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Bill Bonner Try winning at Ultimate Combat wearing a strait jacket. That’s what Ford and GM have to do. This is what the Minneapolis papers tell us: "Each more than 100 years old, Ford and GM are victims of being successful for too long. GM has 476,000 retirees. Ford provides health insurance for 590,000 people at an annual cost of $3.5 billion. Both Ford and GM have health insurance costs of about $1,100 per vehicle. Neither Asian nor European producers are burdened by such costs." How can you compete with that kind of handicap? Poor GM and Ford. The two automakers are suffering. They only seem to make money on their big SUVs and pickup trucks. And now, with oil near $70 a barrel, people don’t see any reason to lug tons of extra steel around with them all day. Auto buyers are downsizing, say the press reports, which leaves a lot of heavy metal on the dealers’ lots. Ford and GM are valiantly trying to "move the metal" with discounts and incentives. These offers are intended to help preserve market share, but what good is a market in which you lose money on every sale? Even William Ford, Henry’s great grandson and now CEO of Ford, thinks the company is in trouble. The shares dropped after he said so last week. But we are feeling sorry for everyone today. Take the poor customer. The guy wants big, manly wheels to ride around on, but he can’t afford them. A U.S. Labor Department study shows that down at the middle and lower ends of the wage scale – where people often drive pick-ups – real earnings have gone nowhere since 1979. Median wage earners realized a total gain over the entire quarter century of just 2.3%. Low wage earners lost 3.7%. While the picture is dark at the center and below decks, the upper berths on this vessel have enjoyed sunshine and smooth sailing – with real earnings up 20.3% since 1979. How can you afford a big gas-guzzler when the guzzling costs so much more money than it used to…and you have got so much less? No more credit cards, ARMs, or home-ATMs to keep the guzzling going. But now, pity the poor homeowners. The Record Net reports from California: "Home prices in the Central Valley have started sagging year-to-year, just as they have in most San Joaquin County cities. Sales were down nearly 43 percent year-to-year as well. "Vince Malta, a San Francisco real estate broker who is president of (CAR), said the market is slowing as sellers often hold to unrealistic pricing expectations while buyers have more properties to choose from. ‘With inventory levels double that of a year ago... some regions of the state prices are down from a year ago,’ he said. "Meanwhile, local homeowners say it’s a bleak housing market these days, even with some price slashing going by some motivated sellers. Jim Coan put his north Stockton home on the market in May. He has cut the price twice, from an initial $459,000 to $424,500. There have been only nine viewings and not a single offer, he said. ‘We have an oversupply of houses and few buyers out there, for whatever reasons.’ "‘The experienced agents are telling me this is one of the worst markets they’ve seen,’ remarked Sue Kappel, who has operated since 1972. "And what of the thousands of people who only recently got into real estate or related industries to capitalize on the boom? ‘We’ve probably had 300–400 people quit in the last few months. We’ve had a lot of Realtors and loan officers quit,’ said Jim Porter, Solano Mortgage’s owner and senior loan officer. "‘It used to be get listings, get listings, get listings,’ Kappel said. ‘Now it’s find buyers, find buyers, find buyers. The paradigm has shifted.’" Uh oh…when the paradigms shift, someone is bound to get hurt. From the East Coast, we get word that the housing market around Washington, D.C., once one of the hottest, is cooling off fast. Agents and developers used to call the police to manage the crowds at housing sales…now they call the police and ask for the Missing Persons department. The buyers have disappeared. One seller reported that his buyer insisted on a $100,000 discount on a $1.6 million house, to make up for falling prices in the area. If he didn’t get it, he said he’d walk away. The seller caved in; he figured this buyer might be the last he’d see for a while. The anecdotal evidence is not too thin to conclude that the housing market is not just liable to a mild 5% decline, which would wipe $1 trillion from household wealth. Rather, it is likely to see a full-scale retreat, in which the bids disappear altogether. Some experts are predicting as much as a 20% to 40% collapse in prices, which would be as much as $8 trillion in "wealth" knocked off homeowners’ balance sheets. And why not? The housing boom has been of historic proportions. Nothing like it has ever happened before. Why shouldn’t the housing bust be extraordinary too? Generally, the bigger the booms, the harder they fall. But unlike the market for stocks, bonds, and pork bellies, the market for housing does not clear quickly. In a housing bear market, the seller sweats for months and months, hoping a buyer will appear. Poor things. On to those poor people who are no longer homeowners! The foreclosure rate is climbing; now, one out of every 1,245 households is in foreclosure. But we note that that still leaves plenty of room for growth. And more pity for the poor victims of paradigm shifts: • Michael Larson, on MarketWatch, writes this: "The housing stocks have been clobbered. Taken out back and shot, really. Stocks such as Toll Brothers (TOL26.48, +0.06, +0.2% ), Lennar (LEN : Lennar Corporation CTX51.13, +0.18, +0.4% ) have fallen drastically in the past year..." But Larson cautions against bargain hunting. He thinks a further drop is likely and suggests looking instead at what he calls the "second round impact" of the bust: "Who ELSE is vulnerable to slowing home sales, rising inventories, and a slumping construction industry? In my view, they're the NEXT round of stocks poised to tank. "The hit list: "Professional construction suppliers: I'm talking about companies that make the ‘guts’ of today's new homes. Think Masco, which supplies cabinets, faucets, and a whole bunch of other products, or Mohawk Industries, which makes carpet and tile. Home retailers: Home Depot and Lowe's are the obvious names. Home Depot shares recently slumped to a 52-week low. Lowe's could be headed to the low $20s. Also vulnerable are companies who sell to consumers through these major retailers, such as Black & Decker." "Other ‘outside the box’ names: There are lots of smaller players in the business as well. Toro makes lawn and garden equipment, for instance, while Scotts-Miracle-Gro sells fertilizer and spreaders. Is it reasonable to think that overwhelmed, overstretched homeowners might cut back on things like lawn maintenance to save money? You bet. "If you're an aggressive investor who's comfortable with selling stocks short, or using put options, this is where I'd focus my attention. Some of them are starting to fall already. But they haven't fallen nearly as far as the home building stocks. That smacks of opportunity to me!" • And pity also the poor people who install granite countertops. The housing boom had them working around the clock – leveling whole mountains in New Hampshire in order to provide kitchen countertops for Americans coast to coast. But not only is there a bust coming in the granite countertop industry, granite countertops themselves are becoming passé, out of style, like, sooooo 2005. This from the blogosphere: "What comes next after Granite Countertops are the Avocado Green Refrigerators (Think Brady Bunch) of the early 21st century? I was at a design center in LA this week and found the answer – frosted glass Italian countertops with lighting from below – kind of glows in dark…really neat. In 10 years, people will tear out the dated granite for frosted Italian Glass!" • And why confine out pity to our shores? Poor Alfredo Stroessner! What is wrong with this world of ours that it can’t shed a tear for a dictator? Last month, the former chief executive dictator of Paraguay died to dry eyes. Wasn’t he a friend to the United States for three decades? Didn’t he maintain law and order in that benighted South American paradise? Didn’t he control his military forces (Paraguayan troops remained in their barracks while he was in command…happy to get from him a share of the spoils from smuggling)? Didn’t he stage periodic elections…and win, according to some accounts, more than 100% of the vote?
September 6, 2006 Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis. Copyright © 2006 Bill Bonner |
