Big 3 Automakers Double-Dipping?

When is enough enough? Each of the Big 3 automakers has received immense local and state tax breaks to locate their manufacturing and research facilities in this state and the next. Politicians have clamored around them for years because they see manufacturing as job creation. To some extent, this is true. The state and local governments make tax concessions on the front-end to the automakers in exchange for building a manufacturing plant or research facility. The local and state taxpayers must make up the difference, because heaven forbid that tax concessions be covered by a reduced government budget. The new facilities commence operation and the local politicians pat themselves on the back and get re-elected a couple of times. Let's not overlook the fact that the Big 3 auto industry has not been expanding in many years, so those "new jobs" were actually replacement jobs. For every "new job", there was a worker displaced somewhere else - but then, that is some other politician’s problem . . . .

Then reality sets in. The auto industry is highly competitive with a broad range of interchangeable vehicles to choose from, i.e. - they all get the passengers from point A to point B, so differentiation is difficult. As time goes on for any specific product line, costs must drop because new competition will be driving down the actual net sales price. Ah - now the reality part. The manufacturing facilities are loaded up with union laborers who, by contract, are getting regular salary increases. The automakers used the government tax incentives to get by in the early going of their operations, but as time passes, the contract labor rates eat that up and more. They are then left with a top-heavy salary burden that cannot be resolved, even with all the off-shore parts manufacturing they can farm out.

So . . . . as we contemplate giving the Big 3 another round (the double-dip) of taxpayer money - the $25 billion discussion of the day - shouldn't we step back a bit and ask why? Saving jobs is a typical response, but for how long? Management fundamentals seem to be missing in action. I particularly enjoyed these reports from today’s hearings in Washington, and applaud these Congressmen:

-- Rep. Brad Sherman, D-Calif., asked the three auto chiefs seated at the witness table before him to raise their hands if they had come to Washington on commercial airliners. No hands went up. Then he asked if any planned to sell their corporate jets. Again, no hands went up.
-- Sherman and Rep. Gary Ackerman, D-N.Y., told the auto executives they were having a hard time justifying to their constituents bailing out companies whose chiefs fly around in expensive private jets.
-- Ackerman said there was "a delicious irony in seeing private jets flying into Washington D.C. and people coming off them with tin cups in their hands."

Given this reaction from the other wing of Congress within his own party, Senate Majority Leader Harry Reid promptly asked President Bush to standby in case he needed help in getting a Big 3 bailout pushed through. Excuse me? Good leaders listen – get a clue, Harry!

Oh, and by the way, the double-dip is actually a triple-dip. Remember the manufacturing plants that were built in exchange for local and state tax concessions? Well, at the Federal tax level, the manufacturers are rewarded for modernizing their manufacturing facilities - yet another tax benefit for big business. Why manage? Uncle Sam will always come to the rescue! What class did all these folks take in grad school, anyway?

Congratulations, America! Don't Let Up!!

A couple of days ago I noted the gasoline price at my most frequented filling station at $1.89 per gallon. I was amused and reflected back to late spring when many candidates in the Presidential primaries from both parties were supporting the idea of suspending the Federal gas tax for the summer months. Only one candidate stood up for addressing the problem versus buying primary votes at roughly $60 apiece (the average saving per household with the gas tax scheme for the entire summer). Only one candidate spoke openly that the problem was the demand for gasoline and if demand was reduced, that the price would follow - his opponents scoffed at him as being an elitist and not being in touch with the average American. Gosh - imagine that - someone trying to understand and solve the problem instead of giving a few token dollars for votes. At the time, there were 17 candidates still duking it out in the Democrat & Republican camps. Statistically speaking, 94% of them were clueless about the problem and thought $60 per household would make Americans forget about it. Amazingly enough, they are almost all still holding their elected offices today in spite of this shallow thinking. Wake up, voters - you really need to pay attention!

At our house, we sold our gas-guzzling SUV and picked up a small (American made) economy car which immediately started saving us $75/month in gasoline expenditures. Many other Americans did the same thing. We were delighted to participate in this exercise, proving that free markets can and do correct themselves - without government intervention.

So now we are seeing sub-$2/gallon gasoline after just 5 months of reducing our collective demand - down from $4/gallon. My message today is very simple. GASOLINE IS NOT ON SALE, folks. Do not go out and start guzzling gasoline because it feels like it is "on sale". A 50% price drop at the pumps was due to reduced consumption. Increasing consumption will have the opposite effect. It will require immense discipline on the part of all American consumers to keep the price down and frankly, to cause it to drop even further. Gasoline cost roughly $0.24 per gallon when I first learned to drive. Wouldn't you like to see that on the sign outside your local filling station?

And just to expand this thinking a bit, as we have reduced our consumption of gasoline, would you be open to the notion that in so doing, we have also reduced our harmful emissions into the atmosphere and helped the environment? Wow - an amazingly simple thing like driving less and converting to more fuel-efficient automobiles providing more net income to your household AND helping improve the environment at the same time. The next time someone comes to my doorstep and wants my signature on a petition and a donation to fund a political action committee / lobbyist to buy influence in Washington regarding an environmental cause to cleanse my conscience, I can now engage in a meaningful conversation about how I have already made a difference and suggest that they are the new endangered species. We may be on to something here, America. Keep up the good work!

Get Ready - Get Set - Rebound!

It has been awhile since I provided a market update for Twin Cities real estate. I have been observing the data with renewed interest of late. We have now identified a trend in two areas:

1) The number of new listings coming on the market for the past 5 consecutive weeks is lower than it was for the same period a year ago; and
2) The number of new sales (pendings) has been higher for the past 6 conscutive weeks than for the same period a year ago.

What does this mean? My interpretation is that we are in the early stages (not widely recognized) of a market rebound. Several states in the nation have already noted the same trends and have declared a turnaround. Minnesota is about to join those ranks. Homebuyers should get ready . . . get set . . . and GO! Savvy investors already have - now it is time for the owner-occupied sales to kick in. Don't be late for the party!

Nonsensical Fed Gas Tax Holiday - Aaaarrrggghhh!

The audacity of politicians with shallow election year proposals - preying upon the emotions of the masses - shame on them all!

Okay I have done the math - our household will likely pay $62.50 worth of federal gas taxes between Memorial Day and Labor Day. Even if that is the same for every driving household in America, the problem of gasoline prices would not be resolved. In fact it would be worsened. Consumption would increase due to a false sense of "hey - gas is on sale - let's drive somewhere for the heck of it because it is cheap!" Consumption goes up - demand goes up - supply goes down - price goes up. This is not rocket science - it is the immutable law of market supply & demand. What new problems would be introduced as a result of the gas tax holiday? That is simple - the account that funds repair & construction of Federal highways and bridges (the Interstate Highway System) would come up short and work would need to be rolled back or another source of tax funding would need to be created to make up the shortfall - cool - a new tax. There is no free lunch, America!

Gotta Reduce Consumption, America!

The only (emphasize ONLY) way to reduce the price of gasoline at the pump is to reduce consumption over the long haul. If a politician wanted to solve the problem, the focus would be on reducing consumption, not finding more supply (by the way - if we decided to go after the oil in Alaska today, it is estimated we would see the oil in about 2014) or playing with taxes (fun topic - could we please pay more?). So . . . what might a clever government do? What does the government really have control of? Hmmmm . . . remember the mention of the Federal highway system - yes, the Interstate Highways in America. Those are the highways that we use everyday to get from one place to another at a high rate of speed. Their purpose, however, is to allow the military to move resources from point A to point B during a national emergency. They are controlled by the Federal Government. Here is an idea - instead of a 3 month gas tax holiday, how about a monthly one-day closing of the Federal Highways? Huh? How can this help?

Ah - let us count the ways! Americans would need to alter their lifestyle one day a month. They might stay at home or in their own neighborhoods and discover alternate activities such as gardening, playing games with family and friends, walking with neighbors, visiting local parks and playgrounds, discovering the natural beauty of their immediate surroundings vs. that found 40-50 miles away enabled by the Interstates and a 35 minute ride at 65mph. What would the residual impact of this monthly closing day? Oh my, well, let's see . . . . um . . . that list might include increased family & community interaction, reduced pollutants released into the atmosphere, improved health of nature and humans, reduced stress, increased support of local "mom & pop" businesses . . . the list is seemingly endless. The impact upon gas prices at the pump? Well, the inverse of the gas tax holiday strategy, of course - consumption goes down - demand goes down - supply goes up - prices go down. Once again, the immutable law of supply & demand.

Okay - let's review this idea of a Federal Highway holiday (NOT a gas tax holiday):

• Lower gas consumption, lower demand = lower prices
• Lower pollutant emissions = improved environment
• Increased family / friends / neighborhood time = greater communication, reduced stress
• Improved climate for local, small businesses = improved economy

Okay - the reality is that all Americans can decide to just stay off the Interstates one day (or more, for that matter) each month and accomplish the same thing without government intervention. However, as we all know, we just aren't that concerned or committed to the ONLY solution. Thus, we need our elected officials to watch out for us - sad, but true. And all this can be accomplished via Executive Order - yep - the President could order the Federal Highway Holiday Program without our dysfunctional Congress - pretty cool, huh?

I know, I know - you think it just wouldn't work because of this, that or the other thing. Really? That is what exceptions are for - yep, public transportation and emergency response vehicles could continue using the Interstates on the Holidays. Maybe (just maybe - gotta think about this one) even food hauling 18-wheelers. Pretty cool, huh? Now you are seeing the possibilities, aren't you?

In the overall scheme of things, it is a bi-partisan get well plan for America. It would reduce dependence upon oil, create demand for alternative products such as short-range electric vehicles (new jobs), improve the environment, boost small businesses (the majority of America) and re-introduce families to themselves - anybody really have a problem with any of this? Talk it up, folks. Thanks for listening!

Sense & Nonsense aka Focus & Distraction

I have often described this political season as entertaining, much more so than any in my memory (although Ross Perot was nothing short of entertaining, even though he was as serious as any candidate could ever get). Just to get the record straight, however, I do not want entertainers / celebrities to influence or determine the outcome of an election. I do not care what a bunch of comedians playing to a live audience in NYC think any more than a talk show host in Chicago. Nor do I care about union endorsements or those of other politicians, veterans groups or super delegates, for that matter. I also discount the importance of race, gender and age. I believe the ultimate decision lies within each eligible voter and the majority opinion of those that vote should (and will) determine the ultimate winner, without any person, entity or special interest group telling [ ordering ] voters how to vote. To think otherwise would be to rely upon the National Enquirer or People Magazine for our news. That thought scares me - it scares me a lot. I hope it scares you, too.

Let's get real folks - we have a few serious problems to take care of in this country, among them the exportation of jobs, a rocky economy, national security and International relations. Let us all listen to our candidates and do the right thing - vote our own hearts and conscience - not that of others. Really - this is important. As always, thank you for reading.

Twin Cities Market, Revisited

Last March, almost a year ago now, I commented on the Twin Cities real estate market. Among other things, I made the observation that the local real estate market was weak, in part, due to two factors: 1) the stock market was strong and 2) a large percentage of local buyers were investors. Let me expand on that.

With a high percentage of buyers being investors (reportedly as many as 1 in 4) in the Twin Cities and with the strength of the stock market, a large percentage of available home purchasing power was invested in the stock market. I suggested at that time that we would see a recovery in the real estate sector when we saw a decline in the stock market. Why? Simply because savvy investors are constantly rotating their money into the market where they can realize the highest rate of return - the old buy low - sell high strategy.

Time to Buy? You Bet!

Having said that, what are we facing today? Well, the stock market has been high for some time and showing signs of faltering. The real estate market is low, real estate loan interest rates are incredibly low and inventories of available properties are high. This is a perfect storm for real estate investment, whether for personal or pure investment purposes. Is anyone paying attention? Yes, indeed. Showing rates of existing properties are on the rise. Savvy investors are returning from the faltering stock market and buying multiple properties in blocks.

What Next?

Well, savvy investors almost always win. Their re-entry into the real estate market will reduce the supply of properties, causing the inevitable rise in prices - good for sellers, bad for foot-dragging buyers. Is there a pent-up demand for housing? Probably. It is said that there is one home purchased for every two jobs that are created. There have been 5.4 million jobs created over the past few years, so we could anticipate a tidal wave of buying when everyone takes notice. My advice is that if you are a buyer in 2008, do not wait for rising prices to jump in - the time is now.