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Old Trader is a 63 year old private investor, managing a retirement portfolio constructed to a) generate a high current yield, b) preserve capital, and c) increase capital. His methodology involves taking a "top down" macro view to identify favorable trends, and then engage in... More
  • How Sustainable Is The Good News In Autos? 2 comments
    Apr 18, 2012 9:58 AM

    As the US economy has ground upwards from the Great Recession lows, one of the more recent signs that's favored the bull camp has been a marked rebound in auto sales in the US. Although the odds of a return to the heady days of yesteryear, in terms of unit sales of around 16 million is unlikely any time soon, sales for almost all manufacturers have rebounded nicely since the start of the year.

    A number of factors would seem to account for this.... some relatively obvious; some others, perhaps less so.

    First, and perhaps the most obvious, has been the notably high age of the current auto fleet in the US, currently running around 11 years. In fact, according to Polk Automotive, in 2011, the average age for auto was 10.8 years, and Crain's Automotive News' most recent numbers show it edging up 11.1 for autos, and 10.4 years for trucks (up from 10.1). No matter how much quality has improved, nothing lasts forever, so it stands to reason that some of the increase in sales can be attributed to necessity.

    The downside for the auto makers (although a big plus for consumers), is the fact that quality HAS improved so much. The penchant for buying a new car every 3 years is well behind us. In fact, today, its not at all unusual to have cars last past 150K miles, assuming minimal care. This will definitely have a telling effect on the replacement cycle.

    I suspect that another reason for the strong sales was the unusually mild winter across much of the US. Traditionally, January and February are the weakest sales months for auto sales. Between being tapped out from holiday spending, and lousy weather, only the most desperate (and/or frugal) shoppers darken dealers' doors. This year, at least one half of the traditional headwind wasn't in play. Obviously, this isn't an effect that can be counted on, going forward.

    Perhaps more disturbing is the "quality" of the current crop of car buyers. According to a piece I ran across from the NYT, via MSNBC Business News, a very sizable number (23%) of auto loans made in Q4, 2011, was made to subprime credits. It seems that more than a few of the big banks (HSBC and JP Morgan are among those mentioned specifically), as well as auto manufacturer lending arms (GM Financial), are busy trying to offset shrinking profits brought about by regulation by going back to the subprime well, lured by the high rates they can charge. Here's the link:


    Although auto manufacture doesn't have the same clout it once had, economically speaking, it still is a long ways from being inconsequential. Its stuff like this that make it difficult for me to get really enthusiastic about economic conditions over the near, and intermediate term.

    It seems that many have forgotten that imprudent lending was behind the last crisis. Although the damage done was by subprime RE lending, poor lending practices were also rampant in auto finance. It should be noted that auto loans are also among the types of loans that are securitized and sold to yield-hungry investors.

    Sources: MSNBC.com

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

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Comments (2)
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  • sethmcs
    , contributor
    Comments (3581) | Send Message
    Auto companies are their own worst enemies. I am currently long Ford and have been since 2008. I am sitting on some nice gains but refuse to sell until Ford announces some policy that I deem stupid. When that happens I will sell half my stake.
    18 Apr 2012, 09:29 PM Reply Like
  • Old Trader
    , contributor
    Comments (5732) | Send Message
    Author’s reply » sethmcs,


    I'd agree. I will say that Ford's the best of the lot, at least among the domestic mfgs.
    22 Apr 2012, 07:38 PM Reply Like
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