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Templeton's Stock Rose 50 Percent in 3 Months

Thursday, 24 March 2005 12:00 AM

1. Templeton's Stock Rose 50 Percent in 3 Months
2. Kia's 3-to-1 Advantage Over GM
3. Inflation News Whacks Stocks
4. Oil Surge Threatens More Price Increases

1. Templeton's Stock Rose 50 Percent in 3 Months
2. Kia's 3-to-1 Advantage Over GM
3. Inflation News Whacks Stocks
4. Oil Surge Threatens More Price Increases

Templeton

Sir John Templeton Reveals Investment Secrets
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1. Templeton's Stock Rose 50 Percent in 3 Months

With the recent bad news about General Motors, Sir John Templeton must be gloating over his "best stock pick in the world," a foreign automaker whose stock price has risen 50 percent in recent months.

Templeton called this stock "the best bargain in the world" -- and it is up 51% since last December, when he first recommended it to us.

Meanwhile, GM has fallen dramatically -- some one-quarter in value.

In the same time frame, the S&P 500 fell just 1.7%.

Had you parked your money where Templeton advised you to, you would have made more than 50% on your money in a matter of months, as the overall U.S. market has been on a downward trend.

This stock Templeton recommended -- and he has invested his own money into -- is South Korea's Kia Motors.

The Kia recommendation is one of several recommendations Templeton made exclusively to readers of NewsMax's exclusive Financial Intelligence Report.

As Kia has skyrocketed, GM looks like the house is on fire.

First the company had to deal with the rather awkward announcement of a revision to revenues this year. That move sparked a 14% decline in GM's share price in a single day. As if that wasn't enough, a story broke that finance giant GE Capital had pulled a line of credit, which would have delayed payments to subcontractors of GM. As it turned out, the story was inaccurate and caused more wild gyrations in GM stock.

But sadly, the story at GM is not a good one. The company, formed in 1908, has been the global industry sales leader since 1931, making it the leading U.S. automaker. With operations in 32 countries and sales across 200 nations, the company employs some 324,000 workers.

But that's a far cry from the 767,200 workers it boasted at the start of the 1990s. Indeed, the company has shed 270,000 workers since 1998. Two things went wrong for GM over the last decade or so.

First, it failed to put aside enough cash to pay for the growing pension and medical benefits of its current and future employees. That led to one of the largest pension deficits ever, which surfaced following the stock market crash at the end of the '90s.
 
Not only was GM running a huge deficit, but the company also had much of the assets from the pension scheme invested in its own stock. The company, along with other listed stocks, saw the value of its assets shrink at a time when liabilities continued to grow.
 
Second, the rise of eastern car production continued to grow. Japanese and Korean production and imports, with their cheaper labor costs, were competing against highly unionized American auto plants.



2. Kia's 3-to-1 Advantage Over GM

Korea's Kia Motors produced a monthly average of 11,216 cars and minivans in 1999 compared to more than 413,000 at GM. That means that for every 100 cars rolling off the production line at GM, Kia rolled out three vehicles. By 2004 Kia Motors had doubled that monthly output as its strategy of competing on price with larger automakers was becoming successful. The Korean giant produced more than 22,000 autos each month last year as GM saw production fall to 384,775.
 
Kia now produces six cars for each 100 produced at GM. It may seem like a small number, but investors made their minds up long ago.

Readers of NewsMax's Financial Intelligence Report have already been warned to avoid investing in either major airlines or U.S. automakers.

Last December, NewsMax's editor-in-chief and Financial Intelligence Report publisher Christopher Ruddy traveled to the Bahamas, where he interviewed legendary investor Sir John Templeton and learned the great investor's latest investment strategy.

At the time, Templeton told readers about Kia Motors and how the company might one day become as legendary as General Motors did in its heyday.

 

The saga at GM continues. Major credit agencies put the company's debt rating on watch for a possible downgrade. That move pushed the cost of borrowing upward for GM -- a harsh blow at a time when the Fed is raising interest rates and government bond yields are heading higher, putting corporate debt under even more pressure.

As the chart above reveals, investors know on which side their bread is buttered. Kia's shares are reaping the rewards of solid management and steady growth, while the fortunes at GM are looking grim.

3. Inflation News Whacks Stocks

First came the warning from the Fed about inflationary pressures in the pipeline... and then came the numbers. The market took a pounding after the Fed move.

On Tuesday the Fed added to its marginal interest rate hike a clear warning that the threat of higher prices was on the horizon, although no serious problems have yet been encountered. Bond traders took that message to mean the Fed was likely to step up the pace of tightening in the coming months.

On Wednesday, traders were greeted with news that core inflation had increased again (as measured by the Bureau of Labor Statistics) at an annual pace of 3%.

The chart shows the relative weighting of categories measured at the BLS, along with the annual changes. The three major categories are housing, transport and food and beverages, which together make up almost three-quarters of the overall index.
 
While averages are a great thing, the data masks larger price pressures. For example, while food and drink rose less than the core 3% rate, dairy prices rose 5.6%. Fats and oils rose 4.3% while food items bought outside the home (that's a Big Mac to you and me) rose by 3.8%.
 
The cost of shelter rose by 3% for the year through February, but the cost of lodging rose by more than twice that -- at 7.4%. That's great news if you run a hotel, but not if you are a paying guest. Part of the reason that rates have increased is due to the rising costs of maintenance. The housing component of the report also covers the costs of energy related to running a home or other dwelling.
 
In the February report, the BLS says that the cost of fuel oil rose by 21.5% and that gas and electric rose by 5.1%. The price paid to maintain water, sewer and trash services rose by 5.5%.
 
In the transport category, the price of new cars was 1.2% higher than a year ago, while the cost of used cars was 5% higher. But a nice little shot to the pocketbook came from the 14.8% rise in the price of motor fuel versus a year ago.

Medical costs continue to run at a rate above that of the core inflation pace. Medical care services have risen by 5% in the past year to more than three times their 1997 level. Hospital services are 5.4% more costly than last year, and they too have risen by more than fourfold since 1997.
 
For consumers, higher prices are not disastrous, as they will be compensated by wage growth. The environment for corporate pricing power has shifted subtly, with companies increasingly able to make price rises stick. Ultimately, that's a stock market positive.



4. Oil Surge Threatens More Price Increases

The effects of the recent spike in oil prices are reaching far beyond just the world's energy-reliant industries, propelling cost increases for everything from basic military supplies in Iraq to lawn supplies in Iowa to clothing and toys in China.

According to a Wall Street Journal report, many companies "are moving more aggressively to cut costs and raise prices to offset raw material and energy costs that now appear likely to stay high for the foreseeable future."

Though the rise in oil is contributing to slower growth and increased inflation, the Journal claims there has been no real threat to the global economy, which remains strong and has been able to take the hit.

Some companies are directly absorbing higher fuel costs, while others are passing on some of the cost to customers.

However, the article goes on to say: "The prices of materials derived from oil, including plastic and synthetic rubber, also are going up, affecting computers, packaging and car tires. Even military tents have been hit. Seaman Corp., which buys petroleum-based coatings for industrial fabrics used among other things for tents the U.S. military sends to Iraq, saw a double-digit price jump in oil-derived raw materials just before Christmas. It recently was told to expect another wave of increases within 90 days. The closely held Wooster, Ohio, company has passed part of the increase on to its customers, but also has seen its profit margins squeezed."

In U.S. farming, profits are expected to drop about 20% this year from last year's record high of $74 billion, due in part to soaring energy costs that are raising prices on everything from fuel and fertilizer to weed killer.

So what are the future implications for the oil hike -- and how does this crisis differ from that of the 1970s?  Back then, higher oil prices quickly spiraled into wage and price inflation.

But now the world's central banks are able to move quickly to stem inflationary pressures by tightening monetary policy. Or so they claim. Time will tell.

"As long as everyone believes the world central banks will raise rates fast enough to anchor inflation expectations, oil won't matter," says Ken Rogoff, a Harvard University economics professor and former chief economist for the International Monetary Fund.

Still, some experts warn that if oil reaches a new high and stays there, as some analysts predict, consumers could stop spending, killing economic growth. They see spending cuts eating into employment, putting a further damper on consumer sentiment.

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Thursday, 24 March 2005 12:00 AM
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