Skynet Makes Its Move: Ford Wraps Workers In Exoskeleton

The secret to crustaceans and insects belonging to the phylum Arthropoda family are their exoskeleton. Ants, lobsters, hermit crabs, spiders, and beetles are all creatures whose life is made possibly by their exoskeleton body plan. Although humans do not have exoskeletons, but rather endoskeletons, it hasn’t stopped the U.S. Defense Advanced Research Projects Agency (DARPA) in pursing this technology.

Over the years, DARPA has invested millions into exoskeleton suits for ground troops. This wearable robotic system gives soldiers the ability to carry heavier objects, run faster, and even leap over large obstacles.

From the battlefield to North American manufacturing plants, Ford is now pilot testing upper body exoskeletal technology called EksoVest. This wearable technology alleviates stress and supports the Ford assembly line worker, who might have to do a task up to 4,600 times per day and up to a million times per year.

According to Ford, embracing the technology could decrease worker fatigue and produce overall better worker safety in facilities.

These are the approximate number of times some Ford assembly line workers lift their arms during overhead work tasks. At this rate, the possibility of fatigue or injury on the body increases significantly. But a new upper body exoskeletal tool – the result of a partnership between Ford and California-based Ekso Bionics – helps lessen the chance of injury.

Ekso Bionics® (EKSO) produces the EksoVest, Ford has adopted the non-powered version, designed to lift five pounds to 15 pounds per arm. The suit’s composition is lightweight carbon-fiber strapped to the back of an operator, as shown below…

Russ Angold, co-founder and chief technology officer of Ekso Bionics, said “collaboratively working with Ford enabled us to test and refine early prototypes of the EksoVest based on insights directly from their production line workers. The end result is a wearable tool that reduces the strain on a worker’s body, reducing the likelihood of injury, and helping them feel better at the end of the day – increasing both productivity and morale”.

So far, Ford is pilot testing EksoVests in two U.S. plants and in other regions….

With support from the United Automobile Workers and Ford, EksoVest is being piloted in two U.S. plants, with plans to test in other regions, including Europe and South America.  

UAW-Ford Vice President Jimmy Settles said, “with the proven success at the piloted locations, we look forward to expanding this technology to our other UAW-Ford manufacturing facilities.”

Ford’s goal with the EksoVest is to improve workplace safety. Bruce Hettle, Ford group vice president, Manufacturing and Labor Affairs said,

Our goal has always been to keep the work environment safe and productive for the hardworking men and women we rely on across the globe.

 

Investing in the latest ergonomics research, assembly improvements and lift-assist technologies has helped us design efficient and safe assembly lines, while maintaining high vehicle quality for our customers.

Perhaps, there is another reason behind the adoption of the EksoVest.. We believe Ford recognizes the global demographic time-bomb that is about to explode on developed economies. As Visual Capitalist’s Jeff Desjardins notes, there’s an economic headwind businesses, Central Banks, and global Governments will face: the percentage of the global population that is 65 or older will double from 10% to 20% by 2050. Ford is essentially taking the body of a prime working age male let’s say 35-48 strapping an exoskeleton on them and turning output as if they were 20-25.

As the population grows old, Ford is turning the bodies of an aged worker into a highly productive one. Ford recognizes the demographic shift that is about to wreak havoc across many developed world economies.

Bottom line: Has the demographic shift in western economies ushered in the start of a Skynet takeover through the adoption of wearable technology, as Ford is determined to strap employees with robotic suits?…

Why Goldman Just Downgraded GM To Sell

After GM"s stock surged over 35% in the past two months, Goldman finally decided they had seen enough this morning and downgraded the stock to sell with a $32 price target. 

So what caused the downgrade?  Well, Goldman figures GM is facing just a few "minor" headwinds over the next couple of years which include collapsing industry volumes and declining margins on crossover products which should result in a ~22% decline in EBIT next year...oh, and the fact that the company suddenly trades at an historically high multiple, just as earnings are about to collapse, was also viewed negatively by Goldman"s auto team.  Here"s the summary of their downgrade:

"Looking ahead into 2018 and given the current valuation level, we see a downward infection in GM earnings and consequently downgrade shares to Sell. We expect that a normalization in SAAR coupled with the company’s product launches in 2018 will weigh on GMNA pro?tability. Our work on pickup trucks and crossovers suggest that GM likely experiences volume and mix headwinds that exacerbate the cyclical pro?t headwinds. Combined, we see this driving 2018E EBIT -adjusted down by 22% yoy and compressing overall corporate margins. We see 28% downside to our 12-month price target of $32."

On overall industry volume, Goldman sees a 15% decline in U.S. SAAR over the next couple of years to 15mm which they think will be prompted by, among other things, "challenging consumer affordability" which will result from rising interest rates and a tightening of auto credit.

US cycle peaked, and production cuts likely continue: We believe cleared through pent-up demand (given sales above normalized levels since 2013) and challenged consumer affordability (rising interest rates, tightening auto credit) will drive a normalization in US SAAR beginning in 2018, ultimately translating into declines in utility vehicles and passenger cars. As GM generates 106% of Automotive pro?t and 108% of FCF in North America, we expect this cycle normalization to pressure GMNA results going forward.

Meanwhile, Goldman sees GM share loss on pickup trucks in 2018 and declining pricing power on crossovers due to a flood of competitive models in that segment.

Pickup truck changeover leaves GM vulnerable to share loss in 2018: Historically,n pickup truck refreshes drive market share losses of 100bps to 300bps in the year during the launch. As GM approaches a 2018 changeover with incremental downtime and given Ford’s recently refreshed F-Series, we expect share shifts to pressure GM. We see a $2bn headwind in volume/mix at GM related to its 2018 pickup refresh.

 

Growing competition in crossover utility vehicles (CUVs) should weigh onn pricing: As the industry has bene?tted from a mix shift to higher variable pro?t crossovers (from passenger cars), OEMs have shifted their product strategy and 40% of vehicles launching over the next few years are CUVs. As a result, competition in the segment has been intensifying and GM’s CUV pro?tability has begun to compress; we believe this trend likely continues particularly as overall sales slow. As CUVs represent 27% of GM’s portfolio (vs. 22% at Ford), we believe the company will see more pressure relative to its peer, and competition in this segment will weigh on GM’s ability to drive positive pricing.

All of which should result in a "minor" 24% decline North American EBIT in 2018.

Oh, and Goldman figures it also doesn"t help that GM"s stock recently soared to record high multiples just as earnings are getting set to collapse.

Meanwhile, GM shareholders are finally starting to take notice that at a 35% surge in share price, or $18.5 billion in market cap, might not have been completely warranted just because a couple of hurricanes wiped out a few cars in Texas and Florida.

Hurricane Harvey Surge-Nado: Auto SAAR Soars To 30-Year High On Hurricane Replacements

Last month, when we reported auto sales data, we noted that this month would be all about replacement demand from Hurricane Harvey and thus largely irrelavant.  Fast forward 30 days and that appears to be exactly what has happened as annualized auto sales for the month of September suddenly surged to a 30-year high of 18.5mm units, up 15.2% sequentially from a 16.0mm run-rate last month.

That is, of course, unless you believe CNBC"s Phil LeBeau who took to the airwaves earlier today to argue that a substantial portion of the sudden surge in auto sales was not necessarily attributable to the fact that a couple hundred thousand cars were destroyed in last month"s hurricanes but rather just a reflection of an abrupt rebound in consumer demand after months of weak data...

...once you"re done with the laughing fit we can continue to review this month"s auto data...

Not surprisingly, almost every OEM, with the exception of Fiat Chrysler, managed to post a significant YoY increase in sales courtesy of Hurricane Harvey.  The only surprising takeaway was just how wrong wall street was in their estimates for the quarter.

Meanwhile, per the charts below from Stone McCarthy, the transition from cars to trucks continued during September with car sales dropping 2.8% YoY versus and 8.1% increase in truck sales. 

All of which likely contributed to Ford"s announcement after the close today suggesting, among other things, a shift in future capital allocation to increased production of SUVs and trucks away from cars...which should be complete right about the same time that oil prices spike back to $100 per barrel rendering those SUVs/Trucks completely unaffordable again.  Here are the highlights from Ford"s press release:

Accelerating the introduction of connected, smart vehicles and services customers want and value. By 2019, 100 percent of Ford’s new U.S. vehicles will be built with connectivity. The company has similarly aggressive plans for China and other markets, as 90 percent of Ford’s new global vehicles will feature connectivity by 2020.

Rapidly improving fitness to lower costs, release capital and finance growth. Ford is attacking costs, reducing automotive cost growth by 50 percent through 2022. As part of this, the company is targeting $10 billion in incremental material cost reductions. The team also is reducing engineering costs by $4 billion from planned levels over the next five years by increasing use of common parts across its full line of vehicles, reducing order complexity and building fewer prototypes.

Allocating capital where Ford can win the future. This starts with the company reallocating $7 billion of capital from cars to SUVs and trucks, including the Ranger and EcoSport in North America and the all-new Bronco globally. Ford also has plans to build the next-generation Focus for North America in China, saving capital investment and ongoing costs. Further, Ford is reducing internal combustion engine capital expenditures by one-third and redeploying that capital into electrification – on top of the previously announced $4.5 billion investment.

Of course, with this non-recurring, one-time surge in demand helping to offset the industry"s pesky inventory crisis (per table below GM was able to reduce inventory MoM by over 70,000 units), the question now becomes whether OEMs will maintain some discipline and restrict production to reflect a normalized SAAR environment or if they"ll just flood dealer lots all over again...we have a guess.

Of course, while today"s results were largely just noise, shareholders still loved the headlines...

Carmageddon Continues - Dealers "Wildly Overweight" SUVs As Sales Slow

Authored by Mike Shedlock via MishTalk.com,

The auto boom, one of the key components propping up consumer spending, has come to an end.

Dealers are wildly overweight SUVs just as the market turned.

As auto-industry growth stalls and family sedans go the way of the flip phone, one silver lining had been the trusty “crossover” SUV. Sales in the category boomed amid lower gasoline prices and higher demand for spacious wagons with all-wheel drive.

But more clouds seem to be gathering as the summer car-selling season comes to an end. Incentives on SUVs are skyrocketing amid rising inventories, a trend that promises to dent the fat profits the segment has long returned.

Auto makers report sales on Friday, and August volume is expected to rise 2% compared with the same month in 2016, but only because dealers have an extra selling day this year. On an adjusted basis, the rate of retail sales—stripping out deliveries to fleet buyers—will hit the lowest point of 2017, according to J.D. Power, despite hefty sales incentives and new model offerings.

The U.S. auto market’s slowdown isn’t a new story, as analysts widely expected a seven-year growth streak to end and for sales to plateau at roughly 17 million a year for the foreseeable future. Red flags for the crossover market, however, represent a whole new set of headaches, particularly for companies like General Motors Co.

“The industry is wildly overweight on crossovers,” John Murphy, an auto analyst for Bank of America Merrill Lynch, said in a recent presentation. The number of crossover models sold in U.S. dealerships is expected to rise to 110 nameplates by late 2020, up from 78 today, he estimated.

Auto makers like GM—long dominant in the SUV market—have relied on bigger or heavier vehicles with higher price tags to drive profits, and offset the losses that result from sales of family sedans or compact cars. But in the first half of 2017, incentives for SUVs shot up 33%, according to research website Edmunds.com, with the average discount or rebate in the segment reaching $3,200.

Ford Motor Co. is currently offering a $3,500 cash rebate on the Ford Escape, along with 0% financing for 72 months. A Ford spokesman said the SUV market is “increasingly competitive,” noting average transaction prices last month fell $400 compared to a year earlier.

Economists Expect Plateau

At every peak, economists expect a “plateau”, be it the stock market, the housing market, or cars.

Reasons to Expect a Crash

• Self-driving features are on the way and many people will wait for them


• Lots of retiring boomers purchased their last car


• Anyone who bought with long-term financing in the past few years is deeply underwater, making trade-ins difficult


• Auto sales are increasingly subprime


• After years of record sales, who needs a newer car away?

Vehicles account for 20% of retail spending. A crash or even a significant slowdown will impact retail sales and thus GDP.

DeSoto To DeLorean - 14 Defunct Car Brands (& How They Failed)

Automobile enthusiasts around the world know brands like Studebaker, Plymouth and Packard, but you’d be hard-pressed to find any of these on the roads today. Former powerhouses in the American auto market, as Visual Capitalists"s Chris Matei notes, they have since become beloved by collectors, but lost to the general public.

Today’s infographic comes from TitleMax and it looks at 14 now-defunct car brands and the circumstances that took them from highways to bygones.

These are only a selection of a much longer list of car brands that have not survived to see the present day. What accounts for the churn rate of these brands?

BOLD EXPERIMENTS, BOONDOGGLES, AND BURNOUTS

Some car brands, like Tucker and Saturn, introduced new ideas that the market simply didn’t care for, didn’t perform as well as the competition, or were too ambitious for the industry climate.

Others, like Edsel and DeLorean, met swift ends as they hemorrhaged money far faster than their owners anticipated. Even more brands were simply folded into the ever-expanding portfolios of either Ford or General Motors, the two biggest auto conglomerates ever to rule the roads.

BAD TIMING, OR WORSE ECONOMY?

Car sales rise and fall with broader economic trends because they are tied into so many different variables: raw materials, production costs, labor costs, oil prices, and interest rates among others.

We can look at two time periods in which the combination of these conditions caused many of the brands on this list to fail.

Post-war Doldrums (1950-1958)

Based on the timeline above, we can see that 1950s were a terrible time for the smaller players in the auto industry. The explanation as to why so many brands declined over this decade has to do with the highly competitive, oligopolistic business practices of market leaders Ford and General Motors. Both of these market titans were locked in a battle to lower prices by taking advantage of economies of scale, while wooing customers who were feeling the economic pressures of a postwar recession.

Smaller volume manufacturers like Packard and Studebaker could not keep up, even when they attempted to merge. As a result, these and many other smaller brands were forced out, or absorbed into the portfolios of one of the “big two.”

Same Car, Different Name (1998-2008)

A similar stretch of declining sales plagued the late 1990s and early 2000s, as the trend of “badge engineering” caught up with manufacturers.

Rather than designing new models at high cost, conglomerates like GM simply engineered new brand “badges” and marketed the same basic models under a variety of names like Pontiac, Plymouth, Mercury, or Oldsmobile. The same tactic was later used to take mid-market designs, such as the Ford Fusion, and style them for a luxury audience as a new model – in this case, the Lincoln Mk. Z.

Badge engineering curbed the appeal of a number of American brands under the GM and Ford portfolios. The nail in many of their coffins was the major auto industry downturn in 2008. That year, GM restructured as it underwent Chapter 11 bankruptcy.

As a result, GM removed the majority of its badge engineered brands, including many of those listed above, from dealerships in the following years.

Plunging Used Car Prices Wreak Havoc On Rental Car Bondholders

Once hedge fund darlings, almost no one is more perfectly aligned to get obliterated by falling used car prices than America"s auto rental companies, Hertz and Avis.  As Bloomberg notes today, on a combined basis, Hertz and Avis dump about 400,000 vehicles per year into the used car market and operate fleets that are multiple times larger. 

And with used car prices plunging, bondholders are starting to get slightly anxious about the collateral impact of writing down billions of dollars worth of capital assets.

Debt issued by Hertz Global Holdings Inc. and Avis Budget Group Inc., which had traded at or above par in recent years, tumbled to new lows earlier this month amid signs that used-vehicle prices are dropping twice as much as expected. That’s bad news for companies that collectively have to dispose of about 400,000 vehicles a year, and especially for Hertz, whose junk-rated debt is teetering close to a downgrade.

Hertz and Avis typically buy the cars outright from manufacturers or get them on a contract with a buyback agreement. The latter, called program cars, cost more because manufacturers assume the resale price risk. Vehicles that Avis and Hertz buy outright are called risk cars because rental companies make their own assumptions about what the cars will be worth when it’s time to sell. Combined with closely held Enterprise Holdings Inc., the three companies control more than 95 percent of the U.S. rental fleet, according to Manheim.

Program cars made up only 20 percent of Hertz’s U.S. fleet last year, according to a company filing, less than half the 44 percent for Avis’s total fleet. Hertz will try to buy more of those this year, Chief Financial Officer Tom Kennedy told investors during a February earnings call.

Of course, as J.D. Power pointed out in it"s most recent "NADA Used Car Guide Industry Update," the flood of lease returns has just started to push used car prices lower....

...and, unfortunately, the volume of lease returns is only expected to grow...

...all of which Morgan Stanley thinks could spark a 50% decline in used car prices over the coming of years. 

All of which begs the obvious question of who is right...auto supplier equity holders or Hertz bondholders?

Auto Industry Resorts To Biggest Incentives Ever To Slow Decline In Sales

Submitted by Wolf Richter of WolfStreet

The Last time automakers tried this was in 2009!

In a few days, automakers are going to report their new vehicle deliveries for March. TrueCar, Kelley Blue Book, and LMC Automotive are predicting total vehicle sales slightly above the flat-line compared to March a year ago, though sales were down year-over-year in both January and February.

TrueCar forecasts an increase of 0.2% year-over-year to 1.586 million new cars and light trucks, with retail deliveries (excluding fleet sales) growing 1% to 1.276 million units. J.D. Power and LMC Automotive said on Friday that they expect an increase of 1.9%, to 1.62 million units, with retails sales up 1%, boosted by record incentives.

If sales nevertheless fall, everyone will blame the winter storm that arrived in the winter – “unexpectedly” or something. And it is possible that sales might fall. There was no winter storm in February, which was one of the warmest Februaries on record. Yet, sales in February fell 1.1% year-over year. They edged down in January too. And sales in both months combined fell 1.4% from the same period a year ago.

It’s not like automakers haven’t been trying. They paid out record incentives to accomplish this feat of slowing down the sales decline. In February, the industry in the US shelled out on average $3,587 per vehicle in incentive spending, per TrueCar. It was the highest ever for a February.

We’ll get to the March incentives in a moment. Just a quick word on what transpired in February. The table below shows average incentive spending per unit sold:

Some standouts among US brands:

• GM clocked in at over $5,125 per unit in incentives. That’s apparently what it took to get its sales to rise 4% year-over-year.


• Ford, which has been priding itself in its “disciplined approach” to incentives, spent over a grand less, $4,011 on average, and its sales declined 4%.


• Fiat Chrysler may be beyond help. That’s perhaps why CEO Sergio Marchionne has been so desperately looking for a buyer. FCA spent $4,362 per unit on incentives in February, as total sales still plunged 10% and are down 11% for the first two months.


• Car sales for GM, Ford, and FCA plunged 23%, 24%, and 26% respectively. While GM and Ford showed gains of 16% and 5% respectively in light truck sales, FCA couldn’t even do that, and its trucks sales fell 7%.

These are averages per unit: At $5,125 per unit at GM, there may be some models with $10,000 in incentives and others with none, depending on what GM needs to move at the moment, based on inventories on dealer lots, production, and profit margins (that range from very fat on high-end pickups to very slim on small cars).

For March, J.D. Power and LMC Automotive pegged incentives at $3,768 per new vehicle sold – the highest ever for any March. The prior record for March was achieved in 2009 as the industry was collapsing. In June 2009, GM filed for bankruptcy.

By these estimates, the incentives in March would amount to 10.4% of suggested retail price, in the double digits for the first time since 2009. These are some seriously desperate incentives!

TrueCar estimates that incentive spending in March rose 13.4% year-over-year to an average of $3,511 per vehicle sold. But this would be 2.1% lower than the desperate incentives in February:

Some standouts:

• GM cranked up its incentives by 21.4% from a year ago, but dialed it back 4.5% from February.


• Honda increased incentive spending 27% year-over-year, and increased it 2.9% from February.


• FCA, which had already been dousing the market with incentives a year ago, increased it another 7% year-over-year, but remained about flat with February.


• Subaru, lowest on the list with a modest $901 in incentives per unit sold, nevertheless felt it needed to crank them up by 59% from a year ago.

And look at the total dollar amounts spent in March: $5.54 billion! In just one month! GM alone spent $1.3 billion in March.

If GM piles on incentives at this rate three months in a row, it would spend nearly $4 billion on incentives, in just that quarter, just in the US alone. How much dough is that for GM? In Q1 2015, GM reported global net income of $2.0 billion. In Q1 2015, it reported global net income of $0.9 billion. These incentives can eat an automaker’s lunch in no time. And they did in the years before the industry collapsed during the Great Recession.

For consumers in the mood, there’s an old saw: “Good deals are made in tough times.”

But not for automakers. They face another reality: Sales have peaked. The seven-year up-trend has ended. Pent-up demand from the Great Recession has disappeared. Trading is getting more difficult, with falling used vehicle prices and rising interest rates. Subprime lending is facing real hardship. And these enormous incentives are now required just to keep sales from falling more quickly, and to defend market share against other desperate automakers and their incentives.

Ford Warns "Used Car Prices Will Drop For Years"

Earlier this morning we noted Ford"s "CFO Let"s Chat" meeting with analysts before which Ford announced weak 1Q adj. EPS guidance of 30c-35c, coming in well below analyst estimates of 47c, which they blamed on higher costs, lower volume & unfavorable exchange rates. 

With the call now concluded, here are a couple of the key takeaways:

First, the bad...

• Volumes will start to fall off this year, next year


• Used car prices will drop for several years


• European profit will fall this year


• China sales down sharply in 1Q


• India more difficult than expected


• All options on table including traditional restructuring

...and the good-ish...

• Favorable market factors offsetting higher commodity prices


• Inventory levels “in very good shape”


• Sedans play diminishing role in U.S. business; SUVs, trucks make up 73% of U.S. business


• Not seeing anything to suggest economy will “tip over”

And while Ford is confident they"re not seeing "anything to suggest the economy will "tip over"" (which is good, right?), their own presentation slides would seem to paint a slightly different picture.

First, on Q1 2017 earnings by region, South America is expected to be flat...so that"s at least not negative, which is nice...

And while Ford pointed to their gross inventory days as a sign that the industry does not have an inventory problem, they snuck in at the very bottom of slide 9 the fact that overall industry inventory was up 13 days in February vs. last year...

...and industry incentive spending paints pretty much the same picture...

And for those of you holding out hope that current volumes aren"t simply the result of a massive auto loan bubble, we present to you some details behind Ford Motor Credit"s "consistent and predictable" U.S. loan portfolio.  To summarize, loan terms up, lease mix up, charge offs up massively...all great news

GM Pickup Incentives Surge Over 80% As Auto Bubble Continues To Show Signs Of An Imminent Bust

For months we"ve argued that record auto sales have been propped up by low interest rates, a perpetual loosening of auto lending standards with terms being stretched to the max and a wave of leases, all of which have allowed the American consumer to trade up to more expensive vehicles while maintaining low monthly payments. 

And so far, this perfect alignment of the stars has propelled U.S. auto sales to record highs.

That said, with rates recently on the rise and a flood of lease returns driving down used cars prices (see "Record High Lease Returns Set To Wreak Havoc On Used Car Prices"), the tailwinds that have propelling auto sales to record highs over the past several months look set to change course.

As we noted recently, a quick look at the 61+ day delinquencies in General Motors" subprime securitization book would seem to support our rather negative thesis on future auto sales with January 2017 delinquency rates soaring to the highest levels since late 2009 / early 2010.

Meanwhile, looking at GM"s subprime data going back to 2001 implies that historical spikes in 2-month delinquency rates is a fairly decent indicator that all is not well.

Unfortunately, at least for the auto OEMs and their investors, at this phase in the cycle the only way to "juice" volume is through artificial market share gains courtesy of excessive incentive spending...which, as we all know, likely signals the beginning of the end of the auto cycle which will quickly be followed by a race to the bottom for OEM profits. 

And, right on cue, it looks as if General Motors has kicked off the "Incentive War" with massive YoY increases in incentive on the auto industry"s most profitable segment, pickup trucks.  Per Bloomberg:

General Motors Co. boosted incentives on its pickup models this month after its biggest foes gained ground, intensifying a price war within the U.S. auto market’s most hotly contested segment.

Discounts averaged about $6,996 for the Chevrolet Silverado and $5,315 for the GMC Sierra this month through Feb. 12, according to J.D. Power dealer data obtained by Bloomberg News. Incentives on GM’s models surged 56 percent and 82 percent, respectively, from a year earlier as Fiat Chrysler Automobiles NV and Ford Motor Co. dialed back their spending, according to the researcher.

“It’s taking a lot more incentives now to move the metal than it did last year or certainly the year before,” said Michelle Krebs, senior analyst with car-shopping website Autotrader.com. “Things are slowing.”

Of course, the increased incentive spending from GM comes as they ceded market share to both Ford and Chrysler in 2016.

Of course, we suspect that this kind of aggression will not be allowed to go unchecked and will inevitably be matched by Ford and Chrysler.

On your mark, get set, go....

Soaring Lease Returns Set To Wreak Havoc Used Car Pricing and Auto Industry Profits

For months we"ve warned that declining used car prices could spell disaster for subprime auto securitizations (see "Slumping Used Car Prices Spell Disaster For Subprime Auto Securitizations").  While it"s always difficult to predict the exact timing of when bubbles will burst, a combination of record-high lease returns in 2017 and 2018, combined with rising interest rates could imply that the auto bubble is on the precipice.

As Bloomberg recently pointed out, strong used car pricing is a critical component required to prop up the overall auto market.  While American"s love their brand new cars, if used car prices become too soft then substitution can hurt new car sales.  Add to that the impact of falling residual values on the finance arms of the auto OEMs and you have all the ingredients required for an auto market meltdown.

A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.

“Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.

This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. If used values weaken more than anticipated, it can lead to losses across the industry, hitting carmakers, auto lenders and rental companies.

Unfortunately, the volume of lease returns is only expected to grow even more in 2018 with returns expected to approach 4mm units.

As J.D. Power points out in it"s most recent "NADA Used Car Guide Industry Update," the flood of lease returns is driving used car prices lower.

Of course, how we got here is fairly obvious.  The majority of Americans buy cars based on one factor: monthly payment.  And when it comes to managing your monthly payment to the lowest level possible, leasing is the way to go.  Per the Bank Rate calculator below, buying a $30,000 car comes with a monthly payment of around $600 while leasing the same vehicle might only cost $420 per month. 

Of course, why buy a $30,000 Ford for a $600 monthly payment when you could lease a $40,000 BMW for $560?  You can afford it so long as you can cover the monthly payment, right?

Not surprisingly, these dynamics have caused lease share of U.S. vehicles to skyrocket in the wake of the "great recession" as people seek to maintain their excessive lifestyles on smaller budgets.

Of course, the problem is that leased vehicles get returned to their originating lenders every 3 years for brand new leases...we wouldn"t want anyone driving around in a 5-year-old clunker now would we?  But, as we all know, vehicles have useful lives of 15-20 years.  Therefore, it doesn"t take too many excessive lease cycles to flood the market with used supply and bring the whole ponzi crashing down. 

Ford CEO Folds? Trump Confirms Carmaker Won't Move Production To Mexico

Just hours after Ford CEO complained of the "huge impact" of Donald Trump"s proposed trade plans, following the company"s plan to move a substantial portion of its passenger-car production to Mexico from a factory in Michigan, Donald Trump tweeted “Just got a call from my friend Bill Ford, Chairman of Ford, who advised me that he will be keeping the Lincoln plant in Kentucky -- no Mexico," seemingly winning his first "america-first" victory. 

As WSJ reported yesterday, Ford Motor Co. Chief Executive Mark Fields issued a warning about President-elect Donald Trump’s proposed trade policies, saying high tariffs on automobiles and other products coming into the U.S. would be a blow to the auto industry and broader U.S. economy.

Mr. Fields, speaking with reporters on the sidelines of the Los Angeles Auto Show on Tuesday, said Ford has talked to Mr. Trump’s transition team and believes the company can work with the new administration. During a separate interview, he said, “We all share the same objective; we want a vibrant and healthy U.S. economy.”

The two sides, however, appear to be at odds on how to achieve that goal.

Ford’s plan to move a substantial portion of its passenger-car production to Mexico from a factory in Michigan was heavily criticized by Mr. Trump on the campaign trail. Like many of its rivals, Ford is building more-profitable light trucks in the U.S. while investing in new capacity in Mexico to produce lower-margin small cars.

And then hours later, Donald Trump tweeted...

Just got a call from my friend Bill Ford, Chairman of Ford, who advised me that he will be keeping the Lincoln plant in Kentucky - no Mexico

— Donald J. Trump (@realDonaldTrump) November 18, 2016

I worked hard with Bill Ford to keep the Lincoln plant in Kentucky. I owed it to the great State of Kentucky for their confidence in me!

— Donald J. Trump (@realDonaldTrump) November 18, 2016

Which was followed by a statement from Ford confirming Trump"s comment...

"Today, we confirmed with the President-elect that our small Lincoln utility vehicle made at the Louisville Assembly Plant will stay in Kentucky,” Ford spokesperson Christin Baker says in e-mail statement.

“We are encouraged that President-elect Trump and the new Congress will pursue policies that will improve U.S. competitiveness and make it possible to keep production of this vehicle here in the United States”

Leaving Donald Trump with his first victory since being elected.

The question is - why didn"t, wouldn"t President Obama do this?