Today’s sales figures confirm it. The auto industry just wrapped up its best year in history!
Market Roundup
Total sales came at around 17.47 million units, breaking the previous record of 17.35 million from the year 2000.
In December alone, Fiat Chrysler (FCAU) recorded a 13% year-over-year rise in sales. Nissan Motors (NSANY) reported a 44% gain. Toyota Motors (TM) reported a 10.8% gain. Ford (F) saw an 8.3% gain. General Motors (GM) reported a 5.7% rise.
And you know what happened in the wake of this news? Auto shares all tanked.
GM broke to a three-month low of $32.43. Ford dropped another 1.8%, extending its losses from the 2014 peak to 24%. Car dealers like AutoNation (AN), Group 1 Automotive (GPI) and CarMax (KMX) are also continuing to trade like death warmed over, down 16%, 26% and 31% from their peaks.
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| Year 2015 was a big one for the auto industry. |
What gives? The “Peak Auto” theory, that’s what. Investors are collectively deciding that the best news is behind the auto sector — and that things are only going to get worse from here.
Take those December sales figures I mentioned earlier. While the year-over-year gains look strong on the surface, several of those percentage increases actually lagged analyst forecasts. Sales figures from the major auto dealers are also starting to miss targets.
Then there’s the biggest elephant in the room, as I see it: More auto lenders have extended more auto loans to more auto borrowers than ever before — even as those borrowers have been less deserving of cheap credit than at almost any point in history.
A few startling statistics: Auto debt outstanding topped $1 trillion in the third quarter of 2015, the highest ever. But more than 19% of today’s loans are going to subprime or “deep subprime” borrowers — and total volume for lower credit score borrowers is just shy of its 2005 record.
Indeed, lenders are basically giving loans to anyone with a pulse. The New York Fed recently found that application rejection rates have dropped to 3.3% from more than 10% a few years ago. The average loan now stretches out to a record 67 months, while 27% of U.S. loans sport terms of six to seven years. That’s because buyers can’t afford their monthly payments any other way.
| “Lenders are basically giving loans to anyone with a pulse.” |
Personally, I see some troubling similarities between what the auto lenders have been doing recently to what the mortgage lenders did back in the mid-2000s. So I’m concerned the auto industry will ultimately face a toxic combination of slowing sales momentum here in the U.S., ongoing weakness in key foreign markets in Asia and Europe, and a potential surge in future auto loan delinquencies and defaults.
Bottom line: If you own auto stocks or stocks leveraged to the auto industry, sell them. Or if you’re more aggressive, you may want to target them with select investments that rise in value as stock prices fall.
I put just such an auto-focused position on recently in my Interest Rate Speculator service, and it’s already paying off nicely for my subscribers.
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It’s good to be back in the saddle after spending some quality time with my family these past few days. Of course, I always closely follow the markets for you when I’m on vacation anyway — and as you know, it was one heck of a rocky start to 2016. Many of the same problems that hurt stocks in the back half of 2015 clearly didn’t go away just because the calendar flipped.
That shouldn’t come as a surprise, as it’s precisely what I wrote about a few days before the ball dropped in Times Square. Some of you also weighed in with related concerns, suggesting this kind of troubling action could persist.
Reader James C. said: “Growing international capital flows set the stage for devastating currency crises in the 1990s and for a globalized financial crisis in 2008. The growth of the shadow banking system, without any corresponding extension of regulation, set the stage for latter day bank runs on a massive scale.
“These runs involved frantic mouse clicks rather than frantic mobs outside locked bank doors, but they were no less devastating. What we are going to have to do clearly is relearn the lessons our grandfathers were taught by the Great Depression.”
Reader Chuck B. said: “I read elsewhere something from the ‘Stock Trader’s Almanac.’ It says that over the past 65 years, January has been an accurate indicator for the following year, nearly always. And the first five trading days show how January will go 87.7% of the time.
“Every down January since 1950 preceded either a bear market, a 10% drop, or a flat market. Is yesterday’s big drop telling us something?”
Reader 151 added: “I think this will be a harbinger of things to come. I looked back at the prognosticators from the firms below from last year. All were wrong: TOO HIGH.
“Goldman, Barclays, and Credit Suisse were at 2,100. A bit high, but not too bad. But you also had Citi at 2,200, UBS at 2,225, MS at 2,275, Oppenheimer at 2,311, and RBC at 2,325.”
Thanks for sharing. Forecasting can be a tough business, as the “misses” you chronicled make clear. Suffice it to say here that I continue to see troubling signs behind the scenes in the equity, currency, and bond markets — and that’s why I have reiterated a cautious outlook over and over again since the early summer.
Do you think that caution is warranted? Or is 2016 a year where the markets will shine? Tell me about it in the comment section below.
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Faced with a hideous start to trading in 2016, China’s Communist leaders started throwing money at the markets overnight. State-backed funds started buying stocks, while Chinese regulators suggested the ban on large insiders selling shares could be extended beyond its planned expiration on Jan. 8. The People’s Bank of China also conducted so-called reverse repo operations to increase market liquidity.
Why is there so much oversupply in the materials business — and why aren’t miners cutting back production even more aggressively? Blame “supermines,” huge new facilities designed to produce more copper, iron ore, zinc, and other commodities than ever before, according to the Wall Street Journal.
Global mining firms planned and started developing these mega-properties a few years ago when pricing was much better. They can’t just turn that supply off without losing even more money and potentially defaulting on even more debt. So they’re continuing to overproduce despite lackluster demand and lousy pricing.
Having health insurance is better than having no insurance. But a New York Times story notes today that even the insured can face financial ruin in the event they get very sick. That’s because insurers have jacked up deductibles and other out-of-pocket costs for consumers in recent years. Interesting survey data on this trend can be found in the linked story above.
What do you think about China’s latest attempt to manipulate … er, calm … the domestic stock market? How about the continued weakness in commodities, and the lack of a more aggressive supply response? And if there’s anything you’d like to add to the health care insurance debate, I’d love to hear about that below, too.
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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Not sure why everyone making a deal about interest rate. Just raised by 0.25 is not significant. Over the course of two to three years it might increase to where it was in 2007.
So interest rate is still low for loans to be affordable. With gas prices low, extra money is there to maintain a good credit and people buy bigger trucks. Ford and GM are here to stay for long term. It is not doomed.
I read an interesting article that suggested The Fed didn’t raise rates because of economic strength but just the opposite. It contends the real motive was to give the bank’s more liquidity without settin off alarms. Does that make any sense? I also saw where the jobs report indicated 325,000 Americans lost their jobs and 375,000 foreign nationals found jobs. Jim
Dan people are Concerned because of the enormous amount of Debt in the World-wide market Place..almost ALL the anemic economic growth of the last 8-10 years was created through the EXPANSION of DEBT not through healthy business practices nor planning..Where will people get the EXTRA Cash to deal with even a slight Increase in interest payments..not to mention the Insane exposure to debt repayment in the World-wide Banking derivatives Markets…thanks for reading and aloha
I remember the Dow jobs and s&p plus the Nasdaq are going up every day I get up in the morning to c the future up , now I think my a pinion is on the down side until we get below 2009 low all this manipulation on earnings will come to end and the Dow under 6000 s&p under 600 that’s wine I’ll put my money to work on the high flying stock ,far is the Energy. Metals aluminum, will make the bottom before anything els
My portfolio continues to go down and I own top name stocks. Price action is telling us to get short. 1950 on theS&P in the first quarter. Wait until it drops and then load up the boat.
Well, that market auto be ashamed of itself by disparaging those hard-working shares in transportation equipment. With over-production in the commodities sector, with factories more than likely locked into the trap as the mining industry, one can only wonder when they will begin to give cars away but charge double for the gas to make it go.
While we are at it, the housing market is also gnawing its knuckles as it ran out of fingernails. Sure the housing market appreciated this year, but not all the sectors were appreciative. Are we also at ‘peak housing’ even for those mountain resort properties?
Happier new year one and all
The U.S. Oil Industry is in a similar predicament. If success is determined by return on investment the shale producers have not done all that well. At present they have invested $80 billion more than they have realized in oil sales. You have to keep producing all you can no matter what the price is in order to have any hope of servicing your debts. If oil doesn’t rally, and I see no reason for it to at present, we will see a wave of defaults this year. Jim
My Long Term SPY Indicator went to a SELL on the First Trading Day of January…. While 2015 has been basically a wash, this indicator went to a SELL just after the tops in 2000 and 2007 and to a BUYshortly after the bottoms in 2002 and 2009…
Yep, I just noticed that several indicators just went to “cash”.
What indicator are you using? (just curious)
well eagle for the yr 2015 the Dow jones industrial avg. saw a loss -2.2% the New York stock exchange saw a loss of -6.4% the S & P saw a loss of -0.7% AND THE NASDAQ SAW A RISE OF +5.7%
And your point?
My monthly S&P & SPY indicators (MACD based) went negative in APRIL of 2015. I got out of all of my broad-based market related holdings between then and June, pretty much with the DOW at 18000, about 2% from the top. Every hit of 2100 & 210 since then have been gift shorts. We’re just in the beginnings of the down phase, with tons of room left to go on the monthly MACD before any bottom is hit. This is a monthly sell signal just like gold got at 1850, silver at 36, Euro at 1.38, and oil at 100. It will take a long time and a lot of price decrease before a true turnaround comes (gold has taken 4 years). This top in the stock market was telegraphed long before the declines of August 2015 and long before now. So simple to ignore the talking heads, all the overheated analysis, and just believe the unemotional signals. Anyone still in the market at this point deserves to get what’s coming, which won’t be pretty (unless you’re short, or unless in 2-3 years you want to buy some bargains in good companies when the bear phase finally turns around).
When driverless cars arrive, we will need far fewer vehicles
When driverless cars arrive, some people will try to do useful work while riding somewhere, but most will just stare out the windows. More people will want to live in the city in which they work, rather than the suburbs, because a long ride will be so boring. Either that, or they will more readily form car pools so they can talk with one another during the trip. It will be like a mini form of mass transit, and lack the fun of driving oneself.
You make a good point – what is the point of not driving the car you are sitting in. It’s not like there is something all that much more important you ought go be doing instead of driving the car. Just wait until people get into accidents because no person was behind the wheel – then we’ll see how “hot” people are to have computers chauffeur them around.
The technology sound exciting – but it may end up being more of a toy and a way for taxi companies to cut costs than a real consumer product. Personally – I enjoy driving, and I can’t imagine wanting to turn that over to a hard drive with ears.
John
i doubt the american love affair with the automobile is going to end anytime soon. i want to drive, not a robot.
everything is about profits nowadays and if one sector would go with driverless vehicles it would be the trucking industry a lot of truckers are making 70,000- 100,000 dollars per year if one industry is ripe for automation its the trucking industry with driverless vehicles hours become unlimited and the price of freight drops dramatically
I too enjoyed driving when I was younger, except for the endless hours I spent creeping down the highways to and from work during the rush hours. One of the problems with growing old is the realization that at some point you are going to be too old to drive safely. With the thought of turning my keys over to my children and thus limiting my mobility to go to the grocery store, the doctor, the dentist, church, a movie, a play, the ballet and opera, grandchildren’s events, or to just take a drive for the fun of it whenever I wanted or needed fills me with dread. It means some of my cherished freedom I have taken for granted has been lost. In my city mass transit is not an option and the expense and time waiting for cabs is not pleasant to contemplate. A driverless car would not only allow me to maintain this freedom but would remove the burden of driving me, which would be placed on my family or friends.
Thanks for your posting. I’m 82 as of Dec 31 and I can see my problems. Dick
Chuck, I think you are probably right, but is driving really fun anymore ?
Yes Jacob that is true but the day of the backyard mechanic is over on this new tech. More technology more things that can go wrong more costs to run a vehicle, more chance of sabotage. New Tech always comes at a hidden price. Example after 2 or 3 years its kaput or outdated. Go to the bank and take out another loan and replace. God bless banks they just love us as long as we can repay.
WHEN DRIVERESS SEMI TRUCKS ARRIVE there will be no use for most of the drivers
the money is in the financing, not the car. anybody with a pulse has always been able to get a loan because defaults end up with a repo and a resale – which means another down payment and refi. the car is just collateral. this can go on indefinitely.
It seems as if the finance people WANT buyers to default, so they can resell the car several times, and supposedly profit each time. Why else can people default, then get financing to buy another car? Houses are probably next.
bad credit, bigger down payment, more profit. do it again.
Your answer is “golden” on this one. You obviously read earlier comments. Its a financial daisy chain for the lender.
The Chinese economy needs a major refocus. Building an economy on exports is eventually a self defeating plan. There are families that are in the three and four wage earners to make ends even come close to meeting. Some basic industries are facing closed plants and bankrupt companies and close to fifty percent unemployment, for many first time in their lives and they are middle age. There are reports of steel workers taking to the streets and the government dumping steel on the international markets at below cost.
Reply to Ted F: I don’t agree about exports. A powerful export economy is generally very good for business and can be a great boon for the economy of any nation. Germany has really done well as en export powerhouse, and the US frankly is one of the biggest and most important exporters on the world stage also. We just don’t get much credit for that due to our even bigger imports.
However in the case of China they have been overly dependent upon export dollars coming in to their country to fund business operations and have not had enough domestic consumption to balance that out for times like now when the rest of the world slumps and foreign orders drop off. It’s not that export is bad – it’s not bad. Exports mean foreign money coming into the country and that revenue fires up job growth, investment in industrial plant and equipment and more. However being able to make and sell products domestically is also a good thing and the lack of balance between exports and domestic consumption is one of several things that is hurting the Chinese right now.
There is no disputing this fact. That the lack of domestic consumption in China is one of the very few things that both the US gov’t and the Chinese gov’t agree on. They would CLEARLY be better off if a greater percent of their manufacturing output could be bought by the Chinese themselves. But the Chinese have valued foreign dollars higher than their own when it comes to markets so in one sense they have been their own worst enemy in this respect. It is true that low wages in China have fueled industrial competitiveness and hence growth. But the flip side of that coin is that low wages in China have prevented the Chinese citizens from building purchasing power -so when it comes to buying product they make – consumers in China just don’ t have that much money to spend. You can’t have it both ways – as the Chinese have found out.
In the US you hear complaints about the high cost of labor all the time – especially in the manufacturing sector. But you don’t hear complaints about the lack of spending power of the US consumer. US consumer spending is the linchpin of the US economy.
Its a closed society divide all the information the Communist party gives out by 2. It amazed me that all the Western companies jumped in there with both feet. It was the lure/greed of cheap labor/low to non existent pollution laws. Pollution is now swallowing the country and cheap labor is disappearing. Some are packing it up and returning home(with their tails between their legs)
Many billions of dollars were “saved” by drivers buying cheaper gas, thanks to cheap oil. So, where did all of the saved money go? Down payments on new cars? If so, the happy owners of those new cars will be paying for those cars for the next 67 months (average). However, when the Saudis and the Iranians get tired of proxy wars and go at it in earnest, the price of oil (and gasoline) will sky rocket and the debt burdened buyers will be driving far fewer miles or mailing the car keys to the bank. The used car market might become a bit soft.
THE JAPANESE ECONOMY “CRASHED” AND THEN ENSUED NEARLY THREE DECADES OF “BLAH” IT SEEMS LIKE WE ARE HEADED DOWN THAT SAME ROAD RIGHT NOW, BUT WE HAVE NOT ENJOYED A “CRASH” IF WE AVOID A MESSY DEBACLE AND ENTER A LIKE PERIOD OF MALAISE, WE WILL BE VERY VERY LUCKY TOO MANY GAMERS IN OUR SYSTEMS ARE COVERING, HEDGING AND OTHERWISE HEADING FOR THE EXITS AND THE DEVIL TAKE THE HINDMOST
THE WHOLE SYSTEM IS FUBAR AND SO ROTTEN I CANNOT CONTINUE IN IT I AM OUT
Yes Richard your right. The game is rigged the little guy cannot win. Even gold is smothered by all the funny paper gold flying around. Mint coins are flying out the door the mints cannot produce enough yet the metal itself stay stagnant. Something is wrong and the people the voters have put in charge to look after things are looking the other way while the rich and big business do us the dirty. All the economists are spouting out the rubber numbers handed to them by the government. Its a mugs game.
Just wait and see what happens when the defaults start to roll in.
do we start with Puerto rico, venzuela , brazil, Portugal ,spain ,Greece, france, Belgium, Italy, Ireland, Norway, japan, Russia, great britain or the united states hmmmm so many to choose from
Mike talks about how supermines have led to an oversupply of materials. of course that merely echoes what happened in the oil patch. It is also just another deflationary impulse, to add to the others we have seen. A deflating economy certainly will have the devil of a time repaying all the inflated debt incurred during the late inflationary economy sponsored by our wonderful, smart members of the Federal Reserve. Deflationary higher interest rates will surely do little to prevent many – perhaps most – of those inflated debts from defaulting. Depression, anyone?
I think Mike is onto something here – this is not a good situation. The reality of the Auto industry is that in spite of its size, making and selling cars is incredibly competitive. Consequently car manufacturing companies don’t make much – if any money at all. In spite of its enormous size, it’s very hard to make at actual profit manufacturing automobiles. And the US car makers have not shown themselves to be particularly good at what they do compared to foreign competitors, which hasn’t helped matters here in the US at all.
The Japanese make cars much more efficiently using a quality philosophy that was born in the USA with W. Edwards Deming and others, but has never been accepted by US companies. And in many cases they make a better product as well, which is a key aspect of the quality first approach advocated by Deming. German manufacturers (auto is the biggest industry in Germany) make a good product but even more importantly (for them) they have been very successful selling their product for a premium price. By selling their cars at a higher price firms like Mercedes and BMW can earn a profit on their product even though it probably doesn’t cost them any more to make it than anyone else – and perhaps less as they are also quite adept in manufacturing generally. The higher price they get for their product opens the doors for profitability that we don’t have in the American auto industry because US car makers have not been able to convince the public that what they make is worth the kind of money German car manufacturers command for their product.
Furthermore our car makers in the US wouldn’t even exist at all when it not for gov’t bailouts to cover up the fact that they have lost their shirts doing what they do. It’s been one of the least profitable industries to be in for quite some time. So when the auto industry is leading the economic charge you really have to be suspicious about what’s up. And monkey business in the financing end of things – a clear way to drive sales and “profits” (if they get paid in the end) sounds like it could be a smoking gun in a large and important part of the US economy.
Good work Mike.
John
I once heard GM described as an HMO that builds cars on the side. Jim
Without financing, there would be no automobile industry in the United States, or anywhere else, for that matter. If the debt incurred on new cars isn’t paid, those companies are dust. One of the biggest auto loan companies, which also issues credit cards, and asks “What’s in your pocket?”, is down about 25% since July. I wonder why?
when i worked for gm in the 80s, the company said it made $500/car sale, but made $2,500/car financed through gmac. so we did the math and net profit divided by number of cars produced came to exactly $500. the money is in the financing, not the sale of the car.
John
You left VW out of the mix. Guess all their success went to their head and pocketbook.
With a decent car, suv or truck going for 30-60k and then depreciating rapidly, who with brains is in this game?
All those sub prime loans are a looming disaster. No car is worth what the asking price is currently. The problem is shops can’t keep these nightmares running without very expensive diagnostics and parts. Out of warranty the values plummet.
Europe has also enjoyed record sales. No one can afford a house so they buy a new car. Wait till the epa is done with VW. As the credit markets dry up Detroit is doomed.
Quote No car is worth what the asking price is currently.The problem is shops can’t keep these nightmares running without very expensive diagnostics and parts. unquote.
Yes Charger john your right. Your statement brings the F35 to mind. Things usually go bad when idiots start to build high rise buildings all over the place look at the New York skyline of buildings over a 1000 feet. Even Iraq is getting in on the act with plans for the worlds tallest building. Did America leave enough money behind to cover this? Euphoria is setting in the hangover is close at hand.
I have a lot of friends who own dealerships they all like to brag how 10 yrs ago they had 1 car loan a month come in with maxed out interest now they say it represents roughly 40% of all car sales
With all of the above hullabaloo re car sales and 0 to low interest rates. Seems no one is commenting of the vast numbers …. Several million ….. (search on net for yourselves) very late new cars stacked and stored in Europe, N.A. Russia and other places. Why are the many car makers still producing other than to maintain some form of employment? This can’t last forever …..producing what they can’t sell. Appears there is more than one balloon going up. Wonder where and who it will fall on?
The same applies to the mining and oil business Alan. Inventories of everything is climbing thus the good government numbers up to the point. In for a dime in for a dollar. Bills/loans must be paid. There in so deep only the whites of their eyes can be seen. What scares me is how the CPP are playing so fast and loose with the stock market. Once the shorts, insiders big stock holders get out they will stay on the sidelines and the little guy will be burnt as usual. All the CPP is doing is showing investors its a rigged market. Then we have the Fed octopus here and all their clutching arms the Central banks of the world.
Mike: Since I haven’t received Safe Money Report since Aug 2015. I guess I can assume you stopped sending out one. I had several of your Model Portfolio picks, I haven’t seen an
online version, Am I just missing it?
Bill
Did you renew, Bill? Mine have been coming in regularly.
I notice only men are commenting today–guess all the gals are still busy working or taking care of the family. Now here I am, retired but working harder than ever–putting in long days–following the markets–handling loads of “paperwork” and gathering notes for a long-awaited book–outline only contemplated currently. Looking forward to all those really good used vehicles coming up when my van gives out. I have noticed that money is only a tool–doesn’t equal “value”. Waste not, want not, and throw worry out the window–it’s a waste of life-hours that never solves anything. Thanks, fellows for doing my share–frees me up to accomplish my goals. Thanks, Mike for all your direction and advice.
You might have to wait a few more years, Sarah, since cars generally last longer now; but the used ones should soon be plentiful, hence lower priced, coming off all those sub-prime repossessions, yet still good for a few more years. Some of today’s cars may well outlast their makers.
What the car companies need is more competition like maybe a steam engine if ever taken to improve, it will put all the car companies in the tank!!
Hey Cuzin maybe a return to the horse and buggy. The motor needed little repair and was non polluting, the fuel was cheap and created fertilizer and the slow speed made the view outstanding.
Gordon….and saved money re insurance…lol
the Super Nova DEFLATION has started GLOBALLY prepare accordingly and Pray for America to Return to GOD we live in times of DECEPTION and End of Times . .
God Bless !
They said the same things between 1929 and 1932….. Then FDR was elected and a Democratic Majority was elected in Congress, the average American was presented with the “New Deal” and the America began to heal….
Ed, how do I invest to take advantage of DECEPTION and End of Times?
Another commentator points out that the U.S. manufacturing index never really recovered after the last crash. After falling for the last 5 months, it is now back to where it was in July of 2009. Without making things, the economy has no basis to exist. Selling and reselling things that already have been made is a dying game. Eventually, everything wears out.