What Will Stabilize Used Vehicle Sales? (Hint: Nothing Good)

Authored by Daniel Ruiz via Blinders Off blog,

Until this point, a lot of what I"ve shared with you is theoretically based on my knowledge and experience of used vehicle values and how I believe they affect new vehicle sales velocity. Today, I am going to share some some hard data that I"ve been researching with a great deal of effort.

I genuinely believe that used vehicle values have a very significant effect on new vehicle sales velocity. I have explained it on Twitter and on a previous blog post through the concept of trade cycles. Because of this, I am certain that used vehicle values can be used as a leading indicator for inventory management at the manufacturing level, at the retail dealer level and certainly as an investment tool. However, I humbly hold that current used vehicle value indexes sources are not good enough.

There is a very specific group of vehicles that can be monitored in order to better project results. The Manheim and NADA index both have too much noise in the data. For example, the Manheim Index has no model year restrictions and includes new vehicle price inflation in the calculations. NADA goes up to 8 model years. Both average the data over multiple months and include vehicles which, in my opinion, have little to no impact on new vehicle sales velocity. Therefore, I have decided to make my own index.

For now, I"m going to use Ford as an example please ignore the red residual line until later.

I have said numerous times that passenger vehicles are at a different points in the value cycle than trucks and SUVs.

This is common knowledge at this point, and most have placed their faith on trucks and SUVs. This includes manufacturers shifting production and rental car companies changing their fleet mix to the better performing SUV and truck sector. Most analyst are looking at fuel prices to mark the top of the SUV and truck market. Here"s what they"ve missed:

Here"s WHY this matters:

Now back to residuals. What I want to drive home, in simple terms, is that assuming no change in demand, supply precedes price changes. When used vehicle values underperform residual values, the return rate of leases goes up. The opposite is also true. Less vehicles returned means less auction volume supporting higher prices. More vehicles returned means more auction volume supporting lower prices. Look at the charts again and note the acceleration of used vehicle value declines when used vehicle values fall below residual values. So where do we stand today? You tell me if this looks supportive of higher used vehicle values:

You might wonder what will stabilize used vehicle values going forward. Consider this, a used vehicle is nothing more than a new vehicle transaction that drove off the dealer"s lot.

The answer, years of declining new vehicle sales and we are just getting started.

If you feel that my insight might be a useful part of your investment decisions in the automotive sector, I offer phone consultations as well as in-person presentations through GLG.

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.

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