Electric Cars Look Like They are for Real at the Detroit Car Show

The expectant air at this week's Detroit Auto Show bodes of increased sales, innovative products and a resurgent auto industry in the United States. This year the electric car concept is center stage and in the midst of all the excitement, the new electric Chevy Volt has been named Car of the Year.  The Volt has been hyped for a few years now and was talked about a lot in the Fall of 2008 in front of Congress as GM execs tried to show why the car would be important for the future and therefore why a bailout was warranted.

Two years later the Volt has finally appeared along with Nissan's electric Leaf. The pair already has plenty of competition right on their heels. At Detroit, the new electric car launch pad has been cranked up by a factor of three or more, and perhaps most notable was Ford as it announced the new electric Focus due later this year. In addition, Ford said it was only the first of a line of autos and vans targeting a full spectrum of uses and different energy efficient power configurations. 

The new electric Focus stands out because its marketing and features make electric for the first time look both practical and potentially mainstream. First it has double the range, 100 miles, on batteries as the Volt and won't need a backup gas motor. Ford has hinted it will sell for a lot less than a Volt too. It will be a lot easier to keep running as it will only take 4 hours to recharge it on its special charging unit that is kept in the garage and $3.60 of electricity will move you 100 miles. The charger will be sold at Best Buy for a reasonable price and uses Microsoft software to work at night when rates are lower. Co-branding and appeals to the American suburban lifestyle are at work here as well. 

Attractive and well marketed, costing only 3.6 cents/ mile to operate vs.more than 10 cents/mile for the gas version, having adequate daily range, it seems the new Focus is at or near the threshold of real sales success in the mass market. If that is the case,  electric cars like the Focus cars can pave the way for the United States to finally reclaim its own energy destiny by freeing itself from the use of imported energy.

Electricity has other benefits. Electric cars will be cleaner, quieter and run on domestically produced energy, but by what power plants? The greater electricity demand that electric cars will require will mostly have to come from new, probably nuclear power plants since they are the only mass scale, 24/7 and clean energy option we really have.

The Investment Themes Here are Powerful but Somewhat Longer Term.

Ford Motor Company's successes since 2007 have brought the stock a long way. But with success now seeming likely in the electric car niche as well, is the market ready for a really new era at Ford? I think we are seeing shows that the company will probably do much more than reclaim its previous market share. It seems to be positioning itself now to become the largest car company in America and maybe the world. 

As electric car demand ramps up, the demand for the electrical components, batteries, electronic controllers and minerals required to produce these cars will bring a lot of business to the relevant companies and industries.

Nuclear energy will be ramped up and have to be fast tracked to meet the extra demand over a similar time frame. On top of that, whatever growth in the nuclear power industry that is taking place in the United States is a fraction of the growth that is happening overseas, especially in the emerging economies. This looks like a great industry over at least the next 15 years or more. Look at nuclear construction companies and uranium miners. . 

What Will Drive Markets in 2011?

The Trends in Place from 2010 are Still Strong

Gold is Money
Reserve Banks Injecting a lot of Money to Help Stocks and Real Estate.
Bubbles Result and Real Estate Still Struggles
Debt Crises Stalking Us
Business Improving Despite Problems. Some Pickup in Jobs.


Big trends don't change course quickly just like big ships and 2011 will see more of the same opportunities and risks as last year.

I think the biggest wind in the sea this year is still the attempt of the reserve banks of the developed countries to reflate the value of assets like real estate and stocks in order to get a recovery going. The amount of money they are injecting is historic in its scale. It is visible in the ultra low interest rates we've seen and really still have.

Meanwhile, debt crises in both the US and Europe are visible in the distance as they form into tempests that will hit us at some point this year. Portugal, Illinois, Spain, California and potential defaults in numerous municipalities across America and perhaps other European countries are all queued up to come ashore, probably sometime in 2011. All that even as last year's storms, Greece and Ireland, have yet to be resolved.  

Economists were surprised again (and again and again) when their predictions of some improvement in the job market last year failed to appear. The lack of jobs was probably the biggest reason the number of home borrowers in default is still growing which feeds back to the likelihood that property values will only fall more in 2011, at least in areas that have a large supply of foreclosed homes on the market.

Despite these negatives, the economy is still mending and gaining some traction. It can keep doing that because there is a growing demand for cars, clothes, homes etc that need repairs or replacement. Business will be improved generally like it was this year, and there should be some pickup in hiring unlike last year.

How these trends translate into the investment world:

Deficits and money printing mean alternative money is becoming important. Gold is money today, just like it was for all the rest of human history excepting the past 20 or 30 years. If deficits are reversed and stimulus curtailed, this will be less so. However, the debt crises coming our way in 2011 and the reserve bank stimulus should only further the cause of alternative money so gold will remain desireable.

The policy of reflating investment assets by injecting money and keeping interest rates super low is also going to remain in the cards for 2011. The 9.6% unemployment rate is the number that guarantees it. When or if the injection of money ends, it will cause a change a traumatic change in the markets.

The reserve banks effort to reflate assets will help the stock market and the economy but also have unintended beneficiaries such as commodities or Chinese IPO's. Some of that may be a side show, but if oil prices are one of them, they will hurt the real economy. Values for some of these assets will seem unrealistic at times but they may not be. After all, the money has been put into place by the central bank.

An improving economy will help cure the credit issues in the economy. Banks and others who lend will benefit. Dividend payouts from banks are expected to increase quite a bit this year. Mergers in banking and other business sectors are expected to be very strong this year as well. All these trends create opportunities for investors.

Debt storms, new price levels and the huge share of total assets now managed by short term trading firms, will give us more volatility this year. There will be times when it will be possible to be very pessimistic about the economy and others to be optimistic. The sentiment and the prices will swing wildly at times, particularly in the commodity and gold sector. The arguments there about the right price for things will become very fierce as price levels exceed prior values.

The power of the cross currents at work mean I won't venture a guess what the outcome for the market will be since it could be raining or sunny at year end just like it will be a couple of weeks from now. I also don't hold early January market optimism to be much of a guide either.

It does seem the odds lean more towards a sunny outcome in 2011 as stimulus and imroving business can probably over come all else. I will predict, however, there won't be calm seas getting to year end and that more than anything is what we must be prepared for.

Disclosure: I own gold and at times other investments mentioned in this article.

5 To 1 Says They're Overpaid (Part I)

Swiss Army Brand Turnaround Benefitted Both Employees and Shareholders, Not Top Management

Swiss Army knives are a pretty good product and you may have noticed the brand has shown up on some other nice things in recent years. Swiss Army brand watches, luggage and fragrances are on the market now too and keeping to the quality, value and style of the knives they have done well.

The parent company, Victorinox, is headquartered in Switzerland, one of the more expensive places in the world in which to do business. In this age of outsourcing and the pressure to lower costs, expensive Switzerland’s economy is still doing very well. Unemployment is only 3.65% and the currency is stronger than either the US dollar or the Euro.

The Financial Times wrote last week that after 911, Victorinox faced a 30% drop in sales of its’ Swiss Army knives due to new strict airport security measures.  Since airport security was going to remain strict, the company decided that this was probably a permanent loss of sales and scaled back its' operations and began to develop and invest in new products.

Victorinox has a commitment to its' workforce as well as its' stockholders. During the adjustment period, the company went to great pains to protect the whole workforce and didn't, like many American companies, reward management for firing workers and outsourcing. Cutting costs like extras across the firm and lending unneeded people out to other firms temporarily minimized the job cuts. The payroll policy also came into play. The company has a rule of limiting its' top paid employees to a ratio of 5 to 1 to the wages of the lowest paid employees, a policy that helped control payroll costs at the time.

The expansion into watches, luggage and fragrances was a success and the new products now make up 60% of sales, a track record which makes Victorinox’s turnaround notable. Despite scoring a small triumph, the company’s management team hasn’t been given bonuses worthy of a czar and instead can enjoy a rate of pay five times that of the bottom of the company’s pay scale as well as the job security, esteem and respect such good work merits. Victorinox’s shareholders and employees have also been rewarded and the company’s future seems to have been only enhanced as the quality and value and reach of the Swiss Army image has only benefitted.

By the way, Swiss Army knives are not made in China. They are still made in Switzerland.

Investment Conclusion: Question management teams whose strategy to add value is to outsource jobs without a realistic strategic plan that will make the company succeed in the long run and are paid huge salaries and bonus packages to do so. Hint: There are lots of them out there right now.

Tax Bill Finally Passed

Now We Can Make Tax Related Investment Decisions

After weeks of wrangling and a long year of uncertainty, at least we know now what tax rates are going to be over the next two years. The bill extended the tax regime we have been in for a number of years but added an estate tax on estates over $5 million.

There was no estate tax this year so when Yankees owner George Steinbrenner died last summer, it seemed his his heirs were lucky and their Dad's $1.5 billion estate would pass tax free. This bill addressed that loophole, however. His heirs now have a choice whether to pay 35% now or keep the much lower cost basis on the estate and pay capital gains taxes on it sometime in the future. I imagine the Steinbrenners will keep the Yankees for now and pay taxes on it some other day.

Fidelity Investments did a nice summary on the new law's tax rates and investment ramifications. If tax policies are important to you, I recommend giving it a close read.

Fidelity's Take on the Tax Bill

Investment Implication:

This tax law is stock market friendly because it will reduce uncertainty and isn’t going to trigger new year end selling as it taxes long term capital gains and dividend paying investments at the same rates as today.

The big questions about this law in a year or so will be did the low tax rates stimulate the economy and was the benefit enough to increase tax revenues down the road enough to reduce the budget deficit?

First observation this afternoon: Bond yields fell very sharply today which seems to indicate the market felt the tax bill will stimulate the economy substantially to help balance the government’s budget without creating an inflation problem.

China's Stolen Software a Trojan Horse

China's growth in manufacturing is in large part due to the theft of technology and licenses. As a result of stolen software installed on the majority of China's computers, it is particularly easy for hackers to get into them....

One persistent problem is that much of the pre-installed software still consists of pirated copies. While China has released statistics showing that the use of legitimate software in China has increased dramatically, the Business Software Alliance, an international software industry group, estimates that 79 percent of the software sold in China in 2009 was illegally copied, creating a loss to the industry of $7.6 billion in revenue. Even more important to Beijing, these statistics mean the vast majority of Chinese computer systems — government and private alike — remain vulnerable to malware.

China and its Double-edged Cyber-sword | STRATFOR December 2010

-Investment Conclusion? Some day just maybe, software companies like Oracle and Microsoft will increase their revenues in China. In the meantime, it is the same thing as before. The Chinese are stealing western technology and neither business or government care to do much about it.

Uncle Sam’s Government Works Best When on a Deadline.

Fiscal Commission Draft Report

Bipartisan Commission Tries to Deal with Reality

There is a threshold where the total debt* of a nation exceeds its’ ability to service the interest and have a hope of paying off the principal but no one knows exactly where that is. By different accounting, the US government currently has an outstanding debt of between 60% and 90% of our annual economic output (GDP). For comparison sake, the headline problem child in this arena is Greece at 120% of GDP. For the US, current rates of annual deficit spending of nearly 10% of GDP are pushing us too close to Greece’s situation and that is the deadline Uncle Sam faces.

With Federal budget deficits that are now embedded in our economy rather than just part of economic cycles and other stubborn problems like health care costs per capita that are double those of any other nation on earth, it was very good news last week when the President’s bipartisan fiscal commission released their preliminary draft. The 24 page report is gathering attention and support even as many political leaders dismissed it out of hand. It has been patently very easy for an elected official (of either party) to vote to increase spending, but the fiscal condition of the country and mood of the electorate seems to have swung around to wanting to go in the direction of fiscal responsibility and the report has provided sound talking points for the public and policy makers to work with.

To summarize generally the document’s recommendations:

• Rollback the last decade’s growth of government, government waste and military spending
• Freeze the growth of government pay.
• Eliminate earmarks from the budget process

From an investment point of view, sound fiscal policy is overdue and absolutely required to provide the back drop for future investment success. The rock solid credit worthiness of the US is a huge advantage for our economy in terms of the cost of borrowing, buying imported goods like oil and attracting investment. If our national deficits are not addressed, we can expect a downgrade in our credit status sometime in the future that will be detrimental to our children’s financial security, our portfolios and the economy. After all, who emigrates to Greece to find financial opportunities?



* The debt referenced in this discussion is the debt of the US Federal government.

Don't Believe Farmers' Grousing

It was too dry. It was too hot. The economy was bad. A storm took down a lot of corn.

Don't believe any of that this year. The American farmer will produce record corn and soybean crops amidst more exports and higher prices. In addition, Russia's wheat crop has wilted this summer. Russia is the world's third largest wheat exporter, but it has stopped wheat exports until next year's harvest. US wheat farmers are benefiting as a good wheat crop is being met with greatly increased export sales and higher prices.

Usually for farmers, a bad economy and record crops add up to lower prices. In 2010 however, growing world demand for grains and bad crops in places like Russia have more than taken up the extra supply and is actually pushing the price of grains higher. It is good business for US agriculture to have more to sell and also to get a higher price for it.

Business is so good actually, that farm income is projected to be up at least 24% this year. How would you like to get a 24% raise in the midst of this deep recession?

Don't begrudge them, however. The financial fortunes of farmers tend to ebb and flow in big cycles. For instance, you were a lot better off a real estate or stock investor in the 1990's than a farmer. Looks like the farmers will be spending a bit more money this year. Hmmm what do farmers like to buy and from whom and who do they bank with?