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May's incredible auto sales could mask some serious risks that could quickly sink auto company stock values. The sales figures themselves are great, but as so often happens, they don't tell the whole story.

Almost every major automaker in the U.S. had a very good May. Toyota (NYSE:TM) sales were up by an astounding 86% and Honda's (NYSE:HMC) sales improved by 48%. Volkswagen (OTCQX:VLKAY) also did very well, as its sales went up by 28%. Nissan's (OTCPK:NSANY) sales increased by 21% and Ford (NYSE:F) and Hyundai saw their sales increase by 13%. Even General Motors (NYSE:GM) had its sales go up by 11%. Fiat-owned Chrysler also had its sales go up by 30% in May. In addition to this, SAAR, or seasonally adjusted annual rate of vehicle sales, was in line with past trends at 13.73.

Normally such huge sales figures should signal a long-term boost for auto stock values but they may have little or no effect. There are several reasons for this but the biggest is the overall economy. Although auto sales are great, other economic indicators look terrible.

Figures released on Friday June 1 show that the unemployment rate has started to go up again. To make matters worse, the U.S. Labor Department found that the economy had added fewer jobs than expected. Only 69,000 positions were added to the economy in May. If that wasn't bad enough, economists adjusted the number of jobs added in April down from 115,000 to 77,000. That would seem to indicate the U.S. economy has stalled. The S&P 500 reacted to this by falling 275 points, which wiped out all of its gains for the year. That isn't a good sign for auto stocks because auto sales are tied to the stock market-- they increase when it goes up and go down in bear markets.

A major drop in auto sales and auto stock values is likely going to happen. Consumers were buying cars in the expectation that the economy was about to rebound. Now that another downturn has begun, many people will begin putting off major purchases-- such as new vehicles.

Easy Auto Financing could be Auto Stocks' Achilles Heel

The biggest threat to auto stocks may not be the lousy economy, but auto financing. Bloomberg Business Week reported that a lot of the increase in car sales is being driven by loser auto financing. Car loans are easier to get than ever before-- even for people with lousy credit scores.

Dealers and lenders have lowered the credit score needed to get a loan. That means people with bankruptcies, foreclosures, repossessions and other black marks on their record can get cars. It also means that a lot of those buyers may not have the financial means to pay their car loans. Manufacturers and dealers have used other tricks to make loans easier to get. They've increased the length of loan terms which makes payments smaller. Lower interest rates also make it easier for lenders to offer smaller payments and easier terms.

The danger here is obvious-- large numbers of people are financing new cars that they may not be able to afford. Only now is the auto industry recovering from its high loan default rates (a by-product of the last recession). If the economic downturn continues and unemployment continues to rise, we could see another rise in auto loan defaults and repossessions. Instead of increasing revenues, those sales could be actually increasing liabilities at the major auto companies.

We could see a repossession crisis similar to the foreclosure crisis, in which large numbers of unemployed or underemployed people start defaulting on car loans. Something similar is already happening in Brazil, where a high rate of auto loan defaults is causing auto sales to contract. The rising defaults have led to a contraction in the number of auto loans which is also affecting sales in that country.

Such a surge of repossessions would be devastating for auto stock values. One of the biggest victims would be General Motors, which is already facing huge losses in Europe. Another company that would be hard hit is Volkswagen, which is even using easy financing as part of its sales pitch.

A repossession surge could cause lenders to tighten terms for auto financing, which would also cut sales. It would also be devastating to dealers and lenders which have taken on a lot of debt. Another result of such a collapse would be calls for stricter terms for auto loans similar to what has happened in the mortgage industry. Stricter terms would lead to fewer auto loans and fewer auto sales. This means that there could be very little growth in auto stock values for the next few years. Instead of a boon, these increased sales could be the anchor that drags down auto industry stocks for the foreseeable future.

United Auto Workers union stepping up Organizing Efforts in South

The United Auto Workers (UAW) union seems to be making another push to organize workers at foreign-owned car factories in the South. The UAW seems to be concentrating its organizing efforts on Nissan. The union is planning to hold a news conference in Canton, Mississippi, where Nissan has a plant on June 10. The event was supposed to feature union leaders and U.S. Representative Bennie Thompson (D-Mississippi). The Clarion Ledger newspaper reported that there has been some worker discontentment at the Nissan plant in Canton.

Successful unionization could hurt Nissan's profits and stock value by taking away some of its competitive edge. Foreign carmakers such as Toyota, Nissan and Volkswagen have been extremely competitive in the U.S. because they concentrate their manufacturing in non-union Southern states. That way they can avoid the restrictive union contracts that have undermined revenues and stock values at Ford and GM.

The danger of unionization of auto plants in the South is limited. The UAW has failed at most of its past organization efforts and Southern workers have historically been suspicious of unions. To get a union into a plant at least 30% of workers have to sign a petition for a union vote. Then the majority of workers have to vote for the union in a secret ballot election. In most cases, Southern workers vote no to the union. The Obama administration has tried to liberalize such elections to make unionization easier.

UAW President Bob King has made unionizing Southern car factories a priority. He's using new tactics including sending pickets to dealers selling non-union vehicles. The UAW is also working closely with civil rights groups such as the NAACP which are politically powerful in the South. The UAW's efforts are likely to go nowhere and have little effect on stock values because of the political climate. The only way the union could effectively organize Southern plants would be with the help of the federal government. The Republicans who control the House of Representatives are not likely to allow that.

Although it is possible that unions could be emboldened by an Obama victory in November and launch a strong push to unionize Southern factories in 2013. Even then, such an effort would not succeed without Democratic control of both houses of Congress, which is unlikely to occur. A more likely result will be a limited union effort that will have little to no effect on stock value. The UAW is likely to put unionization efforts on hold until next year and concentrate on the election. It should also be noted here that these unionization efforts could simply be an election year stunt designed to drum up votes for Democratic candidates. So unionization of Southern auto plants is not a major threat to auto stock values.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Don't Be Fooled By 5 Automakers' May Sales