13

Salient to Investors:

Automotive News reports that 3.27 million unsold cars sit on lots across the US, the most in almost 5 years and versus 2.7 million a year ago and 1 million more than in the summer of 2011.

Interest rates are still relatively low, car loans are easy to come by, even for those with poor credit, and 100 million cars in the US are 7 to 12, the sweet spot for high-maintenance repairs.

Kevin Tynan at Bloomberg said at last month’s purchase pace, dealers can sell the current backlog in a manageable 61 days versus 75 days in January.

August is not the best time for dealerships to be full, as most 2014 models roll out in September. Dealership lots that stock American automakers appear to be ripe for bargain seekers.

Read the full article at http://www.businessweek.com/articles/2013-07-31/american-automobile-glut-unsold-cars-are-piling-up#r=rss

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U.S. Expansion Poised for Longevity – Bloomberg 06-09-13

Salient to Investors:

The economic expansion shows signs of lasting almost twice as long as average, with few of the excesses that often presage the start of contractions – inflation is slowing, not quickening, household debt is shrinking, not expanding, and the labor market is slack, not tight.

Robert Gordon at Northwestern University said the expansion last another 4 to 5 years.  (Which would make it the second longest on record, behind the 1990s and versus the average since the end of WWII of 58 months.) Gordon said the cyclical outlook is bright, but the US will be hampered longer term by an aging population, a plateauing of educational achievement, and increased inequality. Gordon said past expansions often were cut short by Fed tightening credit – in 1957, 1960, 1980, 1981 and 1990 – while many previous cycles ended because of too much exuberance in both residential and nonresidential construction – a major cause of the 1929-33 Depression and in 2007-08. Gordon said fortunately during 2008-13, the US is ‘constructing fewer homes and cars than replacement needs.

Allen Sinai at Decision Economics said the S&P 500 may rise to 1,750 in 2013 and 2,000 in 2015.

Goldman Sachs expects economic growth of 2.9 percent in 2014 and 3.2 percent in 2015 versus 1.9 percent in 2013. Jan Hatzius at Goldman said we could see a good growth environment for a long time.

Mark Zandi at Moody’s Analytics said there are no significant imbalances in the private economy, which is in good shape, though possible shocks could knock the recovery off course, including a collapse of the stock market, a sudden spike in long-term interest rates, or a military confrontation between the U.S. and Iran that drives up oil prices. Zandi said policy makers would be hard-pressed to cope with the fallout of a sudden shift because short-term interest rates already are near zero and the budget deficit is still high by historical standards.

Robert Hall at Stanford said the labor market is still very weak so we have a long way to go before any excess will appear in that most important of all markets.

Itay Michaeli at Citigroup recommends auto shares because consumers have been deferring purchases and we are still very early in the auto-sales cycle – he forecasts sales of cars and light-duty trucks will rise to 16.5 million in 2015 from 14.5 million in 2012.

Maury Harris at UBS Securities said younger adults have the most ability to spend after some delayed striking out on their own by living with parents or friends, so housing starts could rise to 1.1 million units in 2013 and 1.35 million units in 2014 versus 781,000 in 2012.

Joseph Carson at AllianceBernstein see many positives and expects another 3 to 4 years of economic growth at least.

Read the full article at http://www.bloomberg.com/news/2013-06-09/u-s-expansion-poised-for-longevity.html

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Look Out For This Positive GDP Surprise – Seeking Alpha 01-23-13

Salient to Investors:

Lou Basenese at The Wall Street Daily writes:

  • At the very least, an uptick in demand is ahead for housing-related and automotive companies.
  • Richard Fisher at the FRB Dallas says US GDP could grow 3% in 2013 versus the average economist expectation of 2%.
  • Pickup truck sales are rebounding – small business owners, particularly in construction, historically account for a large portion of pickup sales.
  • David Wilson at BusinessWeek says the average age of cars, appliances, and furniture in the US is the highest in almost half a century. Barry Ritholtz at Fusion Analytics Investment Partners says well over 50% of the replacement activity will benefit the US economy.
  •  60.2% of companies report better-than-expected revenues, a strong indication of demand.

Read the full article at http://seekingalpha.com/article/1128121-look-out-for-this-positive-gdp-surprise?source=email_macro_view&ifp=0

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Russia’s Desire for Cars Grows, and Foreign Makers Take Notice – New York Times 12-25-12

Salient to Investors:

Trickle-down oil wealth and the spread of easily accessible auto financing are lifting auto sales in Russia. The Russian middle class is rising, and becoming a force in both commerce and public life. Russians have shown little nostalgia for their own cars.

Russia is projected to surpass Germany and become the largest car market in Europe in 2014. Russia is the world’s 9th-largest economy but 7th-largest car market, with 250 cars per 1,000 people, midway between emerging markets in Asia and developed markets in Europe and versus 11 cars in India, 49 in China, 515 in Germany, and 643 in the US.

Vladimir Bespalov at VTB Bank said growth is in the emerging markets. 

Read the full article at http://www.nytimes.com/2012/12/26/business/global/foreign-automakers-see-potential-in-russian-market.html?_r=0&nl=todaysheadlines&adxnnl=1&emc=edit_th_20121226&adxnnlx=1356894309-sugRmRSSgMvyvOM7jIo8rg.

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