Reply #1: WrapUp by Martin Goldberg [View All]

[ozymandius]

"Nobody Needs A Hummer"
A Technical Look at Auto-Related Stocks

About 18 short months ago it appeared that the US auto manufacturers were in serious trouble. The US economy was in the midst of a soft patch, and it appeared as if automobile demand was turning down within a slumping economy. US automakers were facing pension liabilities that were magnified since they already had highly leveraged balance sheets. At the time, it almost seemed that the only thing that would help the automakers was a government bail out. However, in a short amount of time, the stocks of the US automakers and other auto related companies staged an impressive comeback. This was fueled by the growth in the Asia Pacific region as well as continued robust sales in the US aided by economic stimulus from the government. In this article, I take a technical look at key stocks related to the Automobile industry.

There are many “moving parts” in the auto sector that makes it difficult to thoroughly evaluate the stocks. One such notable moving part is the significant boost to US auto sales resulting from a federal tax deduction for some purchases of gas guzzling trucks and SUVs. According to the Bozeman Chronicle (Montana) (emphasis added by Martin) (1):

“As part of a $350 billion economic stimulus package passed in May 2003, Congress quadrupled to $100,000 the amount business owners can deduct in the first year when they purchase a qualifying vehicle. The quirk is, the vehicle has to weigh at least 6,000 pounds. But almost every pickup and most SUVs meet that threshold, said John Wendt, a sales manager at JC Billion in Bozeman. Self-employed folks like real estate agents, consultants, doctors and lawyers all are finding advantage in the tax break. "We've had quite a number of people buying expensive SUVs and pickups," Wendt said. "They've been advised by their accountants to do that." Wendt said the sales staff doesn't suggest people buy an SUV for the tax break. "Obviously we're not tax accountants," Wendt said. But sales people don't have to bring it up, he said. People are showing up armed with the tax information and ready to buy big SUVs like the GMC Yukon, he said. "It's pretty incredible that you can write off what you can," Wendt said.”

The Bozeman Chronicle captures the essence of what’s going on. Although qualifying people can only deduct the fraction used for business (wink), this is a perfect example of “displacement”. The government, via a tax break, is paying people who would otherwise drive smaller and more fuel-efficient vehicles to buy larger gas-guzzlers, which also happen to have higher profit margins. The tax break is good for the automobile manufacturers, bad for the taxpayers. It’s good for the oil companies and bad for the ecology. It’s bad because it makes the US more dependent on foreign oil. It’s bad for drivers of smaller vehicles, since these 6,000+ pound vehicles are a danger for other motorists in smaller cars. On the surface it’s good for the doctors, lawyers, consultants, real estate agents and others who make this entirely discretionary purchase versus a more suitable smaller vehicle. Or is it? The savings reduced cost resulting from the tax deduction of the Cadillac, Lincoln, Lexus or Hummer SUV is likely offset by the higher maintenance and gasoline costs. But many qualifying Americans are flocking to the new car dealerships anyway to stroke their egos by purchasing these large wagons. And the auto companies are doing a great job of feeding the strange desire that makes such a purchase appealing to many Americans’ psyche. For example, the Hummer television commercial airing during the NFL playoffs immediately comes to mind, featuring the song “Happy Jack” by The Who. But no matter what mental baggage potential Hummer customers may carry to their dealerships, it is clear to me that nobody needs a Hummer.

http://www.financialsense.com/Market/wrapup.htm