Ramblings of a Portfolio Manager 8-17-2009

You Can’t Cruise Main Street in 500,000 Shares of GE

The annual classic car auction at Monterey, CA was held last weekend. Few records were set but the sales numbers were impressive, as they have been for the last decade. One car enthusiast paid more than $7mm for a 1965 Shelby Cobra Daytona race car while another plunked down $2.75mm for a 1958 Ferrari California Spyder. Yet, as we write this the world equity markets are in full sell-off mode. The Chinese Shanghai Index closed down nearly 6% and is now down over 17% from its August 4^th high while Japan’s Nikkei index closed down 3% and the S&P 500 has fallen over 3% since Thursday. Fears over the health of the US consumer are driving the sell-off, according to market pundits. Huh?

Actually, this seeming paradox makes quite a bit of sense and says a great deal about market psychology and the current state of the capital markets. Since the 1980’s, classic cars have morphed from fun toys held by car nuts with too much money and/or time on their hands to a serious asset class for investors. We won’t comment on the advisability of investing in old motor vehicles as a retirement strategy, however, we will examine the reason for the car market’s transformation. There have been two significant periods during which classic cars were treated as assets rather than playthings. The first was immediately preceding and following the stock market crash of 1987. Back then, cheap money had fueled both the US real estate and Japanese stock markets and the beneficiaries of those booms plowed a portion of their new found wealth into high end “collectibles” such as art, and then cars. When the stock market crashed in 1987, the classic car market boomed further as money came out of stocks and sought a “more stable” return. Again, art and old cars were the targets since their values had already been rising and—presto!--cars became an asset class. That house of cards tumbled in 1989 along with real estate and the Japanese economy. The current boom in classic car prices traces back to the Barrett Jackson Car Auction of January, 2002. Immediately following the attacks of 9/11, many baby boomers, wealthy after years of a strong economy and a rising stock prices (sound familiar?), began to feel that life was too short and that it was time to buy “the cool car I always wanted in high school but couldn’t afford.” The market sell-off following 9/11 and the Enron and WorldCom scandals further solidified the asset class status as once again money sought a stable asset whose values were rising. The car market’s boom was then further fueled and perpetuated over the ensuing years by real estate wealth (again, sound familiar?) and although it has weakened in the last 12 months it has not crashed in the true sense

Can we draw any conclusions from this history lesson? The strongest message we take is that the classic car market needs to correct, if history is any guide, and the fact that it has yet to do so signals that, perhaps, money is still seeking returns uncorrelated to the stock market. That, we view, as a longer term positive for stocks as it means investors most likely still doubt the recent rally and that skepticism, which is healthy to any market longer-term, still abounds.