Auto stocks with a looming recession

Dear Mr. Berko: I own 300 shares of General Motors and 600 shares of Ford, which I bought in December 2012, and I still have a profit. Back in May of this year, you wrote to sell General Motors and Ford short because you said auto sales would slow down a lot this year or next year. You should be careful what you say about those stocks. If you give wrong information, it can hurt people who read the things you say. My stockbroker at Wells Fargo says you are a jerk. (He used a better word.) His company recommends Ford and General Motors, and so do Standard & Poor’s and Morgan Stanley. So what do you know about these stocks that big industry experts don’t know? So far, GM and Ford are higher than they were when you told us to short those stocks.
— FN, Joliet, Ill.

Dear FN: Analysts at Wells Fargo, S&P and Morgan Stanley may know more about General Motors and Ford than I do, but their knowing more doesn’t mean they’re right. I don’t keep copies of old columns, but I’m as certain as sunshine that I didn’t advise readers to short General Motors (GM-$32.15) or Ford (F-$12.12). However, I suggest you sell both positions now because each may be lower a year from now.

I told readers that the consumer was up to his clavicle in debt, earning less than he did before the Great Recession, and that financing a new car would be the metaphorical straw that breaks his back. I also told readers that record numbers of new cars were parked on dealer lots, packed more tightly than pickles in a jam jar. I told readers that dealers were offering eight-year financing (96 monthly payments) and that 45 to 50 percent of new car purchases were being made to subprime borrowers. And that the U.S. has the lowest labor force participation rate in 60 years should be enough to worry the bejabbers out of GM and Ford, which have feasted on blockbuster sales during the past few years. But the kicker that may bring all this conjecture to reality is that dealers are now offering incentives, encouraging customers to buy their cars. Incentives always suggest that trouble may be brewing in River City, and you should have another talk with your Wells Fargo lad. I’d also ask the Wells Fargo lad whether his firm ever issued a sell opinion on GM before it declared bankruptcy. For obvious reasons, most investment brokerages are not permitted by their boards of directors to issue sell opinions. It’s bad for their investment banking business. But my dad would sometimes remind me that “it’s better to be right too soon than right too late.” Sadly, too many of us are right too late too often.

I also based my opinion on the possibility of a recession next year. Jim Rogers, the brilliant manager of the successful Quantum Group of Funds, and the legendary leftist George Soros are 100 percent certain the U.S. is headed into a recession. In fact, Soros has recently taken some sizable positions that will be hugely profitable if we have a recession. And active market movers such as Carl Icahn and Stanley Druckenmiller also see economic turmoil in 2017. Meanwhile, Bessemer Trust, UBS and J.P. Morgan believe there’s a 40 percent chance of a recession in 2017. Even Tony James, chief operating officer of Blackstone, the world’s largest money manager, foresees a U.S. recession in 2017. I’m also concerned about the health of the Federal Reserve’s balance sheet, which has grown from $775 billion to $4.5 trillion in the wake of its silly effort to lower interest rates to zero and print the economy back to health and wealth. Our biggest concern should be: If we have a recession in 2017, what tools will remain for the Fed to use to repair the economy?

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@ yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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