Thursday, September 24, 2009

This is What Declining World Trade Looks Like (Picture)

September 24, 2009

This is what declining world trade looks like…

This picture was taken near the Port of Singapore – the busiest port in the world in terms of total shipping tonnage. There are no wakes. These ships are parked.

And the picture doesn't do it justice. According to a report by the Daily Mail, this is the largest fleet of ships ever assembled in history. Locals say you can't even see the horizon. More ships than that of the British and American navies combined!

It is a visible reminder of just how bad things are in the worldwide economy. Two years ago these ships would have been steaming towards the United States loaded with consumer goods for Christmas. Today, they're idle. Not exactly a harbinger for a robust holiday sales season.

Casey Jones…

As the song goes "Casey Jones was a mighty man, now he's living in the Promised Land." I hope he's in the Promised Land, because this is no time to be a train engineer. According to the Association of American Railroads, a staggering 30% of railcars have been placed in storage (more than 200,000). That means that one third of the merchandise transported by rail is not moving.

And if it ain't moving, it ain't selling

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Two thirds of the economy is consumer driven. Without the consumer on board this recovery is DOA. Are consumers ready to pitch in and get this economy rolling again? Not likely. According to University of Michigan economist Richard Curtin, "consumer confidence fell to a greater extent in 2008 than in any other year during the past half-century."

To get things moving again consumers have to start buying. What do they need to buy?

Cribs and rides

Homes and autos. These two are the secret sauce that sparks the initial stages of an economic recovery. The news is not good on either front.

But what about the increase in home sales? And what about Cash for Clunkers?

Cash for Clunkers simply shifted future demand for cars to the present. These buyers won't be back to the car market for years. The $8,000 tax credit for first-time homebuyers did the same in the housing market.

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Automatic Data Processing knows something about the auto industry…

ADP sells payroll software and services to American auto dealers. Here is how they describe things in their last quarterly report: "A weak automotive environment with ongoing dealership consolidations and closings, lower transaction revenues, and dealerships cutting discretionary spending."

ADP goes on to say that it believes a healthier automotive industry will emerge from this crisis. The closing of hundreds of dealerships is hurting ADP right now. But it will save American car companies loads of money and make the industry more cost-efficient. GM has streamlined its offerings. And Ford has some nice small cars in the pipeline.

But the one thing the U.S. auto industry can't do is regenerate demand. And speaking of demand for American cars…

What's worse than losing billions?

Auto companies are exhibit number one that losing money isn't the worst thing that can happen to a company. Losing your reputation can be much worse.

Does anybody outside of Detroit know that the "Big Three" has more or less bridged the "quality gap" between them and foreign auto makers? Cadillac just placed third in the 2009 "Initial Quality Study" by J.D. Power and Associates. Ford and Chevrolet finished ahead of Infiniti, Acura, BMW, and Audi. Will Detroit ever get back its reputation?

So where's the good news for investors?

It doesn't always make for pleasant dinner conversation, but we're not going to sugar-coat things around here. The world economy is struggling. The only growth we're seeing is not real growth – it's the result of government stimulus. And that is merely stealing from the future. At least it is when the money has to be borrowed (the Chinese didn't have to borrow to pay for their $600 billion stimulus program).

But despite weakening fundamentals and a stock market rally that is looking more and more precarious, there are still companies selling at compelling valuations that have a proven ability to weather slow economies.

According to our own dividend-investing expert, Andrew Gordon, the best valuations are with high quality dividend payers.

Today a ten-year treasury bond yields 3.46%. A money-market account provides a 1.14% interest on average. Currently Andrew's INCOME portfolio provides an average yield of 5.3%. And the portfolio is full of companies which love to raise their dividends.

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Your tax dollars at work…

Ed Steer, editor of Gold and Silver Daily, ran some numbers on Cash for Clunkers that ought to brighten your day:

  • A clunker that travels 12,000 miles a year at 15 mpg uses 800 gallons of gas
  • A vehicle that travels 12,000 miles a year at 25 mpg uses 480 gallons a year

That means the average Cash for Clunkers transaction will reduce gasoline consumption by 320 gallons per year. The government claims 700,000 vehicles were involved in the program. Based on the example above, that comes out to 224 million gallons of fuel saved per year.

That would equal about 5 million barrels of oil – or about 5 hours worth of U.S. oil consumption. Now here's the kicker. At $70 a barrel, that would equate to a savings of $350 million dollars.

The U.S. spent $3 billion on the program. Considering the assumptions above, that equates to a payback period of almost nine years. We destroyed 700,000 operable vehicles for that?

Good Investing,

Bob Irish
Investment Director
Investor's Daily Edge

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Bob Irish - Investment Director
Andy Gordon - Editorial Contributor
Jon Herring - Editorial Director
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Consulting Editor

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