Corporate America is full of lying, cheating, swindling, overhyping executives. They’ll tell you everything is great and the future is rosy … right up until the day they release an earnings warning or the FBI shows up at the boardroom with a set of handcuffs.
Market Roundup
So I find it incredibly refreshing when one actually tells it like it is. That’s exactly what AutoNation CEO Mike Jackson did on a CNBC appearance this morning. He didn’t mince words about the auto business right now, admitting it stinks just like I’ve been saying.
His key points:
Automakers are manufacturing way too many cars for the level of real demand that’s out there.
Actual retail sales were flat in the first quarter, so the carmakers are jacking up sales to rental-car fleet operators and others to artificially inflate volume. The problem? Those sales are much less profitable.
They’re also throwing record amounts of “cash on the hood” to move metal. Incentive spending is up 14% year-over-year … and just hit 9.6% of asking price. That’s the highest ever.
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| Are manufacturers making too many autos? |
But even that isn’t enough. So manufacturers and dealers are now rolling out extraordinarily generous lease programs to help strapped buyers. Leasing transactions now account for 32% of new sales, far above the typical 20%.
Jackson went on further to call it a “particularly challenging environment” that has “bigger issues than the weather,” one excuse some have turned to in order to explain away problems. Lastly, he said:
“I was here at the beginning of the year, and everybody was popping champagne corks over the record year of 2015 and saying happy days are going to be here again in 2016. And I sort of said nah, I don’t think so.”
Look, I’ve been talking for a while about the threat of “Peak Auto.” The basic idea is that … once again … too much easy money from over-aggressive central bankers inflated an unsustainable bubble. It encouraged auto lenders to give car loans to anyone with a pulse, just like mortgage lenders did in the early 2000s. That artificially inflated sales to unsustainable levels, and now the bust has begun.
[Read More – The Consequences of Reckless Lending – Mike Larson]
| “Too much easy money from over-aggressive central bankers inflated an unsustainable bubble.” |
But this time, it wasn’t just autos. The biggest flood of easy money and credit in world history inflated an “Everything Bubble” – in tech unicorns, in junk bonds, in M&A, in debt-funded stock buybacks, in commercial real estate, and on and on. So anyone who tells you the down cycle in credit is just about oil is out of their mind!
My take: Stay the heck away from any stock tied to this industry – car makers, car dealers, parts companies, industry suppliers, consumer finance companies and banks with heavy auto exposure, you name it.
Or if you’re more aggressive, consider targeting their shares with select investments that rise in value as these stocks fall. You can find out more by watching my blockbuster documentary, “The Unseen Hand,” online.
What do you think? Is Jackson right? Is this industry facing an epic bust? A casual slowdown? Or a bright future? What do you think of stocks exposed to the sector? Are they beaten down enough that you want to start bottom fishing? Or is there more pain coming down the pike? Hit up the comment section and let me hear your views on this important topic.
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My colleague Mike Burnick penned a piece yesterday on “The Doubt-Filled Rally,” and asked whether it would continue as short sellers covered … or succumb to lousy fundamentals.
Reader Chuck B. offered this take: “The way it works in the markets is that investors who go short in a rising market eventually cover their shorts (losing money, of course). They maybe even buy rising stocks. THEN the markets fall, giving out a big last laugh of triumph.”
Reader Dennis M. said that stocks ultimately can’t keep advancing without a solid foundation underneath them. His comments: “What are the fundamentals? There aren’t any that are driving the market up, unless foreign instability fears are just forcing foreign money into the U.S. market on a ‘just buy anything’ basis.”
Reader Jim also slammed the rally, saying “S&P earnings are down the last three quarters and will continue down for a fourth. This hasn’t happened since 2009. When earnings are falling and prices are rising, what happens to P/Es? This has all the markings of a bear market rally.”
Lastly, Reader Carl offered this perspective: “The traditional fundamentals only set a floor to the market. We are way above that now. There’s so much money competing for returns that prices are driven higher due to the whims of group psychology.
“People invest rationally, but the reasons behind those rational decisions vary in every possible way. If you can figure out what group-think is dominant, you can win. But conditions change, so you aren’t likely to win repeatedly.”
I appreciate you sharing those viewpoints. I have a slightly different view of what might have driven this market rally. European Central Bank President Mario Draghi unveiled a plan a few weeks ago to buy European corporate bonds in addition to government bonds.
That caused a bunch of investors to front-run the ECB by dog-piling into corporate and junk bond ETFs and mutual funds, not just in Europe but here in the U.S., too. That caused credit spreads to compress TEMPORARILY and underwrote a stock market rally, as stocks (especially those of overleveraged corporations) tend to follow credit.
[Read More – Yet ANOTHER Billionaire Warns About Coming Chaos – Mike Larson]
But look at the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). After that huge rally from the February lows, it suffered a sharp intraday reversal on Wednesday, then dipped a bit more yesterday. That could be signaling that the Draghi effect is running out of gas. After all, this is the absolute WRONG point in the credit cycle for us to see durable improvement in spreads.
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If you read the fine print detailing the ECB’s corporate bond-buying program, you find it has some interesting problems, according to Bloomberg. There are serious questions about what the ECB will do if it owns a slug of bonds issued by a company that runs into trouble.
Specifically, it may be forced to sell if earnings and debt problems worsen, and the company gets downgraded by ratings agencies. But it will likely have trouble finding buyers except at deeply discounted prices. That’s because the ECB’s own rules allow it to own a huge percentage of any particular bond issue. Can you say “unintended consequences?”
Here’s another huge unintended consequence, this time in China. Turns out that the flood of easy money that Chinese central bankers have unleashed there isn’t finding its way into the real economy, at least not in a healthy way. It’s fueling a secondary bubble in big-city real estate … and a huge surge in commodities futures trading.
As Bloomberg notes, “The great ball of China money is moving away from bonds and stocks to commodities.” Not because of real fundamentals, but because they’re going up in price. Analysts are seeing massive price and volume surges in everything from futures on steel rebar, cotton, polyvinyl chloride, and iron ore in China, because small investors are “going nuts.” I’m sure that’s going to work out great in the long run!
Lastly, I should mention that yet ANOTHER central bank – the Bank of Japan – is trying to cook up yet another batch of new ideas. The latest is reportedly a scheme to extend negative rates to banks who agree to loan that money out.
We won’t know for sure until we get the results from the BOJ’s policy meeting next Friday. But at this point, you have to wonder why they even bother. I mean, the BOJ has literally been “stimulating” the economy for 20 years with radical policy … but not having any lasting impact whatsoever.
So we have radical policymaking in Europe, China, and Japan – all of which is having unintended consequences and failing to accomplish much beyond temporarily juicing asset prices. What do you think about that? Is it nuts? Or am I being too pessimistic? Will any of this stuff work? Share your thoughts below when you get a chance.
Until next time,
Mike Larson
Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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It’s getting so lately that I believe almost NOTHING the administration says. I’m sad to make this comment.
Hi, Mike. Re: Auto Sales. My son is an agent for a brick and mortar auto insurance company. He is stating that business has slowed down drastically since last summer here in South Texas. Customers have been cancelling insurance policies left & right and not adding any more cars. He says that auto dealers have been complaining about slow business. One dealer had only one sale for the whole month as of yesterday (April 21, 2016) in this city of 60,000 population. Auto dealers are getting so desperate they are regularly coming into my son’s office to try to drum up business. I thought that this was only happening here in South Texas, which has among the highest unemployment and poverty rates in the nation. Dealers are also getting very “grumpy.”
On monetary policy. There’s an old saying “you can fool some of the people all of the time, all of the people some of the time, but you can’t fool all of people all of time”. So I think this monetary foolery will end but I don’t know when.
But you can fool enough of the people enough of the time
I think by mid June the ‘Bubbles’ should start bursting.
Hi,
OK, I can believe that the new car side of the auto industry is over hyped, over sold, but what about the repair and maintenance industry?
While many may have bought recently, has everybody?
I can see many older vehicles on the road (I own one and will for many years) and they will need repair. Even new cars need filters, wiper blades, tires, etc.
For example LKQ Corporation is a huge company that salvages wrecked and older cars for parts as well as sell new parts for maintenance and repair. There are undoubtedly other companies of this sort.
Not as many as there were …. LQK bought or caused to go out of business many of the small salvage yards. It has become a big fish eating the smaller one in much of the after market.
Hi Mike
Some good calls
I’ve read other analysts state the auto industry is in big trouble. I, myself, am in the market for a new car. My present car is 11 years old. But I’m going to hold off buying until I see whether or not the “bubble” bursts. If it does as many think it will, then I should be able to pick up a very decent car at a very decent price.
who says you have to buy a new car. mine is 9 years old with 175k mi and I will keep it for 300k. I am done with the “status” bs;
Please…. no crying towels out for the car dealers. They are dancing the jig as a result of mandatory emission laws that force owners to spend unnecessary money on their older cars as a result of emission systems that were designed to fail. The money they steal selling new autos is nothing compared to the millions they rob from the public for unnecessary repairs for state emission inspections. That is why mega dealers are against electric autos…Goodby gold mine when most autos are running on ZERO emission electric. Also, with the lowest worker participation rate….who is out there that is able to purchase a new auto? They receive their food stamp card electronically updated.. No need to drive to the federal building to pick up canned beans.
The idea of ZERO emission is a false one …. electricity must be produced and there are emissions of one kind or another in every industry.
The S&P500, after powering up some 300 points, from it’s February low, in about 2 1/2 months, with no more than a couple of hic-cups, looks ready to take a breather and decide on the next step. Up, to a new high, or down The next couple of weeks earnings reports will doubtless have some influence. There have been some beauties this month – and some baddies. The next group could be critical.
the fed’s charts show ip (industrial production) reversed again and took another downturn. the charts also show recessions follow ip downturns.
i find this troublesome and i usually don’t worry. i want to at least see good earnings reports or i may take profits.
As long as the S&P yields a lot more than the bank or the ten year Treasury we are on pretty solid ground. This is a rare circumstance that has usually resulted in good stock returns in the past. Jim
The Fed funds rate will continue to support the Market was well as the actions of the other major Central Banks. Foreign funds are pouring into the U.S. With all the promises being made by the candidates the fourth year of the Presidential cycle is also firmly in place. We may get a short term pullback. The big time short covering in the energy sector needs to correct, but after that it’s off to the races thru the end of the year. Jim
When you consider the above how can you not like a stock like AT&T with a 5 per cent yield, big cash position, and great track record. You get a great yield and maybe a few points as well. Jim
at&t is probably the safest, high paying dividend stock of all time. i can’t figure out why a dividend seeking value investor like warren buffet prefers a useless sugar water company like coke over a vital telecom stock like at&t.
i’m guessing low oil prices are playing a part in the improved earning report. maybe we’ll see better s&p valuations down the road. i’ll stay cautious until i see an upward trend in ip.
it appears yellen has finally figured out the fed’s game is to let the economy run and use increasing fed fund rates to control an economy that’s growing too fast – not stop an economy that may grow too fast. we’re back to an accommodative fed again.
Can anyone say …. Pre-election Sucker …. Look at the months before most elections over the last 50 years. Feel Good is Not Real.
You are correcto Sr. Miguel
Man Mike, you’re nailing Peak Auto! Why, I remember you crowing how you were first to call the bottom of the oil market – in spring of 2015! How did that turn out?
Quotation The game, of course, is to lower shareholder expectations, so that when there’s an earnings beat on those lower expectations, the stock might actually pop higher. But who’s actually buying stocks? unquote. Well who is buying them? Possibly the Fed is goosing the market with all the money they sit on? Not out of the realm of crooked possibility that exists today the Fed being the worst. Trust issues? well of course!!
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This environment the past 8-10 years is unlike any other I remember. I’m at the point of just keep my cash in the mattress and turning off the news. Investing in solid companies doesn’t seem to matter in this environment.
Mike you guys have to wake up to reserve fractional banking and not be scared to mention it, the illuminati and the new world order, clinton both, her and bill should be inside for crimes, every think is rigged, the only thing they can’t print is gold and silver but they can rig it.
The wars and the and the debase of people are caused by you and the un its the plan, no one ever talks about peace, no money for the banksters?
The Republican Congress is back to creating loopholes far and wide to allow
friends to escape the regulations put in place after the U.S. Economic Collapse.
It is a miracle any of us can make a living.
what are you talking about Obama promised everyone a glorious raging economy instead we got excuses and a lame economy barely moving start telling truths and you will realize the democrats have doomed us all
yes the socialist progressive democrats have done so much havent they, all they know how to do is blame blame blame and promise promise promise shifting the blame from their inability to do what they promised and take take take from everyone else,
California is booming. The traffic and smog are back to awful, but everyone seems
to be driving a new auto or SUV. People who bought houses after the bust are
unloading them $100,000 – $200,000 higher. Regular people can’t afford rent which is nothing new.
just what are you babbling about
Cars will always be sold, just not a new one every year for each person! This industry will continue to function albeit with lower demand.
This is Keynesian economics all over again like during the depression. Car volumes were down in 1933, 34 and again 1938,39. The same gov’t trying to stimulate the economy with the same medicine getting the same results. Just different tools.
I lieft Los Angeles 10 years ago, now I hear friends who can’t afford to rent move to the out out shirts of the city, friends who own homes can’t buy water at any price, so no grass, etc. I’m not sure of their pools. As I left I watched the elect,water,gas sky rocket….I had banana trees, orange, lemon, avacccado etc…big money came in torn down my home, trees gone…I could not go there for years…..it all became in the late 1970’s when the jobs started to go away with the promised penison fund (supreme court) decided after 30 years A promise was not a real legal promise.A million women march to the supreme court for the class action suit against walmart…suprise suprise walmart won…women can’t expect to equal pay and the glass ceiling even there stays in place. Its about people….and the unfair corp lobby who run the fools in congress.
what about the unfair Obama administration who buried this country under a mountain of debt a no growth economy and he still wants a 18% rise in his salary for doing what ???????????????????
Having worked in the auto industry I agree with Mike Jackson. The industry has always been highly cyclical, just look at the fluctuation in a chart of annual sales over time and which has risen to a peak. (That’s why Chrysler has needed bailouts several times and why GM went bankrupt.) I recall an industry meeting where Jackson was luncheon speaker and he was not afraid to tell the audience of manufacturer people what he was really seeing at the dealer/customer level. The banks have their financial games and the auto manufacturers have their own version of marketing and financing games to manipulate sales “results”.
this market is disconnected from any rational free market action. i’m on the front line of the spot freight market and have seen falling rates for the past two years with an occasional bump. there’s considerable overcapacity. market cheerleaders are just trying to keep your money in the market. i may not be able to articulate thoughts as well as a lot of you, but i know a rigged game.
A dealer friend told me confidentially, that top of the line Silverados went up $12K in 3 years. This is a result of a b.o. bailout. Why stay price competitive? Why worry? Too big to fail? Knowing or at least thinking the govt will bail you out again, why not jack prices. Had this been a Lowes store, after a hurricane, raising prices on plywood so as to make limited supplies last so all can have some, Lowes would be punitively fined. And unrelated,….if there is “global warming”,…..and we can’t buy a toilet that will flush, and a light bulb for under $3, why do we still make production assembly line cars with 700HP? That will go from 0 to 60 in 4 seconds?
The big three are building over engineered nightmares. They are great til the warranty ends. Visits to the dealer start at $1000. A/C systems with 1234yf freeon at $100 a pound.
Transmission fluid at $100 per quart. Loose a key FOB it will cost you $300 to get another at the dealer only. Service manuals are averaging 12,000 pages. Most cars now have 25-50 modules on the CAN buss that micro manage everything. three or four fuse panels and dozens of relays. As these cars age they become unsustainable to repair. Parts companies simply cannot keep up with even simple items like alternators and starters that frequently change design and vendor midyear several times.
These issues are growing exponentially. Now we are adding automated driving systems such as auto braking. This will enable texting and less attention to the road.
Auto leasing is a good choice because you dump the lemon before it starts sucking on your wallet.
Charger John
Ive learned with my new dodge trucks always get the longest warranty possible my 2015 dodges are pure garbage ive had the the lifters changed constantly at 3k miles 4500 miles 7k miles 11k mikes 13k miles ive had the rockerarm blow off 3 of my trucks before 6,800 miles ive had the rear ends replaced because all of the gears in the rear end were disintegrating so i had those completely rebuilt and he transmissions did the same maybe just maybe instead of a bailout to the auto industry the people should have demanded that the parts be made here in the united states where there is actual accountability and quality assurance programs that work instead of building more factorys in mexico or china to produce sub-standard parts besides whats bothers me the democrats are more interested in giving it all away to the food stamp generation than to bother creating actual jobs that people can be proud of … i just read they are now going to be offering high speed internet to low income people for just 5 dollars but their is a stipulation the rest of us get another 10 dollars added to our bills in the form of another tax , it never ends does it THANKS OBAMA FOR TAKING THE FOOD OUT OF THE WORKING CLASS MOUTHS with so much free stuff why should anybody try working for a living its easier just being a parasite
The ECB is a central bank: they print their own currency. “Losing money” does not mean that a central bank goes broke; it means that their monetary policy options become constrained.
If the ECB “loses money” on the forced sale of bonds, it only means they cannot pull back all the currency they sent out to buy the bonds. That constrains their monetary policy a bit.
The central bank’s currency has no value to the central bank: they can create it at a keystroke. Fiat currency is just an IOU, issued by the central bank, redeemable only for another one of the same. Their ability to create currency is constrained only by their fear of losing public confidence and creating a hyperinflation.