Joe Pimentel is at the leading edge of a trend that could make you a lot of money.
At 48, he is the general manager for a Decatur, Georgia auto repair shop called Volmaz. They specialize in imported cars, largely Volvos.
On May 29, Pimentel told Bloomberg this: ‘‘Yesterday we had in a 1992 Volvo 940 that had 330,000 miles on it. We are seeing older and older cars coming in.’’
No doubt, business is good right now, as the average age of cars on the road is at an 18-year high.
Still, Joe often tells his customers “‘to go out and go get something else. Older cars are not going to last forever. There is a law of diminishing returns.’ That is a conversation I probably have four or five times a week.”
It might be easy to dismiss the number of old cars on the road as fallout from the financial crisis. After all, with so many people losing their jobs and seeing their home values plummet, it should come as no surprise they may be reluctant to take on added debt to buy a car…
It’s called “tightening your belt.”
But the fact is the trend Joe is seeing in cars is decades old…
America’s middle class has been losing ground for 20 years.
Where Have All the Good Jobs Gone?
The latest nonfarm payrolls number gives us a great snapshot of how the middle class is being slowly gutted.
Yes, the report was better than expected: 175,000 new jobs were created in May. But the U.S. economy is not creating many good jobs. That’s a problem.
43,000 of those new jobs came from the hospitality industry, where the average wage is $13.45 an hour. Retailers added 27,700 jobs at an average of $16.63 an hour. And temp agencies added 25,600 jobs at an average of $15.74 an hour.
This wage issue is a big one. Americans are losing spending power. And U.S. GDP is around 70% consumer driven.
So, how does the economy get on better footing if people have less to spend and find it harder to get ahead?
This is the biggest problem for the future of America.
Maybe globalization is to blame… because it’s so easy to move production around the globe, American workers compete directly with Chinese workers, and Mexican, and Taiwanese, and so on. To be competitive, the American worker is practically forced to take less.
Or maybe it’s corporate greed and the pressure to meet quarterly earnings… It’s no secret that companies are sitting on record amounts of cash. And profits are at an all-time high, too. Companies have the lowest number of planned layoffs in years, at 219,000. It wasn’t that long ago that 219,000 people were losing their jobs a week.
But companies sure aren’t hiring. And when they do, they can prey on desperation to offer minimal salaries and benefits. Pension? Ha! Good luck with that.
Is it the End of the Middle Class?
A recent poll from Pew Research shows that since the economy bottomed out in 2009, the rich have gotten richer — but the middle class have gotten poorer.
Pew researchers put it like this:
From 2009 to 2011, the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.
And there’s a chart, too…
Household wealth includes all assets: homes, investments, cars, etc.
It’s an easy conclusion to say that the rise in the stock market benefits the wealthy the most, as that group tends to have the most free cash to put towards investments.
But that doesn’t fully explain the discrepancy…
Robots are replacing workers in factories, and headline machines like Twitter are replacing newspapers. The American worker is more productive than he or she has ever been — but wages and compensation have not kept up. Not by a longshot.
It’s pretty easy to say that the record 47.8 million Americans on food stamps are lazy, want handouts, and should pick themselves up by their bootstraps. But did you know that food stamp use is up 70% since the financial crisis in 2008?
No, there’s something else at work here…
The American economy is leaving people behind.
Wait, What?
I co-edit a newsletter that’s focused on long-term wealthbuilding with income investments. The newsletter is called The Wealth Advisory.
In last month’s issue, I recommended a stock that may surprise you…
It’s a fundamentally undervalued American car company. My analysis shows this company has 30% upside for its stock price and at least 50% upside for its dividend over the next 12 months.
Why? Because the automobile sales cycle is about to get extremely bullish.
That’s why this company is adding capacity to build 200,000 more vehicles annually in North America.
Jim Tetreault is the vice president of North America manufacturing for this automaker. He puts it this way: “The sales and marketing guys are obviously very confident, because they’ve asked for additional capacity, and we’re providing it.”
Citigroup says: “‘Consumers have really been deferring purchases… We are still very early in the U.S. auto-sales cycle.”
Citi expects to see car and light-duty truck sales rise to 16.5 million in 2015 from 14.5 million last year.
The company I recommended is Ford (NYSE: F).
And here’s some of my analysis:
- All of the Big Three Detroit automakers — General Motors (NYSE: GM), Ford, and Chrysler — gained market share in the United States in the first three months of 2013. That hasn’t happened since 1993.
- Ford led the pack with a 17% gain. New cars that are affordable and highly rated by quality surveys are a big reason for the gain.
- Ford posted first quarter earnings of $1.61 billion, or $0.40 per share, versus expectations of $0.37 a share. In the same quarter of 2012, earnings were $1.4 billion, or $0.35 per share. Analysts were looking for $0.37 per share.
- It was Ford’s 15th consecutive quarterly profit. And it was carried by North America. Ford’s North American operations booked a pre-tax profit of $2.44 billion. That’s the best number since at least 2000.
- Year to date, Ford’s total light vehicle sales have risen by nearly 13%. Ford’s market share in North America hit 16.3% — and is growing twice as fast as GM or Chrysler. Toyota’s market share contracted by 0.1%.
And that’s not all: Anecdotal data from the auto shipping companies paints a rosy scenario, too.
Clarkson PLC (CKN) is the world’s largest shipbroker. It says global trade will advance 7.2% to 23.27 million vehicles this year. And U.S. imports will expand 3.6% to 3.75 million units.
So, what about all that doom and gloom about the middle class?
Frankly, I am taking a “wait and see” approach over the long term…
There’s no doubt the U.S. economy is in serious transition. But since I tend to be an optimist, I anticipate the resolution will be positive.
In the meantime, we have a rising stock market and improved housing market that are creating a wealth effect that will support a multi-year cycle of improved consumer spending. And Ford will benefit greatly.
Now, I’ve got a Special Report ready for you if you’d like to learn a little more about the income stocks we’re holding in The Wealth Advisory portfolio. You can download your free copy here.
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
