5 Reasons to Shift Into Car Dealer Stocks: LAD, AN, KMX, GPI, SAH, PAG, ABG

When it comes to betting on the automotive sector, nothing’s as wild as the dealer. Auto manufacturers may have their stops and starts, but shares of major car dealer chains are on a tear – prices of the right stocks have risen as much as 193% since last July.

Top names in the sector include: Lithia Motors (NYSE:LAD), AutoNation (NYSE:AN), CarMax (NYSE:KMX), Group 1 Automotive (NYSE:GPI), Sonic Automotive (NYSE:SAH), Penske Automotive Group (NYSE:PAG), and Asbury Automotive Group (NYSE:ABG).

One way to sift through these stocks is to use price-to-earnings-to-growth (PEG) ratios, which measure valuation in the context of expected growth, may be even better. A PEG ratio of less than 1 points to an undervalued stock, while a PEG ratio of more than 1 indicates a stock price higher than the company’s earnings growth.

Asbury has the lowest PEG ratio at 0.4;. Lithia, Group 1, and Sonic all have PEG ratios of 0.6. AutoNation’s PEG ratio is 1.0. CarMax is higher than its peers at 1.32. That’s probably a long way of saying that there’s still good upside potential in this group of stocks.

Of course, the sluggish first-quarter economic data released on Thursday may dampen investors’ spirits. The U.S. economy posted an anemic 1.8% growth rate in the first three months of 2011, pressured by higher gas and food prices. A further buzz-kill: new unemployment claims rose by 25,000 last week. Economists had expected them to drop by 12,000.

Still, one quarter with stormier than expected stats does not, on it’s own, sink retail auto sales. In fact, here are five reasons shares in these companies are still a pretty good bet.

1. Fewer Cars = Higher Margins. The triple disaster in Japan will reduce short-term inventories on some of the most popular vehicle models from Toyota (NYSE:TM), Honda (NYSE:HMC) andNissan. The disaster already has taken a heavy toll on production in Japan — Toyota alone lost 62% of its vehicle output in March.

2. Higher Gas Prices. I know, that logic seems crazy. And in truth, higher gas prices are never a good thing for the economy. But Paul Taylor, chief economist for the National Automobile Dealers Association recently said that higher gas prices will fuel consumer demand for small cars and hybrids. The rule holds true both for new and used cars. Because there were fewer new car purchases or leases during the 2007-2009 recession years, there are fewer used vehicles available now. That means higher prices for buyers and better margins for dealers.

3. Pent-up Demand. The recession’s sharp pullback in consumer confidence – and spending – is rebounding. During those recession years, consumers were content to fix up the old jalopy rather than drop a lot of cash on a new model. But the economy is improving (albeit with stops and starts). And consumer spending did increase by 2.7% in the first quarter, “well above the consensus estimate of a 2% gain,” Goldman Sachs noted on Thursday.

4. Credit Availability. Consumers are finding it a little easier to get credit and the auto lending market is growing more competitive. That makes it far easier for consumers to “sign and drive” their dream cars off the dealer lot.

5. Technology-assisted Sales. After the huge shakeout in the auto retail space, dealers have made great strides toward using technology to more cost effectively manage inventory and market vehicles. Giving consumers the power to access vehicle information online and essentially comparison shop through independent sites like AutoTrader.com is improving dealers’ business models and positioning them for strong future growth.

Cheney got something right

"Deficit terrorists" are gutting governments and forcing the privatization of public assets, all in the name of "deficit reduction". But deficits aren't actually a bad thing. In today's monetary scheme, in which most money comes from debt, debt and deficits are actually necessary to have a stable money supply. The public debt is the people's money.

Former vice president Dick Cheney famously said, "Deficits don't matter." A staunch Republican, he was arguing against raising taxes on the rich; but today Republicans seem to have forgotten this maxim. They are bent on stripping social programs, privatizing public assets, and gutting unions, all in the name of "deficit reduction".

Worse, Standard & Poor's has now taken up the hatchet. Some bloggers are calling it blackmail. This private, for-profit rating
agency, with a dubious track record of its own, is dictating government policy, threatening to downgrade the government's long-held triple AAA credit rating if congress fails to deal with its deficit in sufficiently draconian fashion. The threat is a real one, as we've seen with the devastating effects of downgrades in Greece, Ireland and other struggling countries. Lowered credit ratings force up interest rates and cripple national budgets.

The biggest threat to the dollar's credit rating, however, may be the game of chicken being played with the federal debt ceiling. Nearly 70% of Americans are said to be in favor of a freeze on May 16, when the ceiling is due to be raised; and Tea Party-oriented politicians could go along with this scheme to please their constituents.

If they get what they wish for, the party could be over for the whole economy. The Chinese are dumping US Treasuries, and the Fed is backing off from its "quantitative easing" program, in which it has been buying federal securities with money simply created on its books.

When the Fed buys Treasuries, the government gets the money nearly interest-free, since the Fed rebates its profits to the government after deducting its costs. When the Chinese and the Fed quit buying Treasuries, interest rates are liable to shoot up; and with a frozen debt ceiling, the government would have to default, since any interest increase on a US$14 trillion debt would be a major expenditure.

Today the Treasury is paying a very low 0.25% on securities of nine months or less, and interest on the whole debt is about 3% (a total of $414 billion on a debt of $14 trillion in 2010). Greece is paying 4.5% on its debt, and Venezuela is paying 18% - six times the 3% we're paying on ours. Interest at 18% would add $2 trillion to our tax bill. That would mean paying three times what we're paying now in personal income taxes (projected to be a total of $956 billion in 2011), just to cover the interest.

There are other alternatives. Congress could cut the military budget - but it probably won't, since this option is never even discussed. It could raise taxes on the rich, but that probably won't happen either. A third option is to slash government services. But which services? How about social security? Do you really want to see Grandma panhandling? Congress can't agree on a budget for good reason: there is no good place to cut.

Fortunately, there is a more satisfactory solution. We can sit back, relax, and concede that Cheney was right. Deficits aren't necessarily a bad thing! They don't matter, so long as they are at very low interest rates; and they can be kept at these very low rates either by maintaining our triple A credit rating or by borrowing from the Fed essentially interest-free.

The yin and yang of money
Under our current monetary scheme, debt and deficits not only don't matter but are actually necessary in order to maintain a stable money supply. The reason was explained by Marriner Eccles, governor of the Federal Reserve Board, in hearings before the House Committee on Banking and Currency in 1941. Wright Patman asked Eccles how the Federal Reserve got the money to buy government bonds.
"We created it," Eccles replied.
"Out of what?"
"Out of the right to issue credit money."
"And there is nothing behind it, is there, except our government's credit?"
"That is what our money system is," Eccles replied. "If there were no debts in our money system, there wouldn't be any money."

That could explain why the US debt hasn't been paid off since 1835. It has just continued to grow, and the economy has grown and flourished along with it. A debt that is never paid off isn't really a debt. Financial planner Mark Pash calls it a National Monetization Account. Government bonds (or debt) are "monetized" (or turned into money). Government bonds and dollar bills are the yin and yang of the money supply, the negative and positive sides of the national balance sheet. To have a plus-1 on one side of the balance sheet, a minus-1 needs to be created on the other.

Except for coins, all of the money in the US money supply now gets into circulation as a debt to a bank (including the Federal Reserve, the central bank). But private loans zero out when they are repaid. In order to keep the money supply fairly constant, some major player has to incur debt that never gets paid back; and this role is played by the federal government.

That explains the need for a federal debt, but what about the "deficit" (the amount the debt has to increase to meet the federal budget)? Under the current monetary scheme, deficits are also necessary to avoid recessions.

Here is why. Private banks always lend at interest, so more money is always owed back than was created in the first place. In fact investors of all sorts expect more money back than they paid. That means the debt needs to be not only maintained but expanded to keep the economy functioning. When the Fed "takes away the punch bowl" by tightening credit, there is insufficient money to pay off debts; people and businesses go into default; and the economy spins into a recession or depression.

Maintaining a deficit is particularly important when the private lending market collapses, as it did in 2008 and 2009. Then debt drops off and so does the money supply. Too little money is available to buy the goods on the market, so businesses shut down and workers get laid off, further reducing demand, precipitating a recession. To reverse this deflationary cycle, the government needs to step in with additional public debt to fill the breach.

Debt and productivity
The US federal debt that is setting off alarm bells today is about 60% of gross domestic product (GDP), but it has been much higher than that. It was 120% of GDP during World War II, which turned out to be our most productive period ever. The US built the machinery and infrastructure that set the nation up to lead the world in productivity for the next half century. We, the children and grandchildren of that era, were not saddled with a crippling debt but lived quite well for the next half century. The debt-to-GDP ratio got much lower after the war, not because people sacrificed to pay back the debt, but because the country got so productive that GDP rose to meet it.



That could explain the anomaly of Japan, the global leader today in deficit spending. In a CIA Factbook list of debt to GDP ratios of 132 countries in 2010, Japan topped the list at 226%. So how has it managed to retain its status as the world's third largest economy? Its debt has not crippled its economy because:
(a) the debt is at very low interest rates; (b) it is owed to the people themselves, not to the International Monetary Fund or other foreign creditors; and
(c) the money created by the debt has been used to produce goods and services, allowing supply and demand to increase together and prices to remain stable.

The Japanese economy has been called "stagnant", but according to a review by Robert Locke, this is because the Japanese aren't aiming for growth. They are aiming for sustainability and a high standard of living. They have replaced quantity of goods with quality of life. Locke wrote in 2004:

Contrary to popular belief, Japan has been doing very well lately, despite the interests that wish to depict her as an economic mess. The illusion of her failure is used by globalists and other neo-liberals to discourage Westerners, particularly Americans, from even caring about Japan's economic policies, let alone learning from them. [And] it has been encouraged by the Japanese government as a way to get foreigners to stop pressing for changes in its neo-mercantilist trade policies.

The Japanese economy was doing very well until 1988, when the Bank for International Settlements raised bank capital requirements. The Japanese banks then tightened credit and lent only to the most creditworthy borrowers. Private debt fell off and so did the money supply, collapsing the stock market and the housing bubble. The Japanese government then started spending, and it got the money by borrowing; but it borrowed mainly from its own government-owned banks.

The largest holder of its federal debt is Japan Post Bank, a 100% government-owned commercial bank that is now the largest depository bank in the world. The Bank of Japan, the nation's government-owned central bank, also funds the government's debt. Interest rates have been lowered to nearly zero, so the debt costs the government almost nothing and can be rolled over indefinitely.

Japan's economy remains viable although its debt-to-GDP ratio is nearly four times that of the United States because the money does not leave the country to pay off foreign creditors. Rather, it is recycled into the Japanese economy. As economist Hazel Henderson points out, Japan's debt is twice its GDP only because of an anomaly in how GDP is calculated: it omits government-provided services. If they were included, Japan's GDP would be much higher and its debt to GDP ratio would be more in line with that of other countries.

Investments in education, healthcare, and social security may not count as "sales", but they improve both the standard of living of the people and national productivity. Businesses that don't have to pay for healthcare can be more profitable and competitive internationally. Families that don't have to save hundreds of thousands of dollars to put their children through college can spend on better housing, more vacations, and other consumer items.

Turning the national debt into a public utility
Locke calls the Japanese model "a capitalist economy with socialized capital markets". The national debt has been "monetized" - turned into the national money supply. The credit of the nation has been turned into a public utility.

Thomas Hoenig, president of the Kansas City Federal Reserve, maintains that the largest US banks should be put in that category as well. At the National Association of Attorneys General conference on April 12, he said that the 2008 bank bailouts and other implicit guarantees effectively make the too-big-to-fail banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac. He said they should be restricted to commercial banking and barred from investment banking.

"You're a public utility, for crying out loud," he said.

The direct way for the government to fund its budget would have been to simply print the money debt-free. Wright Patman, chairman of the House Banking and Currency Committee in the 1960s, wrote:

When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. ... [I]t is absolutely wrong for the Government to issue interest-bearing obligations. ... It is absolutely unnecessary.

But that is the system that we have. Deficits don't matter in this scheme, but the interest does. If we want to keep the interest tab very low, we need to follow the Japanese and borrow the money from ourselves through our own government-owned banks, essentially interest-free. "The full faith and credit of the United States" needs to be recognized and dispensed as a public utility.

Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org. In Web of Debt, her latest of 11 books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are webofdebt.comandellenbrown.com.

US Economic Calendar For The Week

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior	Revised From
May 2	10:00 AM	Construction Spending	Mar	-	-0.5%	0.0%	-1.4%	-
May 2	10:00 AM	ISM Index	Apr	-	58.5	59.7	61.2	-
May 2	3:00 PM	Auto Sales	May	-	NA	NA	4.75M	-
May 2	3:00 PM	Truck Sales	May	-	NA	NA	5.19	-
May 3	10:00 AM	Factory Orders	Mar	-	2.5%	1.9%	-0.1%	-
May 4	7:00 AM	MBA Mortgage Index	04/29	-	NA	NA	-5.6%	-
May 4	7:30 AM	Challenger Job Cuts	Apr	-	NA	NA	-38.6%	-
May 4	8:15 AM	ADP Employment Change	Apr	-	200K	200K	201K	-
May 4	10:00 AM	ISM Services	Apr	-	57.5	57.3	57.3	-
May 4	10:30 AM	Crude Inventories	04/30	-	NA	NA	6.156M	-
May 5	8:30 AM	Initial Claims	04/30	-	400K	400K	429K	-
May 5	8:30 AM	Continuing Claims	04/23	-	3650K	3638	3641K	-
May 5	8:30 AM	Productivity-Prel	Q1	-	1.0%	1.0%	2.6%	-
May 5	8:30 AM	Unit Labor Costs	Q1	-	1.0%	0.8%	-0.6%	-
May 6	8:30 AM	Nonfarm Payrolls	Apr	-	175K	183K	216K	-
May 6	8:30 AM	Nonfarm Private Payrolls	Apr	-	200K	200K	230K	-
May 6	8:30 AM	Unemployment Rate	Apr	-	8.9%	8.8%	8.8%	-
May 6	8:30 AM	Hourly Earnings	Apr	-	0.1%	0.2%	0.0%	-
May 6	8:30 AM	Average Workweek	Apr	-	34.3	34.3	34.3	-
May 6	3:00 PM	Consumer Credit	Mar	-	$5.0B	$5.0B	$7.6B	-

How To Stop the Foreclosure Of Your Property

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Sell in May and go away: fact or fallacy?

Where is the stock market heading? Is the cyclical bull market that started in early March 2009 close to exhaustion? These are the key questions on all investors’ minds as financial markets remain caught between the easy money actions policies of central banks on the one hand, and a still tentative economic outlook on the other.

It is therefore no wonder that even so-called “pop analysis”, including some legendary axioms, is resorted to in a quest for direction. And besides “buy low and sell high” few other axioms are more widely propagated than “sell in May and go away”. A Google search revealed an astounding 12 million items featuring this phrase.

As equities have seen a particularly strong rally since August 2010, investors are justifiably questioning the market’s next move. And they nervously wonder whether this May will not only herald longer days in the Northern Hemisphere, but also live up to its reputation as the advent of a corrective phase in the markets.

The important issue, however, is whether this axiom actually has any scientific basis at all. Analyzing historical returns, the figures vary from market to market, but long-term statistics seem to show that the best time to be invested in equities is the six months from early November through to the end of April of the next year (“good” periods), while the “bad” periods normally occur over the six months from May to October.

A study of the MSCI World Index, a commonly used benchmark for global equity markets, reveals that since 1969 “good” periods returned +6.5% per annum while investors were actually in the red by -1.0% per annum during the “bad” periods.

“Sell in May and go away” also holds true for the US stock markets. An updated study by Plexus Asset Management of the S&P 500 Index shows that the returns of the “good” six-month periods from January 1950 to April 2011 were 8.1% per annum whereas those of the “bad” periods were 2.4% per annum.

A study of the pattern in monthly returns reveals that the “bad” periods of the S&P 500 Index are quite distinct, with five of the six months from May to October having lower average monthly returns than the six months of the good periods. Interestingly, May – the first month of the bad patch – is the only exception.

But what exactly does this mean for the investor who contemplates timing the market by selling in May and reinvesting in November? Further analysis shows that had one kept the investment in the S&P 500 Index only during the “good” six-month periods, and reinvested the proceeds in the money market during the “bad” six-month periods, the total return would have been 10.5% per annum.

These calculations do not take tax into account. And, of course, every time one switches out of and back into the stock market there are costs involved, which would also reduce the returns for the market timer.

How did the good and bad periods stack up during the past two years? The results are as follows.

• May 2009 – October 2009: +19.53%
• November 2009 – April 2010: +10.94%
• May 2010 – October 2010: +5.01%
• November 2010 – April 2011: +14.32%

Some you win, some you don’t! It seems that the axiom “sell in May and go away” in itself is a rather doubtful basis for timing equity investments. However, it may serve a useful purpose as input, together with other factors, to otherwise rational decision making.

In the video clip below, James Mackintosh, FT’s investment editor, analyses the maxim’s record and considers whether to heed it this year.

Click here or on the image below to watch the video.

Source: Financial Times, April 29, 2011.

What's the Difference Between Smart Money and Dumb Money?

By Jeff Clark, BIG GOLD

You’ve probably heard the term “smart money” used by various pundits, a reference to those investors and institutions that are consistently better at making money than the uninformed masses. Which begs the question: are you one of them?

To answer that query, let’s first describe smart money (not to be confused with the magazine by that name) so we have an idea of what makes this group of investors successful…

Smart money buys when others are fearful. A good example of this is last year’s Gulf oil disaster. Wild speculation of British Petroleum’s ultimate demise caused panicked bouts of selling. The stock lost roughly half its value in less than two months. To use a classic idiom, there was blood in the streets – and that, of course, was the time to buy. The investor who did so is currently up 50%, and that’s not even measuring from the stock’s absolute bottom.

Smart money sells when others are greedy. My colleague Doug Hornig is a perfect example of selling when others are greedy. In the Nasdaq hysteria of the late 1990s, Doug had accumulated a number of Internet stocks and watched his brokerage account swell to a level he’d never seen before. The greed around him was palpable; everyone was talking about the latest stock pick, the classic sign of a mania in full bloom. “But I’d had enough,” he told me. “My positions had logged spectacular gains, and bottom line, I knew this couldn’t go on forever.” He sold his Internet stocks prior to the 2000 top, just as the greed reached a pinnacle.

Smart money sees trends others don’t. Doug Casey urged readers in 1999 to buy gold, convinced from his own research and study that a bull market was about to get underway. But he couldn’t get an audience; no one wanted to talk about the metal or mining stocks. It goes without saying that he and many of his readers have since profited enormously, with many stocks earning doubles on top of doubles.

Smart money ignores the headlines. Beyond the traditional advice of “Buy the rumor/sell the fact,” smart money largely ignores the blather from mainstream media and instead focuses on the factors that ultimately drive headlines. When it reaches mainstream coverage, the smart money is already invested. And is looking at what will be tomorrow’s headlines.

Smart money plays the big trend, not the gyrations. What do Jim Rogers, Marc Faber, Rick Rule, Doug Casey, and Warren Buffett have in common? None of them “traded” their way to riches. They identified the fundamental factors driving the trend, bought big, and held on. No technical analysis, no trend lines on a chart, no fancy signals from moving averages. And they didn’t get scared out at the first drop in price.

Smart money doesn’t count its money before it’s made. These investors understand there are no sure things, and further, that no one is going to bail them out if their analysis turns out to be wrong. They keep a realistic expectation – and an eye – on their investments. And if they take a loss, they learn from it and refuse to let it keep them from investing again.

And the one that’s becoming increasingly critical to businesses and investors…

Smart money ignores official government reports and relies on its own research.There are copious examples of government reporting that is patently off base. The best current example is the Department of Labor’s CPI number. It claims that core inflation is a mere 1.1%. When looking at all your expenses over the past year, have they risen just 1.1% since last spring?

Here’s what real inflation looks like compared to what the U.S. government reports.

Costs in every major area of our lives have risen greater than what the government states in its core figure. The smart money ignores the official report and instead focuses on its own research and data.

With that description of smart money, the next logical question to ask is, what are they looking at now?

To answer that question, understand the time horizon they have in mind. They’re not looking at next week or next month like a trader would, nor so far out that it will take the rest of their life to realize a profit. The smart money is looking at the likely trends over the next few years.

Therefore, I think they’re asking themselves questions like these:

• Is real inflation likely to rise or fall over the next few years?
• Is it more probable that interest rates will remain depressed or move higher?
• Is the U.S. dollar likely to be stronger or weaker in the next few years?
• What is the best way to hedge against egregious debt and runaway government spending?
• Which assets are most likely to make money over the next few years? Which should be avoided?
• Is it time to invest in real estate again, or will it take the rest of my life to see big profits?
• Will the global economy be on solid footing during the next few years?
• Is oil – or something else – the best energy investment?
• Are gold and silver in a bubble, or will they push higher in the coming years?

The answers to those questions will dictate how the smart money invests for the next few years.

When it specifically comes to gold and silver, they ignore the bubble talk and instead focus on facts and trends. While they acknowledge that precious metals have risen tremendously over the past decade, they’re analyzing the factors that will either continue to drive prices higher or take them lower. So they’re looking at supply and demand trends; fiat currencies and if they’re likely to be further diluted; the logical outcome of too much debt and too much deficit spending; the direction of inflation; gold’s role as a store of value and if there are reasons for it to remain; and just as important, how the greater masses are likely to react to all this.

Once you address those topics, you can determine if we’re in a true gold bubble. And your answer to those questions will determine the action you should take at the next correction.

How does Doug Casey answer the question as to whether we’re in a gold bubble? Here’s what he told me:

“The peak is not going to be here until you hear the money-honeys talking about gold on television and all your friends are talking about the latest silver stock. Don’t worry about charts. Don’t worry about statistics, lines on charts, supply and demand figures, or any of that. The best indication of where the market is at any moment isn’t mathematics. It’s psychology. Watch the public’s psychology.”

While new investors are beginning to enter our sector, the psychology of the gold market is not like the crazed hysteria with the Internet stocks in late 1999. Yes, gold is not cheap, but if we were in a bubble, those shouting “Bubble!” would be buying gold, not bashing it. By Doug’s definition, it’s when their psychology has turned from negative to giddy that will mark the top.

If your own research tells you this isn’t a true bubble in precious metals, then you might embrace the next correction instead of fearing it.