Morningstar Advisor - August/September 2012 - (Page 33)

Whiston: Yes. This was the worst-case scenario for the three Detroit guys because they were so pickup and SUV reliant. They made lousy small cars. Toyota Corolla, Honda Civic, and then Hyundai, came in and ate Detroit’s lunch in that segment. Whiston: In 2009 at 10.4 million units, worst per capita year since at least 1951, which is as far back as records go. Guziec: How many units are we running at now? Whiston: In 2012, 13.8 to 14.2 million, probably buy parts or paying a mechanic to keep it running, but at some point, it will cost more to fix that 15-year-old car than replace it. Richard Hilgert: There’s also an historic relationship of new driver’s licenses issued to new vehicle sales. There’s been growth in the number of driver’s licenses, but we are still at a very low level of new-car sales. Miles driven has increased a little bit this year, too. We were off a little bit in 2011 versus 2010, which was up significantly over 2009. So, there are all of these dynamics making this pent-up demand that is going to have to get filled sooner or later. In the summer of 2008, used Priuses were going for more than new Priuses, which is still amazing to think about. The hybrid technology of GM and Ford F was pretty primitive. It probably still is today relative to a Prius, but it’s much better in 2012 than it was in 2008. Same with small cars. In 2007–08, there was the Chevy Cobalt. Now, there’s the Chevy Cruze. It’s finally a car that can go head to head with the Corolla. Anyway, by 2007–08, Detroit was losing market share and needed to shrink, but they couldn’t because of their massive fixed-costs obligations. The all-in labor cost for these guys was $75 to $78 an hour. But unions didn’t trust management, and vice versa. Both ways, the hostility was pretty nasty then. Guziec: So, going through the cycle, the edge of bankruptcy brought the unions to the table enough to allow the companies to shrink to an appropriate size. Rising fuel costs allowed the companies to design small vehicles that people now demanded. Whiston: The transformation came in two parts. The distress got the unions to the bargaining table in fall 2007, after they struck at GM, to at least get retiree health care off the books through the establishment of the VEBA [Voluntary Employee Beneficiary Association] funds. closer to 14.2 million, but mid-14 million is not out of the question. Guziec: We’re coming out of the slump. Whiston: Yes. Morningstar has long argued that we’re going to see a pretty healthy recovery. It got delayed last year by the disasters in Japan and Thailand. This year, we don’t have those impediments to supply coming back online. Honda HMC is just about caught up. Guziec: What is normal U.S. demand? Whiston: I’ve done analysis that suggests to me that normal demand is between 16.1 to 17.3 million units per year. We still have a ways to go, and that’s the exciting thing about seeing names like GM and Ford trading at absurd valuation multiples. GM is under 5 times our 2013 earnings. GM is barely trading above EBITDA right now. Ford is under 6 times earnings. These are very attractive points. It’s just a matter of how patient do you want to be because the stocks aren’t done selling off with what’s going on in Europe and concerns about the U.S. economy. Guziec: Theres’s a lot of pent-up demand? Whiston: Yes, for a couple of reasons. First, But we’ve got a huge pushback against it in the economy. There’s no homeowner’s equity out in the marketplace, and about 20% to 30% of new car loans were coming from that market in 2004–06. We’ve also got the wealth effect, where the retirement portfolios of baby boomers were hit hard, so individuals who are close to retirement are spending less. Baby boomers have become conspicuous savers instead of conspicuous spenders. Young adults have been unemployed for 24 months or longer in many cases, and college grads can’t find a job. These people are also saving more and might have a behavioral change akin to what occurred after the Great Depression, where younger people became lifelong savers instead of spenders. Now, at some point the rubber band is going to stretch and snap back. When unemployment and consumer confidence improve, we’re going to start to see better new-car sales. Guziec: So, there’s pent-up demand in the United States. What about in the rest of the world? Hilgert: Brazil and South America had been But it still took bankruptcy at GM and Chrysler to drastically transform these companies. Ford was able to borrow a ton of money in late 2006, and [CEO Alan] Mulally started turning Ford into a Toyota TM. They got on the commonplatform bandwagon a lot faster than GM did. Guziec: When did sales bottom out? used-vehicle prices are at record highs. Eventually, a consumer will come into a showroom intending to buy a used 4-year-old car, look at the price, and walk out with a new or leased car for just a few hundred dollars a month. Plus, for some vehicles, it’ll get 40 miles per gallon without being a hybrid. Also, the age of the average car is at a record high: 10.8 years. You can keep going to AutoZone to setting records year over year, up until this year. Conditions in Brazil look to be flat year over year. China has also been faltering. But again, on a year-over-year basis, we’re looking at a decline from record levels. Russia is a growth MorningstarAdvisor.com 33 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2012

Morningstar Advisor - August/September 2012
Contents
Contributors
Letter From the Editor
How Much of the Behavior Gap Is Your Fault?
What’s Your View of the Muni-Bond Market?
A Balanced Life
How to Get to Know EMMA
A Strong, Robust Fund Business
Dividend Investing Abroad
Four Picks for the Present
Investment Briefs
Fund Expenses Through the Decades
Autos on Comeback Track
Lessons From the Muni-Bond Rebound
Municipal-Bond Landscape Shifts
Municipal Bonds 101
A Tale of Two Cities
Unraveling the Mysteries of Money
Small Companies Mean the World to Him
The Chinese Art Market and the Origin of Bubbles
The Myth of the Dumb Investor
Stocks That Can Stand the Heat
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The War on Savers

Morningstar Advisor - August/September 2012