Cash 4 Clunkers and the Law of Unintended Consequences

This is what happens when gov’t meddles in the market. Now, I am torn because C4C did help our AutoNation (AN) holding. But I fear its effect will be short term and leave potential buyers of new cars sitting, waiting for the next gov’t program before they go buy. Basically a short term gain and detrimental longer term effects. Anyway, the ugly result…

From the WSJ:

Independent dealers across the country, most of which have no affiliation with the large auto manufacturers and outnumber franchise dealerships in most states, are struggling in Clunkers’ aftermath. Some of these small businesses – which number between 40,000 and 45,000, according to the National Independent Auto Dealers Association – say they’re being forced to sell vehicles for less than what they’ve paid at auction, a move that’s cutting deep into already shaky bottom lines.

Wholesale prices for pre-owned vehicles are up 19% over December 2008, when the prices first started rising, and may be up “substantially in September, maybe 8% to 9% on a year-over-year basis,” says Thomas Webb, chief economist at Manheim Consulting, an Atlanta firm that tracks data in the used-car marketplace. Official pricing for the month is scheduled to be released Wednesday.

Inventory in August was the lowest in at least 35 years, according to Manheim. The supply has dwindled because gas guzzlers traded in for Clunkers rebates have been taken off the road, rather then sent to auction. And now, franchise dealers who cleared out inventory during Clunkers are holding tight to their pre-owned vehicles as they wait for manufacturers to restock lots, industry experts say.

Later:

To be sure, the Clunkers initiative, despite putting pressure on the auction prices, wasn’t all bad for independent dealerships because it whetted the consumer appetite. “We saw more traffic at independent car lots because customers who couldn’t get a deal at the franchise would leave with a yearning to trade and upgrade their vehicle,” says Gil Boers, executive director of the New Mexico Independent Automobile Dealers Association in Albuquerque.

Yet for many independents, the current situation might be too much to bear. While experts aren’t willing to guess how many could shutter before the end of the year, Jim Edwards of the Carolinas Independent Automobile Dealers Association in Harrisburg, N.C., says that 1,500 independent dealerships hard hit by the recession have closed in the past 18 months in North and South Carolina.

Here is the impact of wholesale prices visually:

What politicians fail to realized is the for every action there is a reaction. The reaction cannot be predicted in a free market (I know, but ours is as free as exists out there today). You cannot direct or guide participants in it and when gov’t jumps in the pool with both feet so to speak, there is a huge splash and a wake that may (usually does) cancel out any positive effect of the very thing they are doing.

This is the main reason for opposition to health care reform and my refusal to even consider investing in the sector despite some potentially very appealing companies. It isn’t that people do not think changes need to be made, it is that we are highly confident that when wholesale changes are made, while possibly helping some in many areas, are just as likely to hurt many other folks in other areas. When the general population can’t determine what side of that equation they will be on, they will opt for the status quo.

“Cash for Clunkers” is proof of what can happen…

Comments

[Brian McMorris:]

Todd,
Michael Jackson (CEO of Auto Nation) today on CNBC was pretty optimistic about the Auto market for the coming year. He says that the American auto industry now has a globally competitive cost structure and has wrung out years (decades?) of excesses in terms of labor, benefits, production capacity, an middle management. It is now a lean and mean fighting machine with a breakeven well below "recession level" annual sales volume of 13M. So, I think you have a great investment here and I am looking at adding AN to my portfolio. Clunkers was a temporary injection of adrenaline, but Jackson doesn't think it did any damage.

On another note: GGP passed the $5 per share mark today. Great work on that stock! I am loving my position, which is about a 10 bagger so far since April (and will be a 40 bagger before all is done).

Oct 08 07:59 PM

[Steve0:]

BS take your political agenda to another site.

Oct 08 09:52 PM

[john s. gordon:]

sure c4c borrowed against future sales but leasing programs have been doing the same thing for many years, and business leasing gives corporations a tax deduction (called 'other direct costs').
how much revenue has the federal govt lost over the last 20 yrs from the business car leases?
todd - to link the national health care debate to c4c is inappropriate - shame on you.
> jack

Oct 09 09:04 AM

[elcopone:]

Comparing health care and CFC is irresponsible. People die because they do not have health care. People do not die because they do not have a new car. The consequences of doing nothing in health care are dire. The consequences of doing nothing (or something) in the auto industry are minimal.

I agree that their are unintended consequences, but using that logic as a reason to do nothing a archaic and stupid.

Oct 09 11:07 AM

[TCK:]

Are you sure nobody died because they drove an old car ?

Government mandates on fuel economy, etc may raise the price of a new car to be permanently out of reach of some consumers .

Another unintended consequence.

Oct 09 11:50 AM

[taggert:]

Your comments suggest that you are missing the point of the reference to health care reform... The author did not pick a side in the debate, he only stated that with government involvement comes a great deal of uncertainty related to any investment in that sector. The same can be said for financials, green energy, and the list goes on. Whether you agree with the policies or not the reality is that government is becoming a major force in the markets.

Enough with the reflex defensive posturing and fake outrage.

Oct 09 01:12 PM

[car czar:]

Todd,
You focused on AutoNation? Do you really think C4C was the main focus of the stimulus? You need a much better understanding of where the money goes when a vehicle is purchased.
Even our elected representatives don't get it. The bulk of the C4C stimulus money went to Japan, not US. The majority of the vehicles sold were Japanese, made with Japanese parts like engines, transmissions, Japanese steel and textiles. This is where the money is made. US auto buyers - good job stimulating the Japanese economy.

Oct 09 09:19 PM

[sethmcs:]

Cash for C4C was the best damn money the government spent to stimulate the economy. The leverage to the economy was at least 6 to 7 times the amount spent. It dealt with the inventory overhang and actually forced an inventory build. I think the political problem is not everyone qualified so people are jealous. The money came out of the energy budget which is otherwise wasted on all kinds of stupid projects. At least C4C will have a measurable impact on GNP. Like I said the best 3 billion spent.

Oct 10 12:40 AM