Auto Sales Miss Again!

The auto industry started the year with its fourth consecutive monthly sales decline, with the six biggest automakers missing analysts’ estimates.

And then on Tuesday, April auto sales came in at 16.88 million, down 4.7% year-over-year. Expectations were for a seasonally adjusted annual rate of 17.1 million.

Sure, in both cases these are lousy results. But are there bigger problems in the auto industry than just a slowdown in sales?

You bet your bottom dollar.

First off, one of the biggest drivers behind auto sales recently hasn’t been rising wages or consumer confidence, as you might think.

Nope. The real culprit has been a ton of quick-and-easy auto financing: America’s car-buying spree has been fueled by cheap credit.

And as you can imagine, these loans aren’t just doled out to the best borrowers. Just as you might expect, subprime loans have surged along with the rest of the auto-loan business.

In fact, nearly a quarter of outstanding auto loans are subprime.

You read that right: One-fourth of outstanding car loans are to less-than-stellar borrowers!

This GM plant may cut shifts or close down because auto sales have been so low.

And these subprime auto loans are now getting crushed by surging defaults. Losses for the loans, annualized, were 9.1 percent in January, up from 8.5 percent in December and 7.9 percent in the first month of last year, according to the most recent S&P data.

To make matters worse, auto lenders package their loans into asset-backed securities (ABS) and then sell them as bonds to yield-hungry investors.

Now, of the $1.1 trillion in auto loans outstanding, subprime loans that have been packaged into asset-backed securities are getting hammered by net charge-off rates.

And get this: Those charge-off rates are the worst since the financial crisis of 2007-2008.

All told, auto loan delinquencies now stand at a staggering $23.27 billion. And they haven’t been that high since late 2008.

Here’s where it gets nasty.

If we continue to see weak auto sales, automakers will need to incentivize the consumer by boosting discounts. Plus, they’ll need to cut production to address swelling supply on dealer lots. And as lenders put the brakes on free-flowing cash, you’re looking at a one-two punch to the U.S. economy.

And don’t forget: The automotive industry is a key part of the what we do here. Carmakers and auto-parts suppliers account for more jobs than any other manufacturing sector AND they generate about 3% of GDP. As automakers go, so go the rest of us.

Now, here’s the good part: In spite of what’s happening to autos right now, I still see tons of opportunities. In fact, right now I have my sights set on a few high-quality energy-service stocks, defensive stocks, and some select technology stocks.

Best wishes,

Dave