Cars and USA Today

by Wendell Cayton

According to an article in USA Today, I qualify as a “cheapskate.” No, not because I make my own soap, or buy the cheapest beer, but because I drive a car with over 250,000 miles on it. “Not such a bad thing,” says Thomas Stanley, Ph.D., author of The Millionaire Next Door.

Dr. Stanley, who makes his living studying the habits of millionaires, tells us that those interested in achieving real wealth view financial independence as more desirable than displaying high social status. His study subjects see cars as functional tools of transportation, not status symbols. They are more likely to own older, American-made cars rather than newer, more glamorous foreign models.

I can attest to his findings from my experiences in dealing with the financial lives of many people. Show me a person who constantly trades for a new car, or leases a more expensive car than they could buy, and I will show you someone who is having trouble accumulating wealth!
I wasn’t always so insightful. I remember coming home from an all-expense paid, 13-month, camping trip in Southeast Asia with a year’s worth of combat pay in my pocket. Bought the first Alfa Romeo I laid eyes on. Learned a couple of years later in the oil fields of Western Colorado that “metric” and Italian precision hadn’t made it into this land of 24-inch crescent wrenches and breaker bars!

After “investing” in a number of other foreign sports cars, I began to understand what Dr. Stanley was talking about as he described the inverse relationship between wealth accumulation and frequent new cars. He said we are essentially a consumption-oriented society. If we choose, we can become wealthy by adopting a defensive strategy of inoculating ourselves from contracting the high-consumption lifestyle that many of our non-wealthy, but high income-earning neighbors have adopted. By so doing, we should be able to save significant amounts of capital that can be put to better use as investments in real wealth producing assets, rather than the superficial.

Stanley’s PAWS (Prodigious Accumulators of Wealth) are more likely to:

• Buy used cars, especially large American makes. They buy them by the pound. Why spend $15 per pound for a BMW 740 sedan when you can buy a Ford Explorer for $5.98 a pound?
• Spend 25% less than those who inherit wealth on their most expensive car purchase.
• Be more interested in objective measures of wealth than in the car they drive.
• Favor models such as used Jeep Cherokees, Cadillac De Villes, Ford F-150 pickups and Explorers, Lincoln Town Cars, and Chevrolet Suburbans.

I have found other advantages to owning a 250,000-mile car. I haven’t made car payments in years. I don’t waste a lot of time in front of magazine racks reading up on the latest models. My car is easy to find in an airport parking lot. It’s the one that doesn’t look like all the newer cars . . .no fancy round headlights with little wipers. And it continues to transport my daughter, her friends, and a dog without causing me to stress out over their spilled drinks or muddy paws.

Finally, my wife apprised me that granite counter tops are more important in our life than cars. So what do I need a new car for anyway?

This Bull Has Legs

by Wendell Cayton

It is a call I will never forget… a stockbroker friend of mine in Denver called me in Oregon where I was fishing to tell me the markets were beginning to move. It was around the middle of August 1982. On August 12, 1982 to be exact, the greatest Bull Market in history began its run.

I was reminded of how far we have come when I visited the office of a patent attorney friend. As we talked, one of his firm’s IT technicians fixed a minor problem on his laptop computer. We laughed about the changes since we have known each other. When I met him in early 1985 in his small office in San Francisco, there were fewer lawyers in the office than he has IT technicians working for him today.

Today, his entire 28,000 sq. ft office is layered with networks of computers. PDAs, scanners, and video conferencing are the rule. Yet only 15 years ago, the IBM Selectric typewriter was the height of productivity. When his office first started with word processing, only a select few were authorized to touch the Wang Word Processor. When the firm finally allowed personal computers, the staff was allowed to use any model they wanted… as long as it was an IBM. Portable cell phones created huge suit case affairs with limited range and usefulness. Only 15 years ago!

I glanced around his office and admired his collection of antique patent artifacts.
A model of the very first Mercedes Benz automobile, manufactured in the 1880’s, caught my eye. Next to it was a small rectangular device of many computer chips and complex circuitry. Extruding from the front of the device was a chip and circuitry protrusion shaped like a small weather vane. He asked me if I had any idea what this was. I correctly guessed that it was the core element of the Mercedes ignition switch and the Mercedes optical key.

This key system works on an optical signal from the key to the circuitry. It not only starts the car but it enables the car to customize itself for its driver and who knows what else.

It is incredible to look at the model and the switch and realize how far we have come. Are we there yet, you might ask? Is this the end of the trip… the end of the Great Bull Market of 1982? I tend to think not.

The catalysts for the start of that market such as falling inflation, falling interest rates, a work force that was just beginning to become productive, a wave of innovation just taking off, all contributed to the growth of the Bull.

According to a report published by CSFB economist Tom Galvin, these elements combined to provide free cash flow and liquidity. Despite today’s anemic market, the mutual fund industry takes in more dollars each month than it did on an annual basis in 1982. The top two stocks in the S&P 500, GE and Microsoft, have a combined market capitalization of nearly $800B that is greater than the aggregate of the 500 companies back in August 1982.

But as any marathon runner can attest, there is a time to pause and rest. The Bull is resting, giving businesses a chance to slim down and become more productive, more competitive, for the next push. Businesses will need the technology that is coming along in order to remain competitive. Our higher workforce productivity resulting from this investment in technology will keep prices and inflation down and keep the fittest of companies growing.

This Bull has plenty of leg left. It’s just catching its breath!

Transportation and Our Economy

by Bruce Fenton

Recent attention given to the financial troubles of the airlines underscores the importance of transportation systems to our economy. Indeed, the so-called “Dow Theory” used by technical analysts to predict major market movement, uses the Dow Jones Transportation Index as an integral element for such predictions.

Charles Dow, father of the Wall Street Journal and developer of the Dow Jones Averages, theorized in his early financial reporting late in the 1880s that there was a relationship between industrial stocks and the railroads. (Keep in mind that there were only railroads at that time. It wasn’t until 1969 that the Dow Transportation average was broadened to include truckers and airlines.)

Dow was of the opinion that market movements could be categorized as three types. A primary trend takes place over the course of years. This trend can be either up (Bull) or down (Bear). Secondary trends may run counter to primary trends and are usually of much shorter duration, lasting several weeks or months. Finally, of lesser importance are the day-to-day fluctuations, which can move in either direction.

He theorized that in order for a reliable trend to signal the market’s direction, the railroad index and the industrial index should be moving in the same direction.

The relationship between the two indices was logical to Dow. In order for the industrials to get their products to market, they must use the railroads. He noted that when the industrials did well, so did the transportation companies. But, when one sector was doing much better than the other, a divergence was forming. If the other sector did not catch up, a major market reversal was coming.

During Dow’s time, railroads had a monopoly on industrial transportation. The invention of the automobile gradually diminished the strength of this monopoly.

Even though the automobile was invented in the 1880s, it was not until the 1920s that it became a factor in industrial transportation. The reason was simple—there were no roads.

In 1919, the U.S. Army put together a cavalcade of military motor vehicles and set out to drive from Washington, D.C. to San Francisco. This epic continental journey took them across and through 3,250 miles of dirt, mud, rocks and sand. They averaged just less than 5 mph along the way.

The struggles of the journey left an indelible impression on a young Army officer, Dwight Eisenhower, who, four decades later when he became president, launched the building of the interstate highway system.

Author Pete Davies chronicles this adventure in his book American Road. He notes how important the development of a reliable transportation system was to the building of commerce across the lands.

Then, with very few exceptions, there were no paved roads. Few states were willing to fund the development and paving of roads. Much of the journey in the western states took place on wagon trails left over from the western migrations of 50 years earlier.

Today, our land arguably boasts the finest transportation system in the world. But Dow’s original theorizing retains remarkable relevance.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

The Automobile in Our Economy

by Bruce Fenton

The automobile has long played a pivotal role in the history of our nation’s economy. A former chairman of General Motors once said, “What is good for GM is good for the country.” That may have been true in the Roaring ’20s, but is certainly less so today.

However, it was interesting to note that recently when GM, the world’s largest automaker and holder of a large portion of the market, announced their declining sales figures, they also reverted to a sales inducement strategy, dating back to the brief depression that occurred in 1920-21.

In the early part of the innovative 20th Century, the automobile was seen as the answer to the nation’s number one environmental problem of the day—too many horses and their resulting by-products. The automobile was cleaner, faster, and more chic among the urban population.

Not so in the farmlands, where more than one-third of the agricultural lands in 1900 were used to produce fodder for the nation’s millions of horses. When faced with a declining demand, the nation’s farmers turned their farmlands into food production for humans. The increasing food supplies caused agricultural prices to drop and farm incomes to decline. This condition continued well into the Great Depression that followed the Roaring ’20s.

The increased speed and mobility of the automobile brought the cities and better, more competitive shopping closer to the countryside. Soon, the economies of small rural towns were under duress, as families moved into cities to work in factories. Those that stayed bought more from larger, urban-centered stores.

In 1921 the number of banks in the country peaked at 29,788 and most of them were located in these smaller communities. These banks were heavily dependent on making local agricultural loans. As the 1920s progressed, these banks began to fail in increasing numbers, averaging over five hundred a year by the end of the decade, according to author John Gordon, in his book “The Great Game.” These failures went largely unnoticed as the great growth boom of the Roaring ’20s took off.

Financier William C. Durant—who parlayed his ownership of the Buick Company into what was soon to become the world’s dominant automobile manufacture—founded General Motors. Durant took the proceeds from his early successes and went on a buying spree, acquiring other automobile companies and parts suppliers. It wasn’t long before his buying excesses got him into financial trouble as the nation went into a recession in 1910.

Durant rescued his company with a marketing coup. When Henry Ford automated the manufacturing process, and chose to sell his cars at rock bottom prices (in any color so long as it was black), Durant rolled out his Chevrolet, slightly more expensive but with different colors. Within a decade, GM’s mass marketing tactics moved them past Ford as the number one automobile manufacturer.

In 1920, the nation’s economy went into a brief but sharp depression. GM’s stock plummeted. Again, it was marketing to the rescue with the unheard of idea of allowing buyers to purchase using installment credit. Car sales took off and the economy roared.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Strong Dollar or Weak Dollar

by Bruce Fenton

Policy makers seem to be endorsing a weakened dollar after years of strong dollar performance. Some cheered, some winced, some ran for cover . . . and the rest of us, well, we remain as confused as ever.

Our dollar grew in strength during the latter half of the ’90s as our strong economy and booming stock market attracted foreign investors. They bought U.S. stocks and investments, driving up the dollar. At the same time, our relative affluence allowed us to purchase foreign goods at ever cheaper prices, creating a huge trade deficit. And, like past bubbles, the strong dollar bubble has finally burst, although the result, depending upon your value judgment, will not be as onerous as the stock market bubble bursting.

Meanwhile, foreign goods that used to be cheap will now be more expensive. Take the case of the announcement by BMW that they are rolling out a new “5 Series” automobile. A weaker dollar means we will pay more for the latest German import. This has a negative effect for Germany, but a positive effect for our economy, as this will make the automobiles of domestic manufacturers more price-competitive.

The rising prices of imported goods also help ward off fears of a deflationary spiral.

Administration planners see another plus. They hope our trading partners will respond to the weaker dollar by lowering their own interest rates or loosening fiscal policy. This would help fuel a global economic revival and eventually stimulate global economic growth.

Those running for cover remember past history of a dollar decline when foreign investors yanked their money out of the U.S., causing stock and bond prices to plunge and interest rates to skyrocket. That does not seem to be the case now, as no wide sell-off has occurred. According to the Fed, foreign investors seem to be standing pat with their U.S. investments, and perhaps doing some hedging in the currency markets by selling dollars.

In the short run, however, a weak dollar could put a drag on our economy, making imports more expensive and acting like a tax on consumption. This causes real wages to fall and could impede profits for firms dependent on buying goods and services from abroad, including raw materials and manufactured items like shoes and clothing.

It will take time for our economy and that of the world to adjust to these changes. So is the dollar strong, weak, or neutral? It depends on how you look at things.

Bruce Fenton is a financial consultant, a writer, and the president and founder of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Goodbye to the Audi

by Wendell Cayton

It’s time to say goodbye to an old friend. It’s tough, considering all we have shared these past eleven years. But, as with other things in life, it’s time for a younger, newer model. After 301,000 miles together, the Audi that has been so much a part of my life will leave next week for a charitable cause.

You see, with those miles, no one would want to buy this car, although I can tell you that you could fill up the tank, check the oil, and make New York City in a long three days—no problem! Many times the Audi and I crossed Nevada and Utah on our way to visit the folks. Each time, we both marveled at how the Donner Party and those that followed could possibly cross the salt flats of Wendover and the Humboldt Sink, let alone the High Sierras.

I have to hand it to the Germans, they make fine carriages.

But modernity has doomed the Audi in our household. No one drives a stick shift any more; this means I’m the only one who can move it! The lack of a cup-holder is a particular safety hazard, as is only one airbag. And the list goes on . . . so bending to the wishes of those who make decisions around here, I am donating it to a charity in hopes that it might make a difference to someone else.

A number of times I have written in this column about the virtues of being frugal when it comes to car ownership. After all, cars are a depreciating asset and certainly not an investment. But you have to agree with me that those 301,000 miles—for the price of the car, 4 sets of tires, 2 alternators, a single fuel pump, and superb routine maintenance by the same local mechanic—was not a bad deal!

So, moving on, it’s time to explore the world of car purchasing and car financing. As you can probably guess, since I become attached to my cars, I tend to buy new and keep the car for a long, long time. Intuitively, leasing is not a very practical solution for me. However, in discussing this with several dealers, they are quick to point out the ways that leasing is a good deal for a business owner like me.

To the extent an automobile is used for business, lease payments are tax-deductible as a business expense, reduced by a small add-back number the IRS applies. However, if the car is financed, so is the interest for the auto loan, again to the extent the car is used for business, and you are allowed a limited amount of deductible depreciation. And when you’re done, you own the car!

When making the buy/finance decision, the factors are how long you intend to keep the vehicle, how many miles you intend to drive it, how you care for your car, the amount of business vs. personal use it will get, and your cost of money to borrow vs. capital cost rates charged by the leasing organization.

What I will miss most is how well the Audi was trained. Say “let’s go skiing,” and it knew the way to the mountains without a minute’s hesitation. “How about Los Angeles?”—I refuse to fly there because I’ve found driving to be faster and certainly more pleasant—and we were on I-5 in a twinkling of an eye.

Now I will have to learn how to use the new technology. I am faced with a retraining program, though I’m not sure which of us will be training the other. A friend informs me that the new cars talk to you, even tell you where to turn . . . sort of a stand-in wife, I guess.