The important Auto China 2012 show has allowed many large manufacturers to increase their commitment to the People’s Republic. It is the world’s largest market for cars and light trucks, with sales of 18 million last year. What has not been mentioned much is that these investments may not return capital as expected. China’s auto market growth has stalled, and local companies have become more powerful competitors to share leaders General Motors (NYSE: GM) and Volkswagen. This leaves little room for the next tier of manufacturers, which includes Ford (NYSE: F) and Toyota (NYSE: TM). The press has remarked that a number of SUVs and luxury cars are on display at Auto China 2012. The upper class in China continues to grow quickly, and with it the appetite for cars from Mercedes, Audi and BMW. None of these firms wants to say it, but each has to offer discounts to gain sales. That is a sign that vehicle demand, even at the high end of the Chinese market, has flagged.
Apple Going Soft?
Apple (NASDAQ: AAPL) announces earnings at the close today. The sell-off in the company’s shares so far this month shows that many investors believe that the sale of iPhone and iPads will not be up to expectations. There is even more concern that Apple’s forecasts for the current quarter and the balance of the year will be soft. Apple normally guides toward the low end of expectations and then beats them. This quarter, that trend may end. By most measures, Apple’s value is not really extraordinary. Its PE on a trailing 12-month basis is only 16, which is modest for a growth stock that controls market share in most of its businesses. But Apple also has an important card it will play soon. The iPhone 5 will be released in the next several months. It has an important advantage over its recent predecessors. The iPhone 5 will run on the wildly successful 4G networks deployed by AT&T (NYSE: T) and Verizon Wireless. The desire for consumers for a combination of high-speed wireless and a new iPhone will be irresistible.
Nokia Knockout Punch
The blows to Nokia’s (NYSE: NOK) fortunes have become fatal now. Fitch downgraded the company’s debt to BB+ from BBB-. The outlook for the Long-Term Issuer Default Rating is negative, Fitch reported. The reason for the downgrade is not new, but the fact that it come from one of the “big three” ratings agencies is devastating:
The downgrade reflects Fitch’s view that the deterioration in the company’s core Devices and Services division in Q1, together with the company guidance of -3% non-IFRS operating margins or below for the division for Q2 and the general lack of visibility beyond this point, means Nokia’s profile is no longer commensurate with an investment grade rating.
The flawed launch of Nokia’s line of Lumia handsets and its alliance with Microsoft (NASDAQ: MSFT) have not been close to enough to offset concerns, which existed even before new management began to restructure the company.
Spain Takes a Hit
Spain’s financial future took another thrashing today. The yield it had to pay on new bonds almost doubled from its last auction. The yield on three-month bills was 0.634%. For six-month paper, it rose to 1.58%. The figures are a sign that Spain cannot convince the capital markets that its fortunes are safe for even a few short months. Spain’s unemployment is more than 23%. And the consumer economy is so poor that demand for home loans dropped 47.1% on a an annual basis in February, while capital loaned dropped 54.8%. Spain’s housing market already has been damaged enough that the drop in real estate values is a major cause of the trouble with the nation’s largest banks.
Douglas A. McIntyre