Issues and Opportunities 6-1-2009

June 1, 2009 Edition, Volume III

Inside Signature Update

- Thanks GM… more than just another auto maker
- Economic Data Supports Improving Trends
- A Case for American Manufacturing


"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."

~~~~ Dr. Adrian Rogers, 1931



Thanks GM… more than just another auto maker

I held off publishing this week’s issue of Signature Update until after the Obama administration and General Motors announced GM’s filing for bankruptcy. Though I suggested well over a year ago that this outcome was inescapable, we’ve now sadly observed many months of indecision and posturing, culminating in an historic event few ever thought we’d live to see. GM’s entry into the bankruptcy courts marks the end of an era in US manufacturing. It’s not that automobile manufacturing won’t continue in the US - it might even become healthier than in recent decades – but the venerable US automotive giant, once the largest employer on planet Earth, will likely never regain its position of automotive dominance. The jingle, ‘… hot dogs, apple pie, and Chevrolet’ will fade into memory as the old GM is reengineered and brought back to life as a shadow of its former self.

Many of you know I’m a long time corvette-aholic, proudly avoiding cure or treatment, and more recently have become a proud owner of an iconic symbol of American Muscle; a 1957 Chevy. My fear, and that of many other middle-aged baby boomers, is that the new GM will be forced to produce cars based on political mandate rather than consumer appetite. Already, GM has been forced to scrap plans for the innovative Volt and ordered to introduce a fuel and cost efficient small car for the masses, one that meets CAFÉ standards, if not consumer preferences. Unfortunately for GM and it’s new owners – that would be us, the US taxpayer - the masses in America vote with their wallets and consistently express a preference for larger cars and SUV’s, fuel efficient or otherwise, or cars like the Volt, on the cutting edge of innovation and technology.

No one wins in the latest saga of GM. As with Chrysler, the UAW (United Auto Workers) fares better than other non-government debt and equity holders, but that’s a matter of degree. Ford, the lone independent among the major US auto manufacturers (Henry Ford, Sr. would be so proud) and seemingly holding a competitive advantage over its government held peers, stands to face stringent competitive disadvantages as administration and legislative actions will undoubtedly show preference to the ‘people’s’ auto manufacturing concerns. Consider the financing terms and tax incentives potentially available to GM buyers that would be difficult to offer to buyers of Ford products. At the same time, Ford may rise in dominance if GM and Chrysler’s engineering and innovation directives become the purview of legislative or administration gamesmanship. Only time will tell.

Regardless, I’ll never forget sitting in my brother’s two toned, metal flake 1956 Chevy two door, going through the gears and playing the radio, while he served in the armed forces during the Vietnam conflict, and wishing I could someday have a car that cool! I was 12 or 13 years old at the time, and the car never moved from its parking place in front of our home, honestly, but I traveled the country in that car. Thanks GM… and thanks to you too, Johnny.


Economic Data Supports Improving Trends

1st Quarter GDP was revised at the end of May reflecting a .4% improvement from the 6.1% decline announced last month; an adjusted rate of 5.7%. While this may not seem like a meaningful improvement, in all reality it is very important. The markets are looking for confirmation that many of the early signs of economic improvement are more than faint hopes and the adjustment of 1st Quarter GDP to a number more in line with economists’ expectations couldn’t have come at a better time.

The latest ISM (Institute of Supply Management) survey reported that most supply managers are observing real growth in the economy. Likewise, durable goods orders increased for the third straight month by 2.1% for March, 1.9% for April, and nearly 3% for May (projected). National Economic Trends, the St. Louis Federal Reserve’s publication of the latest economic data released this afternoon, provided evidence that most sectors of the economy have actually began to see gains rather than simply revealing slowing declines as in earlier releases.

The Conference Board Consumer Confidence Index™, which had improved considerably in April, posted another large gain in May. The Index now stands at 54.9 (1985=100), up from 40.8 in April. The Present Situation Index increased to 28.9 from 25.5 last month. The Expectations Index rose to 72.3 from 51.0 in April.
The change (increase) in unemployment remained steady for the 6th consecutive week as jobless claims continue to mount, but at a consistent pace rather than the previously escalating rate. The pace of jobless claims had been climbing over the prior months and the emerging pattern offers hope that we may be near the height of the unemployment curve. Jobless rates may still increase in coming weeks, perhaps even months, but the current data supports unemployment rates topping out between 9% and 9 ½% by the end of the year. Nonetheless, employment gains may elude the labor markets until early 2010, putting continued pressure on both the housing and retail markets.

April new home sales increased .3% from March 2009 (34% behind April 2008) and existing home sales increased by 2.9% from March 2009 to April 2009. Small, though important gains were seen in most markets as residential real estate inventories fell to 10.1 months nationally. While buyers are still bargain hunting, real estate pricing appears to still be suffering from lower-than-normal loan approval rates, a signal that the credit markets, though substantially improved from late 2008, are operating at less than optimal levels.

Taken separately, these improvements may appear to be no more than insignificant anomalies in an otherwise struggling economy, but together they show clear and coordinated signs that the economy is slowly improving. As credit markets continue to heal and return to efficient, if not irrational, levels of operation, the lynch pin of our economy, housing, will right itself as consumer demand pushes forward.


A Case for American Manufacturing

The decline of GM and other major US manufacturing concerns along side continued increases in unemployment puts a fine point on the need for export-oriented manufacturing operations in the US market. We can all understand the economic efficiency of allowing manufacturing to take place in lower cost labor markets, and we can easily point towards the higher paid service and technology sector jobs that have replaced many manufacturing jobs, but what we may have forgotten is that a US job creating product for export creates more than one job in the domestic market. In general, one job in the US marketplace, in an efficiently ran company creating market surpluses and producing export product, creates one or more other jobs in supporting the local economy.

As we’ve now seen through famously bloated union contracts and the excess wages and benefits they demanded, the problem in US manufacturing has never been the American worker. Rather, it has been the expectations forced on those workers by a media driven economy, fueled by promises of buy now-pay later, a ‘you can have it all’ mentality, and social excesses never before tolerated in respectable society.

As our global economy continues through this ‘reset’ we have an opportunity to create and innovate at such a level that it can spin off hundreds of thousands, if not millions, of export-oriented jobs to support the efforts of innovators on the cutting edge of energy and technology development. These jobs can produce goods and services for which an energy hungry world will crave and pay for. Just as we became the world leader in technological innovation to support the information age, we can become the leaders in clean energy technologies, health care products, as well as financial services, engineering and education.

We can easily make the case that US workers, unleashed to create and build the next wave of energy efficient power plants, technologically sophisticated and fuel efficient transportation systems, and superior manufacturing processes can and ought to be the backbone of the global economy as we venture into and through the remainder of the 2000’s and beyond.









Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC