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Atlanta, July 23 (Bloomberg) -- Richard Nash, who helps oversee $73 billion for Victory Capital Management Inc., is selling Ford Motor Co. shares and holding onto International Paper Co. That's because the No. 2 automaker is cutting prices, while the biggest paper company is raising them.
Nash, the chief market strategist for Victory Capital, an investment firm based in Cleveland, shed shares of Ford and General Motors Corp. in recent months as they lowered prices by offering incentives. Those price cuts are among the most visible signs of why U.S. inflation is at a 16-year low.
Few companies in the U.S. economy are finding they can pass along higher costs to their customers. That's a scenario the Federal Reserve calls price stability, and it has allowed central bankers to keep interest rates at a generation low. At the same time, constrained prices lead to constrained profits, putting the brakes on business investment.
``Given the fact that most of corporate America is finding it difficult to put through any price increases, companies that can will be rewarded,'' Nash said.
Those companies are few and far between. Most are makers of raw materials, which are benefiting from a pickup in orders among U.S. goods-makers. In last month's manufacturing survey by the Institute for Supply Management, companies reported paying more for steel, copper, aluminum and plastics, pushing the survey's prices-paid index to its highest since May 2000.
Companies that sell directly to the public -- airlines, carmakers, computer companies and retailers -- are having a rougher go of it.
`Not Enough Demand'
U.S. consumer prices rose 0.1 percent in June, the Labor Department reported Friday, following no change in May. Prices last month were 1.1 percent higher than a year ago, matching the inflation rate of 1986 and the smallest increase since the Beatles came to America.
The major U.S. airlines slashed fares Friday as much as 40 percent. Fares are near 15-year lows as carriers compete to draw from fewer travelers after the Sept. 11 terrorist attacks. The lower ticket prices and passenger traffic have contributed to combined losses of $7.3 billion last year and $2.4 billion in the first quarter.
``We have too much capacity and not enough demand,'' Delta Air Lines Inc. Chief Executive Officer Leo Mullin said on Thursday during a conference call with analysts to discuss the company's second-quarter loss of $186 million. ``Until we get that in better balance, we really won't have any pricing power.''
Pressure on Earnings
Automakers have returned to zero-percent financing and are offering deeper discounts than in the aftermath of Sept. 11. They've pushed incentives to an average of $1,400 a vehicle, up from $1,200 in October 2001, when sales of U.S. cars and trucks peaked at a 21.3 million-unit annual clip, according to J.D. Power and Associates.
Some investors are betting the incentives will hurt second- half earnings. Ford shares have declined about 27 percent since May 22, and GM's have dropped more than 30 percent.
``Ford and General Motors are getting so promotional,'' Nash said. ``When we hear of companies cutting prices, we have to ask, `Hey, do we want to get out of this?'''
Higher Productivity
Fed Chairman Alan Greenspan isn't concerned. He and other policy makers are counting on productivity gains -- better technology, more efficient workers -- to fuel rising profits. The Fed has kept its benchmark interest rate at 1.75 percent for seven months. It hasn't been that low for so long since 1958. Low rates have spurred consumer spending, which accounts for two-thirds of the economy.
In a ``situation in which pricing power is nonexistent,'' productivity gains have been ``surprisingly successful,'' Greenspan told Congress last week.
Productivity rose at a revised 8.4 percent annual rate in the first quarter, the fastest since the second quarter of 1983. The result was a 5.2 percent decline in unit labor costs, and that means higher profitability.
Still, that has offered little solace to investors. Growth slowed in the second quarter to a 2.3 percent annual rate, less than half the 6.1 percent pace recorded for the first three months of the year, based on the median of 39 forecasts in a Bloomberg News survey.
Steel Industry
``Until we see stronger demand, pricing is going to be very difficult'' for the 50 companies in the Northern Large Cap Value Fund, said co-manager Carl Domino. The fund, which owns shares in Procter & Gamble Co., Hewlett-Packard Co. and General Electric Co., has lost about 22 percent of its value over the past four months. The broader Standard & Poor's 500 stock index fell 28 percent over the same period.
Industries in the early stages of production, and far removed from store shelves, have bucked the trend.
Steelmakers have had less price competition from abroad since March, when the Bush administration imposed duties as high as 30 percent on foreign steel. Hot-rolled steel, used in cars and appliances, sells for about $340 a ton on the spot market, more than 50 percent above January's average of $220 a ton.
U.S. Steel Corp., the largest U.S. steelmaker, yesterday reported second-quarter earnings of $27 million, or 28 cents a share, compared with a net loss of $30 million, or 34 cents, a year earlier.
Higher Premiums
International Paper and Georgia-Pacific Corp. are charging more for paper and pulp products. And Dow Chemical Co. is boosting prices for chemicals used in vinyl to plastic car parts after slashing them last year as the economy slowed.
``Pricing power starts with the basic commodities,'' said Tim Ghriskey, founder and hedge fund manager at Ghriskey Capital Partners, which owns shares in Georgia Pacific and Dow Chemical.
Homebuilders are benefiting from a shift away from stocks and into investment properties. While the Standard & Poor's 500 stock index is down 30 percent over the last 12 months, the average selling price of a new house has risen 6 percent. That's been a boon to Toll Brothers Inc., Lennar Corp. and other builders.
Insurers, too, are charging more, putting an end to a decade- long pricing war after suffering large losses from claims related to Sept. 11, mold and asbestos. American International Group Inc., the biggest insurer by market value, raised prices on business and auto policies after the Sept. 11 attacks, which cost the industry about $50 billion.
Keeping `Insulated'
Tenet Healthcare Corp., the second-biggest U.S. hospital company, said earlier this month that profit more than doubled in its fiscal fourth quarter ended May 31. Tenet, based in Santa Barbara, California, raised the prices it charges managed-care insurers, and revenue per admission at its hospitals owned at least a year surged 12.7 percent.
Tenet's ``premium pricing'' is one reason why Bill Young invests in the company, whose shares have risen about 27 percent over the past year.
``Investors are interested in companies that earn money in good times and bad times,'' said Bill Young, co-manager of the $10 million Sparrow Growth Fund. Tenet is one of 20 stocks in the fund and makes up 7 percent of the holdings. ``It keeps you insulated.'' |
