Auto Sales Recovery? Investors Are Being Taken for a Ride

| About: General Motors (GM)
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By Brandon Matthews

The media has gone out of its way the past few months to paint a rosy picture of improving auto sales, citing reports from independent companies that the rate of sales is steadily increasing. Part of the logic of that argument stems from factoring in the Seasonally Adjusted Annualized Rate, or SAAR. Edmunds is predicting a November SAAR of 12.2 million, while J.D. Power is projecting a RETAIL SAAR of just 10 million.

Edmunds is calling for just 865,000 vehicles to be sold, while JD Power puts retail sales at 699,700 and total sales of 867,700. The idea is that November is traditionally a slow month, and these numbers are considered by experts to be above expectations, and suggest that during stronger months of the year, sales will be higher based simply on their assumption that the pace should continue. This method is tried and true over decades. So far be it from me to question its validity now, which is exactly what I am going to do.

This accelerated pace we’ve heard so much about of late has produced five straight months, assuming the forecasts are accurate, of overall sales DECLINES. I wouldn’t want to be the one to suggest that because the U.S. Government had a stake in the General Motors (NYSE:GM) IPO, along with some heavy hitters on Wall Street and a very powerful union, that perhaps the media was misled in some way.

Date Vehicles Sold
Jul, 2010 1,022,912
Aug, 2010 970,617
Sep, 2010 956,957
Oct, 2010 949,037
Nov, 2010 867,000 (projected)

The powers-that-be did a wonderful job of creating a thirst for GM shares by retail investors, simply by locking them out of the initial public offering. Feeling slighted, retail investors that had felt left out are now willing to mortgage the ranch, to own that which was denied to them. The fact is that until the job picture and economy improves, and credit is loosened, new cars sales are not going to be able to pick up much steam. Automotive CEOs are cautiously predicting 12 million unit sales in 2011, just half a million more than the current year’s pace. That is hardly an optimistic outlook.

The Cash For Clunkers program provided automotive analysts with a fantastic cushion. They are now free to be wrong, and can simply point to the CFC program as the culprit of skewed forecasts. The data they rely so heavily on is unreliable, and will be for at least the remainder of 2010. That is how long it will take for the negative effects of CFC to exit the mathematical equations, necessary to again determine a reliable vehicle sales rate. The entire bullish posture is based on October 2009 sales of 811,476 units, and November 2009 sales just 732,199 units. Forgotten in all of this is that the CFC program in August cannibalized sales for much of Q4 2009. Year over year comparisons are moot at this point.

We all know what it can be like buying a new car. The smiling, personable salesperson explaining why that particular car is more valuable to us, than our hard earned money. In this case, the seasoned professionals want us to believe that like that lemon, we should drive it off the lot right now and let our own mechanic have a look at it later.

Disclosure: No positions