Sell BorgWarner (BWA)

What, if anything, should you be selling into this rally?

That’s hard to answer when you don’t know with any precision how long this rally, which seems to me to be taking a breather today, might run. (My crystal ball is in the shop.) Even with this rally I think this market is range-bound, but I don’t know if the top of the range is the August 31 high of 1219 or the July high of 1344. With the Standard & Poor’s 500 Index closing at 1175 yesterday, September 27, the closer of those two tops is just 44 points of 3.7% from here.

The way I’m approaching this question right now—acknowledging my state of imperfect knowledge—is to think about the fundamentals that haven’t changed.

So, for example, we’ve got a huge rally in European stocks on relief that, apparently, Greece won’t be forced to declare a default on its debt in either September or October. But while another postponement of a Greek default is reassuring to global and European financial markets, it doesn’t fix the basic problems in the European Monetary Union, and we know that we’re almost certain to have to revisit the Greek debt problem in December when the country owes a big payment on its debt.

And we know that nothing in this current rally—which I would characterize as rally on relief that we aren’t going to see the end of the financial world as we know it this month or next—changes the forecast for extremely anemic economic growth in Europe in 2011 and 2012.

In its World Economic Outlook, released on September 11, the International Monetary Fund projected that the U.S. economy would grow at an annual rate of just 1.5% in 2011 and just 1.8% in 2012. Among other depressing conclusions that’s not enough growth to make a significant dent in unemployment.

But that growth rate makes the United States look like a rabbit next to the EuroZone’s snail. The IMF projects that the economies of the euro nations will grow by 1.6% in 2011 and then stagger to a 1.1% growth rate in 2012.

And even those numbers understate the damage inflicted on European economies in 2011. After growing at a 2% annual rate in the first half of 2011, the EuroZone economies will grow at just a 0.25% annual rate in the second half of the year, the International Monetary Fund projects.

To me that suggests that one priority for selling into this rally is to reduce your portfolio’s exposure to the very slow growth EuroZone economies. Read more

Ford’s new engine announcement shows direction of auto industry

Better gas mileage and enough power to keep customers happy.

You can see where the global auto industry is headed in Ford Motor’s (F) announcement that it will build its first three-cylinder engine.

The small engine—the smallest Ford has even used—will go into global car lines such as the Fiesta and Focus. By shrinking the size of the engine and using direct-fuel-injection technology Ford hopes to get up to a 20% improvement in gas mileage from these engines over its current smallest four-cylinder engines

And thanks to the addition of turbochargers, Ford thinks it will be able to get enough va-va-voom from its three cylinder engine to make up for their smaller displacement.

Ford hasn’t identified which auto supplier will provide the turbochargers for the three-cylinder engine. Read more

Update Johnson Controls (JCI)

Let me use Johnson Controls (JCI), which reported quarterly earnings on January 20, as another concrete example of how to think your way through what to do about individual stocks when the U.S. market seems to be looking for a 5% pullback and overseas markets have the potential for a 20% correction.

Johnson Controls illustrates to me the importance in a potential slowdown of emerging market economies of looking at where a company’s growth, revenue, and earnings are coming from in terms of geography and industry.

The fiscal first quarter of 2011, the one the company just reported, is typically a seasonally weak quarter—which is what makes the results so positive. The company reported record net sales for the quarter of $9.5 billon, up 13% from the fiscal first quarter of 2010. Earnings of 55 cents a share beat the Wall Street consensus by a penny.

The stock got dinged because margins fell by 1.7 percentage points from the fourth quarter of fiscal 2010. But a drop in margins in this quarter is normal for the company and year-to-year margins climbed by 0.1 percentage points.

Six months ago Johnson Control’s extraordinary performance this quarter in China’s market for auto interiors would have been grounds of cheering. Sales in Asia climbed 49% and in China alone by 37% from the first quarter of fiscal 2010. The company now estimates that it holds a 45% share of the Chinese auto seating market. The company’s battery business in China grew at a double-digit rate and the company will begin construction on a third Chinese battery plant in February 2011.

Of course, what was good news then generates worry now. Read more

Is China’s auto market about to slam on the brakes?

Looks like we’re headed to a car wreck in China—or at least something more seriouis than a fender bender.

On one side, speeding toward the intersection, is soaring demand for cars in China. Total vehicle sales (autos, trucks, busses) rose by 32% in 2010 to 18.06 million units.  Passenger car sales jumped by 33%, according to the China Association of Automobile Manufacturers. (For comparison, sales of cars and light trucks in the United States rose by 11% in 2010 to 11.6 million units.)

On the other side, heading to the intersection with just as much speed, are a truckload of measures designed to damp demand growth in 2011. From the central government these include an end to tax breaks and subsidies. For example, the national government has raised the sales tax on small cars to 10% from 7.5% and ended subsidies for rural residents to buy cars.

From local governments even more draconian measures include restrictions on the number of new license plates, auctions to raise the price of new license plates, and a freeze on car purchases by government offices, all designed to help reduce traffic congestion that is choking cities such as Beijing and Shanghai.

For example, on December 24 Beijing introduced a new lottery system for license plates that will cap new registrations for 2011 at 240,000. That’s a third of the 2010 level. In addition only potential buyers who have paid taxes and social insurance assessments for more than five years are eligible for a new registration. That will take about 10 million potential buyers out of the market. (Beijing had 4.7 million registered vehicles at the end of November.)

The end of subsidies and local anti-congestion measures will reduce growth in China’s auto sales to 10% to 15%, projects the China Association of Automobile Manufacturers. That would still leave total auto sales on a pace to reach 20 million in 20111, according to Nomura Holdings.

In comparison U.S. auto sales are forecast to hit 12.8 million to 13.5 million in 2011

U.S. automakers are back, baby.

And so are their stocks.

December vehicle sales in the U.S. climbed to a 12.5 million unit annual rate. That’s without help from “Cash for clunkers” or any other government subsidy program. And with relatively restrained incentives from the automakers themselves.

For the month General Motors saw sales climb by 8.5% from December 2009 and Ford saw sales grow by 6.8%. General Motors retained a leading 19.6% share of the U.S. market and Ford jumped over Toyota to take the No. 2 slot with a 16.6% share. For the full year General Motors saw a 6.7% climb in sales and Ford’s sales grew by 15.2%.

No wonder the price of Ford soared in 2010—up 67.9%. General Motors only emerged from bankruptcy this year. The company’s November 10 IPO (initial public offering) closed at $34.19 on its first day of trading. From that close to the close on January 6, the shares were up 13.8%

But looking ahead, if in 2011 you really want to leverage the recovery in auto sales, shares of General Motors and Ford aren’t the best stocks to own. To get the most mileage from the auto industry, to really turbo charge your returns, to … well, you get the idea, look to the shares of auto industry suppliers. Read more