Boy, the economy is looking ugly. But there are always some bright spots. Would you expect to find those bright spots in automobiles? How about auto-related commodities? I have news and ideas on both.
First the bad news:
• Consumers may be pulling back. In June, personal income increased at a seasonally adjusted 0.1%, the smallest gain since last November, according to the Commerce Department. Since our economy is 70% driven by consumer spending, that worries investors and traders.
• Manufacturing growth hit its lowest level in two years. While the Institute of Supply Management’s index is at 50.9, and any level above 50 indicates growth, it’s the lowest reading since July 2009.
• China’s manufacturing slowdown continued in July. The purchasing managers index fell to 50.7 from 50.9 the previous month, according to the China Federation of Logistics and Purchasing. It seems global demand for Chinese exports is weakening.
This is on top of weakening economic growth. U.S. gross domestic product grew just 1.3% from the end of March until the end of June, according to the latest figures. So this looks like economic weakness all around.
But now for the bright spot. The U.S. car market is shifting into higher gear. After bottoming with annualized sales of 9.5 million units in 2009, sales this year could reach 13 million units, and may rise as high as 15 million units by 2015.
Result: American automakers are reporting good news. For example:
- Sales at General Motors (GM) jumped 7.6% in July from a year earlier. That’s an increase of 215,000 vehicles. The automaker also maintained its full-year industry forecast of 13 million to 13.5 million units sold domestically.
- Meanwhile, Ford Motor (F) reported July sales of 180,800 vehicles, up 8.9%. And last year’s sales were up 3.3% from the year before that. Ford reported it sold 180,865 vehicles in July, compared with 166,092 a year earlier but 6.8% lower than in June.
- Chrysler Group posted a 20% increase to 112,026 vehicles. It was the automaker’s best July since 2007. This, despite the fact that Reid Bigland, chief executive of Chrysler’s Dodge brand, told the Los Angeles Times that the sales environment was “tougher than a cheap stake.”
Now compare that with Toyota. The Japanese automaker said its July sales fell 22.7% to 130,802 vehicles. Subaru’s sales fell 9.4% to 21,730 vehicles. And American Honda Motor Co. said its July sales fell 28.4% to 80,052 vehicles.
Japan’s Pain Is America’s Gain
It’s understandable that Toyota and Honda are having a tough time. Their sales are suffering due to lack of product; both are recovering from the March 11 earthquake that devastated factories in Japan.
But Japan’s pain probably translates to gain for U.S. automakers. That’s the first reason why U.S. car makers’ sales are red-hot.
But that’s not all. There are other reasons why U.S. car makers are probably doing so well.
Secondly, look at the cars the American automakers are selling. Many of them share a common theme — great gas mileage.
GM sold 24,648 of its Cruzes in July, and that could be enough to make it America’s top-selling car for the second month in a row. The Cruze gets 26 miles a gallon in the city, 36 on the highway.
Another hot seller was the Chevrolet Equinox crossover at 17,094 sold in July, up 73%. It gets 22 mpg in the city, 32 on the highway.
Meanwhile, sales of Ford’s gas-sipping Fiesta, which boasts up to 40 miles a gallon on the highway, 29 mpg in the city, increased by 58%.
The Ford Escape, which gets 23 mpg/28 mpg in its standard version and 34 mpg/31 mpg in its hybrid version, saw its sales jump 66%.
Third, old cars need replacing. Many people haven’t bought new cars since the recession started in late 2007. People need to replace worn-out cars, even in a tough economy.
Heck, that’s probably one reason why used car sales soared 13.5% in July — people who can’t buy new cars are buying newer used cars.
Car Prices Are Rising
And people are willing to pay up for cars, even in this economy. AutoNation (AN), America’s largest dealership chain, said last week that its average selling price for a new car in the second quarter rose $1,747, or 5.5%, from the year before to $33,703.
Prices for used cars jumped by nearly 6%, or about $1,000 per vehicle.
I’d say this 1-2-3 of Japanese shortages, car replacement cycle and fuel-efficient models may fuel sales for U.S. automakers for months to come.
Not all is good news. For example, Ford beat expectations in the most recent quarter, but its profit slid 7.7% as it spent more to upgrade its vehicle portfolio and paid higher prices for commodities.
Autonation, GM, and other car-focused stocks are also taking it on the chin.
If you think the downturn is temporary and we aren’t going into another recession, then these stocks are coming down to real buying opportunities.
The Metal That Rides an Auto Rally
Now let me show you my auto-related idea that is already doing well, and should do better.
This is a chart of ETFS Physical Palladium Shares (PALL) — a fund that holds physical palladium.
It’s one of three U.S. ETFs that hold the physical metal, along with ETFS White Metals Basket Trust (WITE) and ETFS Physical Precious Metals Basket Trust (GLTR). WITE also holds silver and platinum — and is heavily balanced toward silver — while GLTR adds gold to the mix.
But PALL is the big kahuna. ETFS Securities, which has physical palladium funds in both the United States and Great Britain, holds more than 1.6 million ounces in both funds.
Take a look at this chart showing known palladium holdings over the past five years:
Look at this trend over the past five years. And recently, ETFS, COMEX and other investors that hold physical palladium held more than 2 million ounces of the metal all together. Considering that only a little more than 6 million ounces is produced each year, that’s HUGE!
The China Factor
Still, investment demand for palladium is only a small part of total demand. Most palladium is used in auto catalysts. The rest is used in electronics.
No wonder, then, that in 2010, China’s palladium fabrication demand grew 10.5% to 1.3 million ounces, according to data from CPM Group.
Coincidentally, China became the world’s largest auto market, with 2010 sales of 18 million units, up 32.5% from the year before. CPM Group expects China’s auto-sector demand for platinum and palladium to rise another 17.5% this year.
This rising demand is coming even as supply is pinched.
Supply Isn’t Rising
As I said, annual global mine supply of palladium is just 6 million ounces. Russia supplies about 45% of the world’s supply of palladium, with a third of that coming from its strategic stockpile.
Now we hear rumor that the Russian stockpile — the third largest supplier of palladium after mine output in South Africa and Russia — may be scraping bottom. The truth is a Russian state secret. We won’t know until the Russians want us to know.
Meanwhile, the world depends on South Africa for 40% of its palladium (and 80% of its platinum — another automotive catalyst metal). South Africa is dealing with power outages and labor strikes.
And Norilsk Nickel, the world’s largest palladium producer, recently reported its palladium output rose by 9% from the previous quarter but was down 1% year over year.
Put it all together — car sales in the United States trending higher, increased demand from China, and downright lack of new supply, and I’d say palladium could go much higher.
Many Ways to Play This
So there you have it — a number of ways you could invest in surging auto sales.
You could buy Ford or GM, or one of the other auto stocks I listed, if you think the economy is just wobbling rather than sliding into a recession.
Or you could invest in a palladium fund or even physical palladium. That metal should do well if China’s economy can keep chugging along, and the car-crazy Chinese keep buying new vehicles. And explosive investment demand could really help it take off.
All the best,
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