TAKING STOCK: General Motors and Ford

Dear Mr. Berko:

I'm a married 43-year-old systems engineer earning $67,000 a year, and my spouse works for one of the large automobile dealers in Portland, Oregon.

His dealership and other dealerships have sold more cars this year than ever.

He has $8,000 cash in his Roth IRA and he was recently advised by an automobile big shot to buy Ford stock, General Motors stock or both.

He prefers Ford because seeing as it's $14 a share, he could buy 750 shares and make $750 if the share price were to increase by $1.

He could buy only 225 shares of GM at $35, so he would make only $225 if the share price were to increase by $1.

Should he buy both?

Please tell us what you think.

JD, Portland, Ore.

Dear JD:

If Ford (F-$14) shares were to rise by $1 in value, that would be a 7.14 percent gain. If General Motors (GM-$35) rose by $1, that’d be a 4 percent gain.

But it’s likely that if F shares gained $1, or 7.14 percent, then GM would also gain 7.14 percent, increasing the value of each share by $2.49.

I don't know what a systems engineer is, but I hope this calculation makes more sense to you than it does to your husband.

Frankly, I wouldn't buy either; but if you do, you may have a solid loss before the year ends.

Here's my thinking.

According to an auto analyst at one of the big Wall Street banks, over $200 billion was lent for automobiles between January 2015 and December 2015 to borrowers with credit scores under 660.

That score is the bottom cutoff for what is considered to be “fair” credit. However, $130 billion was lent to borrowers with credit scores below 620, and that's considered subprime — or “very risky,” in
everyday English.

These subprime loans are at higher levels today than they were in 2006 and 2007. And this uncomfortably raises the question about the health of the nation's auto lending portfolios.

It brings up nervous comparisons to the rise in subprime mortgages that fueled the Great Recession, including the banking crisis and the implosion of the real estate market.

And it’s no stretch of one's imagination to realize that the borrowed amount of most auto loans exceeds the value of the collateral (the car) by a significant amount.

Certainly, the moment you drive that vehicle off the lot, your new car crashes in price, so the resale value is lower by 20 to 30 percent.

And considering the hundreds of thousands of vehicles lined up like toy soldiers on dealership lots, never to be sold, it’s a great miracle that the immediate fall in value isn’t significantly more.

It seems that the production of new cars greatly exceeds demand.

When you drive past the ubiquitous General Motors, Chrysler/Jeep and Ford dealerships in Portland, note that their lots seem to overflow with shiny new cars, snugly packed, side by side, like cheap stogies in a cigar box.

The crammed lots are not limited to American models; Mercedes-Benz, BMW, Toyota, Honda, Volkswagen and Hyundai have them, too.

In car lot after car lot, in Cleveland, Cincinnati, Columbus, Kankakee, Kokomo and Kalamazoo, spanking-new vehicles are begging for kind, loving Americans who can afford to take them off the lot, drive them to a new home, fuel them, care for them, take them for a ride and show them to friends.

And one can’t help but wonder: What happens to those old 2015 models after the new 2016 models are presented in the showrooms?

I don’t have that answer.

It was suggested to me that there are photos on Google of massive car parks in Europe where these cars are consigned to die.

But according to Snopes.com, that's pure tommyrot.

Those photos depict stockpiles from 2009, when there was a dramatic decline in sales because of the global financial crisis.

I’m not enthusiastic about auto stocks. However, Credit Suisse and Morgan Stanley are bullish on GM, while Goldman Sachs and Stifel really like F. Each expects earnings and dividends to accelerate this year.
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.