This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, January 18, 2010

Autos Help Drive Economy, Can’t Carry Whole Load

Our topic for this week is one of surprise, but particularly pleasant surprise. The auto sector, a regular in the headlines during this past financial crisis and ensuing recession, appears to have turned a corner and now seems poised for a recovery.

Recently released numbers for December auto sales reflect not only an increase over preceding months, but also an improvement over the previous December (2008).

Of course, after last year, there was little room for auto sales to fall any further. Sales for 2008 were so low that they didn’t even keep up with the scrap rate for cars, which was quickened by the government’s Cash for Clunkers program.

Now, thanks to cost-cutting measures taken by car companies since the crisis began, they’re now sitting on large amounts of cash, which they have been committing to new projects, including the opening of new plants and calling back workers.

What’s more, auto companies are now spending their well-guarded cash in much smarter ways. Auto companies are now slimming down their product lines to emphasize only popular models.

Incredibly, after all these months of languishing, to the point of requiring government aide, auto companies are already discussing repayment of bailout funds and even reissuing shares of stock to the public. General Motors has discussed such a reissue to occur later this year, while Chrysler is looking to the beginning of 2011.

Despite this pleasing bit of news, the fact remains that GM, Ford, and Chrysler are not going to save the US economy on their own. After all, the real workhorse of the American economy remains, even during these troubling economic times, small business.

At President Obama’s banking summit last month, JP Morgan CEO Jamie Dimon reportedly interrupted Obama to inform him that banks haven’t been lending because there has been little demand for loans by qualified individuals and small businesses (Gasparino, New York Post).

The reason for this lack of demand for loans among small businesses is due mostly to the lack of encouraging policies coming out of Washington. Between taxes and the rising costs of healthcare and energy (re: cap and trade), companies have been extremely hesitant to take on debt obligations.

This debt-aversion is not just common among small start-ups or, conversely, corporate giants. In fact, it is pervading the American, nay the global economy. The world over, the race to deleverage is quickly gaining momentum.

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