Welcome to the inaugural edition of The Week Ahead. I'm sure that normally you rely on other sources to see a compiled list of all the important releases for the upcoming trading week. This column endeavors to pull out a few key items and put the forecasts into some kind of context.
The Detroit Bounceback
We've been witnessing the steady decline of the industrial base since I was in eighth grade (1978 for those keeping score). But the falling dollar could prove to be a long-awaited elixir. Simply put, it is becoming notably cheaper to build products in Youngstown than in Munich or Marseilles.
That's why I'd be a buyer of auto stocks next week -- soon after the monthly auto-sales figures are released on Tuesday, April 1. The numbers are likely to be weak, as the U.S. consumer remains on the sidelines.
But in coming weeks and months, look for a string of positive headlines in the sector that should herald a renaissance in Detroit and elsewhere.
Volkswagen ditched its U.S. plants 15-20 years ago, citing the then-strong dollar. The German automaker now appears set to announce plans to start producing cars again in the U.S. Jochem Heizmann, head of VW's production, has said that 80% of the content in the cars would also be domestically produced, according to autoblog.com.
VW has admitted that the Passat should be about $4,000 cheaper, but being built in Europe, that simply isn't going to happen. All told, the company hopes to build 250,000 cars annually, though some of those vehicles may be for other VW brands, such as Audi, SEAT and Skoda.
In a similar vein, BMW has announced plans to boost its manufacturing capacity in South Carolina, while trimming German production. If Daimler's inexpensive SmartCar proves to be a success on our shores, then U.S. production is likely inevitable.
But the real game changer for the industry will come when Ford
(F)
and GM
(GM)
announce plans to start exporting more cars from the U.S. to Europe. Ford, for its part, is moving to global platforms in order to more easily shift production between markets.
Ford has stated that it needs a stronger presence in the economy segment of the market. Simply put, Ford cannot build the upcoming Fiesta in Europe and export it to the U.S. That would be a surefire recipe to lose money on every car they sell. Instead, look for American-made Fiestas to land on the streets of Liverpool and Lisbon.
Of course, auto suppliers such as Visteon
(VC)
and Johnson Controls
(JCI)
will get a commensurate boost.
Rising incomes in the industrial belt could also strengthen sales trends at mid-priced retailers, such as Christopher & Banks and casual-dining stocks such as Darden's
(DRI)
or Brinker Int'l
(EAT)
. My colleague Scott Rothbort has written an outstanding primer on this space, which is very attractively-priced right now.
Of course, many will argue that the dollar's strength is ephemeral, and the euro will crash to earth once interest rate trends in the U.S. and Europe start to change direction. I'm not so sure. After all, as long as Uncle Sam is running budget deficits, the dollar will remain under pressure.
Others will argue that the U.S. will never be as cheap as China, and manufacturing erosion is bound to continue. Well, the Chinese yuan is finally starting to strengthen -- a trend that is likely to continue if China ceases to wash all of its dollar earnings. Soon enough, the added logistical costs of exporting around the world will meaningfully offset the relative currency advantages that China holds (A controversial opinion, to be sure).
Much of the potential manufacturing renaissance will hinge on November's presidential elections. Both Democratic candidates appear inclined to support legislation that gives favorable tax treatment to the creation of U.S. jobs. Senator McCain's stance on the matter is less clear, but he'd be hard-pressed to veto any legislation that is deemed favorable U.S. workers.
The (Jobs) Trend is Not Your Friend
On Friday, April 3, the employment figures will be released. Various consensus estimates are calling for 40,000-50,000 in fresh job losses in March. If the consensus is correct, then it would represent an improvement from the 63,000 jobs lost in February. The trouble is that metric has been in decline for four straight months, falling an average 40,000 per month sequentially.
So, I'm hard-pressed to understand why economists think we've hit bottom on the employment front. If anything, economic downturns of the current magnitude typically imply job losses moving into the six figures. I guess hope springs eternal.
Keep an eye out for the Civilian Labor Force figures in the upcoming report. After maintaining steady levels in December and January, the labor force shrank by a stunning 450,000 in February. That's the biggest one-month drop since 2001. If March's labor-force participation rates drop by a similar amount, then you can expect more pain in the retail sector this spring.
Another area I'll be addressing will be themes from the upcoming earnings calendar. Of notable interest for the coming week is Best Buy
(BBY)
, which is expected to report fourth-quarter results on Wednesday, April 2.
The fact that Best Buy's fiscal 2008 earnings are expected to be up 10% from a year ago is impressive in a challenging economy. The electronics retailer surpassed estimates by at least 25% in each of the last two quarters, so perhaps another upside performance is in the offing.
However, I'm much more intrigued by the steady demise of Best Buy's competition. CompUSA is already out of business, and Circuit City
(CC)
appears to be falling into a vicious spiral.
Just last Sunday, I went to buy a DVD player at a nearby Circuit City on 14th St. in Manhattan -- and it was closed! No explanation. Just a bunch of frustrated customers milling about, peering into the dark store. Presumably, they took their business to a nearby Best Buy.
Paradoxically, a lousy economy in 2008 would be great for Best Buy because it would likely force Circuit City to accelerate its pace of store closings. When the economy rebounds, the oligopolistic consumer electronics retail sector might just have become a monopoly.
David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.
