American Auto Industry In Trouble? — Your Questions Answered

Question: UPS stock. Should I buy, sell, or hold? — Pam (Belleville, NJ)

Jonas Max Ferris: Hold. Sell over $80. Buy under $65.

UPS pays a decent dividend and is a safe way to benefit from the growth in Internet retailing. Although Internet merchants may cut into traditional merchants sales, they actually lead to more UPS-style shipping to the home — shopping at or means packages to your door, not a trip to the mall.

In addition, UPS is helping companies setup distribution and fulfillment operations for business customers. The main downside in the short term is that the next economic slowdown may hurt UPS. Okay, there are actually two downsides. The second is the FedEx (FDX) battle over ground shipping, which is starting to look a lot like the Intel (INTC) Advanced Micro Devices (AMD) conflict: a profit margin killer.

I recommended UPS stock on "Cashin' In" back in April 2005.

Question: It's back to school time, so Staples stock (SPLS) vs. Office Depot (ODP), which is the smarter buy? — Jack (Lubbock, TX)

Jonas Max Ferris: Staples has been running their business a little better than Office Depot, as evidenced in the margins. Staples now pays a dividend — a good idea in a business with limited growth prospects. Also, Staples is a little more school-oriented than a company with “Office” in its name.

I'm worried the next economic slowdown is going to hurt growth in business startups — a negative for both companies. Wal-Mart (WMT) is less economically sensitive and much bigger back-to-school destination than Staples and Office Depot combined.

As for your premise of looking to buy a stock before their seasonally strong periods of sales, I offer this true story:

In my first “economics” course way back in high school, a local stockbroker came to our classroom as a guest to teach us about stocks. He said now was a good time to buy Hershey's (HSY) because Christmas was right around the corner and people buy chocolate for the holidays. Unfortunately, investing isn't this easy. Everybody knows Toro (TTC) sells more snow blowers in the winter.

Investors compare sales to last year's numbers and competitor's figures. If you think Hershey's has a new fat free chocolate that tastes great, maybe you're onto something, but a mere seasonal pattern is worthless. Another investing gem gleaned from this class was from the teacher, who noted that cell phones would never be more than a rich man's toy. I still kick myself for not buying cell phone related stocks the next day. This was several years before Qualcomms (QCOM) IPO (split adjusted price, $0.50 cents) and offered plenty of time to get into McCaw Cellular before AT&T snapped it up for $11.5 billion. Fortunately, my finance and economics classes improved in college and grad school!

Question: Whenever I go shopping, my nose leads me to the Yankee Candle store (YCC), and it seems candles are more popular than ever! What do you think of YCC? — Jenn (Providence, RI)

Jonas Max Ferris: I don't like it. Yankee Candle over-expanded somewhat — a common problem for chains. A few years ago, you could replace the words “Yankee Candle” with “Krispy Kreme” (KKD) and “candles” with “doughnuts” in your question. Doughnuts didn't work out so well for investors, and neither will candles. Aren't candles just the new incense? Scented candles are one of those things that get cut from the budget when the economy slips (way before cable and beer do anyway).

Question: Is the American auto industry in trouble? It seems to be a great time to get a deal on vehicles made here in the U.S., but is that a sign of the beginning of the end for Ford (F) and GM (GM), especially with union buyouts and layoffs that are happening? — Jeff (Albany, NY)

Jonas Max Ferris: There might not be an American auto industry in 15 years. Is that trouble enough for you?

The great deals on American cars are the core problem. While this is good for you, it's bad for GM. In the old days it was, “what's good for GM is good for America”. Now it's, “what's good for America is bad for GM”.

You generally don't want to invest in companies that have to sell their own products at a discount to competitors. Note: I said “their own”, as this logic doesn't really apply to retailers — Wal-Mart's ability to undercut the competition is their main engine of growth.

Consumers aren't buying iPods because they are cheaper than the ones made from other companies. I just bought a Sony Laptop that was a lot more money than a comparable Dell, but man is it ever cool (until the battery catches on fire anyway). I can assure you, when the next version of Microsoft Office comes out, I won't be upgrading because its “a great time to get a deal” on it. It's never a good time to buy Microsoft's products; they get to charge what they want. Burger King has to worry about McDonalds' prices, but Starbucks and Whole Foods seem unburdened by mere competitive pricing. Ever buy a Red Bull? It costs more than a Coke and a Pepsi combined.

Why can't American cars command top dollar? Like the government, American auto companies have been making decisions that make financial sense today, with little concern for the longer run.

Here then, is a brief history of the slow train wreck of what was once a shining star in global business success — the U.S. automobile industry:

Milking brands dry: GM (and Ford) once had what is known as brand equity, from the days when they had a 50% plus U.S. market share and made interesting, quality cars that people wanted to buy. At some point they said, “Gee, people value brands like Cadillac. If we make a junky car with cheap parts and slip-shod design, we can still charge a premium price and improve profit margins.” Hence clunkers like the Cadillac Cimarron — the Chevy Cavalier with a Caddy grill.

GM ruined what brand equity John DeLorean (when he was a GM exec) built up in Pontiac in 1965 with the GTO. Ford destroyed the Thunderbird. Acura was just starting to steal market share when GM was putting leaky engines into Caddies in the 1980s. Trouble is, Americans are not as dimwitted as Detroit executives think, and eventually realized these cars were junk compared to higher quality, style-conscious competitors from Europe and Japan.

Now, Ford and GM have to charge less, even though they have closed the quality gap somewhat. Brands are hard to build and easy to destroy. It's like they don't even try anymore. Even GM's current logo looks like something that fell off a 1979 Buick Riviera.

"No way out" relationships: As noted by financial writer James Surowiecki recently, decades ago U.S. auto makers decided to franchise dealerships rather than owning distribution (an odd choice given the fad of vertical integration at the time, and that Ford once owned a rubber plant in Brazil). That move saved them a few bucks, and supposedly led to better-run operations (how could GM keep their eyes on a Florida dealer that is just an employee?). The downside is GM can't easily kill a tepid brand, like Pontiac, without paying off the dealers. Cutting the dying Oldsmobile a few years ago cost GM billions.

Reliance on style, not engineering: Maybe it was the success of 50's auto style — fins and chrome — moving cars off the lot. U.S automakers have always been good at building splashy, image-based products. SUVs are the reason we still have a U.S. auto industry. Whenever efficiency becomes a consideration of American buyers (like when gas prices rise), U.S. auto engineers draw a blank. We just can't do small or powerful and efficient. We don't engineer, we style.

Unions: While unions get the entire bad rap for GM and Ford's problems, they are really just a part of the problem. The expensive benefit packages dragging on U.S. automakers had a solid reason for existing beyond union strong-arm tactics — lower costs in the present.

Offering an employee liberal healthcare and pension benefits in retirement didn't cost GM much money at the time (in fact it let them pay lower salaries, because without benefits employees expect more cash each week). Adding benefits puts off a liability until much later.

Well, later is now. To make things worse, the benefits system is similar to Social Security in that it works so long as the auto workforce grows, like a chain letter. Forty years ago, GM probably didn't envision a world where they would be employing less people.

Reliance on giveaways: U.S. automakers can't sell cars without inventing some new “deal.” Zero interest rates, cash back, no money down, employee discounts, and most recently, 100,000-mile warranties. The trouble is that GM cars are not reliable enough to guarantee for 100,000 miles. While this will help move cars off the lot, it's creating yet another future liability, as GM will be picking up the tab on new, expensive automatic transmissions that regurlarly fail outside of the relatively short warranty period.

Is this the beginning of the end? No. The beginning started decades ago. The last American car I owned was a 1967 Cadillac DeVille Convertible. It has been downhill for the American auto biz since about 1968.

Henry Ford and Alfred Sloan are rolling over in their graves.

Question: Is Sony (SNE) a strong buy, with the evergreen popularity of the Xbox? — Tom (Taos, NM)

Jonas Max Ferris: I've recommended Sony (SNE) a few times on "Cashin' In" over the last three years, and with the recent weakness in Japan in general, and Sony in particular, (laptop battery fires anyone?), Sony is at a reasonable price at $41 — at under $35, it's a bargain.

Microsoft has done very well with the Xbox, breaking into a tough business late in the game. But hard-core gamers expect big things from Sony PlayStation 3 this holiday shopping season. Assuming there are a couple super-duper games that fully take advantage of this machines stunning CPU power and massive Blu-ray disc capacity, PlayStation sales could offer a nice boost to Sony's sales and stock price, although a big company with many product lines like Sony can only benefit so much from one hit. That said, PlayStation is too expensive if the economy slows down or the housing market takes a nosedive. At $600 a pop, you practically need a home equity loan to buy the thing.

Jonas Max Ferris is a regular contributor on "Cashin' In" (Saturdays at 11:30am ET and Mondays at 5:30am ET) and is co-founder of .