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<\/a><\/p>\nSELF INFLICTED\u00a0ABUSE<\/strong><\/p>\n In the fall of 2015 we released a video study entitled: “The Coming Global Auto Abyss<\/a> – Too Much Supply, Too Many Brands; Combine with Too Much Credit!”. \u00a0<\/em>We concluded that low interest rate monetary\u00a0policy for the auto industry was like handing crack cocaine to a drug addict. The auto industry would rapidly and irresponsibly\u00a0abuse it, to such an extent that it would once again ‘spin out’\u00a0and careen back\u00a0to what can only be termed the\u00a0Washington ‘substance abuse center’. Whether mis-management or clever strategy we are unfortunately being proven right and are now witnessing the reality.<\/p>\n The\u00a0Washington Keynesian planners mistakenly believe that cheap money still stimulates demand. It historically did this before it became a legally addicting substance, but even its original tenet\u00a0was essentially\u00a0based on\u00a0bringing demand forward. By design this creates a demand hole in the future, but as Keynes himself famously rationalized: “in the long term we are all dead” … so not to worry when the economic need is urgent! Setting aside for a moment this critical structural reality, we need to remember that cheap credit additionally fosters structural ramifications seldom elucidated:<\/p>\n FORD INADVERTENTLY\u00a0SIGNALS THE\u00a0REALITY<\/strong><\/p>\n During\u00a0Ford Motor company’s latest earnings call, while defensively attempting to justify a massive 50% shortfall in earnings (falling to $0.30-0.35 from $0.68 in Q1 2016 and versus expectations of $0.48), they disclosed\u00a0that sales volumes are now expected to fall off this year and next with used car prices dropping for several years!<\/p>\n How could this be with US industry sales at historic levels approaching 18M units per year and no one anywhere with any credibility, even remotely suggesting \u00a0that a US recession was imminent? \u00a0The answer is that ‘hole’ we referred to above has arrived but it is a much worse chasm because of the industry financing options that have been foisted\u00a0on the unsuspecting, tapped out US buyers since the “cash-for-clunkers” slight of hand.<\/p>\n The\u00a0industry has created a minimally two year hole in the market that will flood used and new auto supply inventories while buyers are effectively\u00a0locked out!<\/p>\n This is not how a well managed industry strategically and responsibly plans, unless of course the game is actually government regulatory arbitrage (think: “Cash-for-Safety” to justify new expensive regulatory features)?<\/p>\n HOW IT WAS ORCHESTRATED\u00a0– GIVE BUYERS ONLY TWO CHOICES<\/strong><\/p>\n Auto Leasing has exploded since 2015 and now\u00a0approaches\u00a035% of all sales. The Lease terms are normally 2-3 years with questionable residuals being used to achieve low lease rates on highly priced units. We have now entered the period where those initially leased units are being returned – in massive. Meanwhile, those Buying versus Leasing have been financing over much longer terms. Ford detailed this with the following charts for their units sold.<\/p>\n THE FORD MOTOR EARNINGS PRESENTATION<\/p>\n Vehicles prices since 2008 are dramatically higher. A $28,000 vehicle in 2008 is now $50-$55,000 and loaded down with new standard equipment features such as backup cameras, WIFI, Seat Warmers etc to justify the higher prices. Prices that can only be sold via cheap credit financing terms. \u00a0It was to be an expected marketing strategy to drive profits higher while money was cheap.<\/p>\n As a result:<\/p>\n The government wanted it, the central bankers wanted it and the industry wanted it. To achieve this it meant a sustained period of cheap money and creative financing. But it comes with a price tag that must soon be paid! \u00a0 All of this is now\u00a0hitting as Ford inadvertently warned!<\/p>\n THE COMING CHASM IN AUTO DEMAND\u00a0IS ‘BAKED-IN’<\/strong><\/p>\n CONSIDER THE FOLLOWING 7 INDUSTRY FACTS<\/strong><\/p>\n WHAT WILL WE DO WITH THIS INVENTORY?<\/strong><\/p>\n There are now approximately 265 million light vehicles registered in the US today compared to 255 million driving age people, or just over 1 car eligible driver. How many cars can we absorb, especially since useful age of vehicles has been increasing by one year every 6.7 years over the last 20 years.<\/p>\n We have a massive problem looming and the auto industry knows it. We are fully expecting\u00a0broad based problems to emerge over the next 18 months in multiple areas of the auto industry:<\/p>\n This is all as predictable as a drunken sailor on shore leave. \u00a0We knew cheap money would be too much for auto executives to\u00a0refuse and oversupply was a sure bet!\u00a0So will be the industries return to the Washington “substance abuse center”. \u00a0Expect the industry to be back at the government feeding trough asking for help.<\/p>\n\n
<\/a>DUSTRY CULTURE: Sustained periods of cheap credit unintentionally changes buying behavior patterns, expectations and\u00a0financing structures of industries.<\/li>\n<\/ul>\n<\/p>\n\n
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TRADE-IN TREADMILL<\/b>:\u00a0 Typically, car dealers tack on an amount equal to the negative equity to a loan for the consumers’ next vehicle. To keep the monthly payments stable, the new credit is for a greater length of time. Over the course of multiple trade-ins, negative equity accumulates.\n\n
\n\u2022 Incentives currently average 10.4% of a new-vehicle\u2019s MSRP, which is the highest percentage since March 2009 when rebates averaged 11.3% during the Great Recession.
\n\u2022 SUVs and pickup trucks\u2014with a combined market share of 61.5%\u2014still dominate the sales mix in a market that is bolstered by rich incentives averaging $3,768 per vehicle, according to a March sales update from J.D. Power and auto forecasting partner\u00a0LMC Automotive.<\/li>\n
\n\u2022 A decline in used-car prices is a bad sign for dealerships, which typically see better returns on used vehicles versus new ones.<\/strong>
\n\u2022 Limited supplies have driven up prices in recent years, but analysts have warned that used vehicles would increase in number as leased vehicles are returned to dealer lots.
\n\u2022 Since 2015, consumers looking for lower monthly payments have leased new vehicles at a record pace. Many of those cars, trucks and SUVs that were leased at the start of the recent U.S. sales boom are now reaching the end of their terms.
\n\u2022 Ally, the former finance arm of General Motors (GM), noted in a recent presentation that full-year earnings growth would fall short of expectations, citing the anticipated price drop for used cars. \u00a0\u201cWe\u2019ve seen a pretty dramatic move in 2016,\u201d said Ally CFO Chris Halmy, adding that the downward trend is expected to continue.
\n\u2022 The used-vehicle price index from the National Automobile Dealers Association posted a 3.8% decline in February compared to the prior month. NADA also said wholesale prices fell 1.6%.
\n\u2022 In the first quarter of 2017, Ally saw used-car values retreat 7%, a steeper move compared to the company\u2019s projection for a 5% drop in 2017.
\n\u2022 Falling used-car prices are a troubling trend for manufacturers, dealers and financial services firms, including Ally and in-house lenders such as Ford (F) Credit. Some bargain hunters will be swayed by affordable used cars, thus reducing demand for new models. When sales begin to slow, automakers often ramp up discounts to attract buyers, a strategy that cuts into profits.
\n\u2022 Incentive spending in March rose 13.5% month-to-month, hitting $3,443 per vehicle, based on data from ALG, TrueCar\u2019s (TRUE) research division. Those gains were slightly offset by an increase in transaction prices.<\/li>\n
\n\u2022 <\/a>Car Inventories Swelled to 13-Year High – highest level since 2004, a potentially troubling sign for automakers.
\n\u2022 In February, new vehicles waited in dealer inventory for an average of 74 days before a sale, the most \u201cdays to turn\u201d since the government\u2019s Cash for Clunkers program in 2009.
\n\u2022 Passenger cars accounted for roughly 38% of all new vehicles sold during the first two months of the year, reflecting a sharp decline. \u00a0Sedans have fallen out of favor with many consumers enticed by roomy and fuel-efficient crossovers. Although manufacturers have cut production of some small cars, supplies remain at elevated levels.
\n\u2022 Caldwell noted Banks are stretching out loans to make payments more affordable for buyers, extending loan terms as high as 84 months.
\n\u2022 The average loan term in February marked an all-time high at 69.1 months, beating the previous record set in September 2016, based on Edmunds data.
\n\u2022 For the full year, sales appear to be falling short of last year\u2019s record of 17.55 million vehicles. Edmunds is looking for a 2017 total of 17.2 million vehicles amid softer consumer demand for both cars and utilities as the year progresses.<\/li>\n<\/ol>\n<\/p>\n\n