Weekly commentary Dec 15-19

Friday the Market took a huge dump in the morning. Why? Because a few Southern GOP Senators decided to vote against the automobile makers, blaming the United Auto Workers union. To them, the price of labor was just too expensive causing the price of GM and Chrysler cars to be too high. But lets take a closer look at what was claimed.

First, the price of the average US automobile consists of only 10% labor. 10%. If they cut their labor costs in half, it wouldn’t make a major difference to the price of the car. The real problem with GM is not its hourly wages, which average about $30/hour. The burden GM faces is having to pay health care benefits to more than 432,000 GM retirees. If the US had a national health care system, GM could become profitable.
Another interesting fact about these Southern GOP Senators. They represent states that have non-American car manufacturers. And new plants are opening in non-union states as we speak. Toyota is opening a new plant with a production capacity of 200,000 units.

The last thing we need to examine when looking at these Southern GOP Senators. They did not vote “NO” with the $700 billion bailout for the financial institutions. They did not demand that white collar labor be reduced. And that was for $700 billion. Yet for $14 billion, they hem and haw and balk. What game are they playing here? And did we mention that foreign auto plants have received over $3.6 billion in subsidies from southern states. Toyota has received over $385 million, Honda 855 million, etc., all from Southern States.
The real question is this…was this a setup, just a game. Think about it. The Democrats put all kinds of restrictions on the automakers $14 billion bailout, imposing a “Car Czar” to monitor the changes the automakers are making. A handful of Southern Senators reject the agreement. At the 11th hour, the White House emerges stating that it will now consider giving money from the TARP project, money that according to the Government Accounting Office, has not had any oversight whatsoever. So if the money is given from the TARP project, we won’t need a car czar or any oversight. Was that what this was all about in the first place?

Now the automaker CEO’s don’t have to give up their bonuses. They can just have the money. Not like poor Merrill Lynch who has to give up 50% of its bonuses. Merrill Lynch, the company that got bailed out by Bank of America…poor them, a huge 50%.
So how long will this endless Bear Market last? The slump have actually have further to go, according to Tobin’s Q ratio. The Q ratio is a comparison of the Market Value of a company to the company’s cost of its constituent parts. The Q ratio still shows that the S&P 500 Index is still expensive, in relation to the cost of replacing the companies’ assets. With the given rise in deflation, the 39% drop in the S&P Index shows that the equity price of each of the 500 companies has been pushed below its respective replacement costs. If the Q ratio is correct, the S&P 500 may tank another 55%, down to a range of 400 by 2014. It is possible to see a “Bear Market Rally” over the next 2 years while the Feds actions delay deflation, but according to the Q ratio, deflation will catch up and tank the S&P 500. Right now, the Q ratio dropped from 2.9 in 1999 to 0.7 in 2008. But a bottom to a Bear Market is 0.3. The Q ratio for the U.S. stock market has ranged between 0.3 and 3 over the past 130 years. When the Q ratio is above 1, this signals that company assets are overbought. A Q ratio of less than 1 signals oversold.

Q ratio effects hinge upon 1 thing…deflation. If the economy continues to deflate, the Q ratio effect is likely to take place. Right now, we have seen the Feds using their tool called “Quantitative Easing” to attempt to stall deflation. What is Quantitative Easing? Simple…that’s where the Feds print money and flood the Market with cash in order to encourage domestic spending. As we all know, there are only so many printing presses and so much ink. Eventually government debt could devalue the dollar so much that investors will want to sell their S&P assets and cause the Index to drop to 400. Gloom and Doom? Maybe, maybe not!

Next week we will see another tough week for economic news, There is CPI, building permits and housing starts, Leading Indicators and the FOMC Policy Statement. Could be another volatile week in the Market.

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