Falling dollar proves kind to US automakers

Jitters over the falling dollar, the United States trade and budget deficits, and potential White House-congressional stalemate during the first year of the new Bush administration have imposed new downward pressures on the stock market. For the week ended Nov. 18, the Dow Jones industrial average closed down 4.62 points, at 2,062.41. Ironically, the market tumbled 38.59 points on Wednesday, following a report that the trade deficit fell 15 percent to $10.5 billion in September. But that news was not enough to stem the drop in the dollar.

Though many investors saw the recent rise in US exports as inflationary, the investment community clearly wants decisive action to reduce the budget deficit. Federal Reserve Board chairman Alan Greenspan added his weight to the need for deficit reduction in his testimony before the National Economic Commission last week. But given the outcome of the presidential election - with President-elect George Bush's victory offset by Democratic gains in Congress - comprehensive action seems unlikely, or at the least, protracted.

One good piece of news in the trade deficit is the strong surge in US exports, says Charles Brady, an analyst with Oppenheimer & Co. Mr. Brady believes that for the American auto industry in particular, the lower dollar will mean sustained and increased car sales abroad.

Oppenheimer is currently recommending all three US car manufacturers - Ford, General Motors, and Chrysler. ``I expect the Big Three to have one of their best years ever during 1988,'' Brady says.

Last year's stock market plunge had little adverse impact on car sales, he says. ``Sales for the 10 days immediately following the crash were higher than for the 10 days before the crash.'' That suggests, he says, that concern over the dollar - as well as the trade and budget deficits - should not have a negative impact on sales of US carmakers.

Car sales for the Big Three jumped 17.8 percent in early November, compared with the same period last year. So far, according to analyses supplied by the carmakers, they have sold 6,020,667 cars, compared with 5,714,523 during the comparable period from Jan. 1 to Nov. 10 last year.

So far ``1988 has been a pretty good year'' for the Big Three, says Kathleen Heaney, an analyst with Nikko Securities Company International. Nikko is currently recommending only Ford. Ms. Heaney says Ford ``is looking particularly strong over the long term,'' given its substantial $10 billion cash cushion to tide it over any adverse economic situation.

Heaney sees General Motors as somewhat more questionable.

Chrysler, she says, continues to look ``highly speculative.'' She believes that Chrysler's earnings will improve during 1989 because of a ``richer product mix'' but that this will partly be offset by higher marketing costs.

Heaney notes that the three carmakers ``lost a good chance'' to regain some domestic market share several weeks back when, despite the falling dollar, they raised their retail prices an average 3 percent on '89 models, compared with an average 2 percent rise by the Japanese.

Mr. Brady of Oppenheimer believes that the lower dollar should help all three US automakers regain lost market shares abroad, while overseas producers operating in the US will find their own costs rising as the dollar falls in relation to their overseas currencies. ``They [the overseas companies] could cut their prices to hold market share, but then they would be losing $2,000 per car instead of $1,000 as now,'' he says. ``That's not a very tenable situation.''

The Wall Street Journal reported last week that the nine major US automakers, including Japanese producers in the US, plan to manufacture 13.9 percent more cars in the first quarter of 1989 than they did last year.

One question that must now be asked following the declining dollar - and its impact on retail prices, with the cost of overseas goods generally more expensive compared with US products - is the stability of consumer stocks in general. For example, the Futures Group, a Washington consulting firm, believes retail buying will now shift from big-ticket hard goods items to soft goods such as clothing.

Were that shift to occur, the stocks of soft goods companies would continue to look very attractive.

Still, Jeffrey Applegate, a strategist with Tucker, Anthony & R.L. Day Inc., contends that it is time for the investor to consider selling off consumer stocks and buy selective industrial stocks instead. Mr. Applegate says consumer stocks are typically bought as ``a defensive hedge against recession.'' But the continued strong economy hardly suggests a recession, he says. And even if a recession were to occur, he questions whether consumer stocks - which have figured so prominently in recent leveraged-buyout activity - are very good defensive issues at the moment. Many of the consumer companies he notes are now or will soon be up to their necks in debt. That does not make them good defensive stocks in case of a downturn, he argues.

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