Auto Sales

Is the consumer really back again and kicking with vigour?

Let's take a look at the latest auto sales in both the EU and the US, which is usually a reliable indicator of consumer sentiment and helps us gauge the health of the economy.

Auto sales in the US are not as buoyant as they would appear when you remove the debt financed boom created by the Federal Reserve’s easy money policy. Could that be why Ford is slashing their profit forecast by as much as 1.5 billion US dollars? The US auto company's profit margin has been slashed, which in part has had a lot to do with heavy price discounting to try and entice consumers into the showrooms and get them buying. Ford's stock price has remained flat all year round. In fact, since 2011 Ford's stock price has fallen by 25 percent. What about the other giant US auto maker, General Motors (GM)? Well regretfully their stock price is not doing much better in this booming stock market. GM's stock price is also down 25 percent, on year to date. But according to mainstream, US car sales are rocketing. Auto dealers' lots are experiencing a steady flow of inventory.

So the auto industry is experiencing brisk trade, meanwhile their stock price has been slashed by an average of 25 percent in the last three years. But we’re in a raging bull market with markets breaking record highs almost on a weekly basis. Moreover, the economic data supports the view that not only is the US economy recovering but it’s now gaining momentum.

Meanwhile, the average automaker's share price is down by 25 percent since 2011.

But its hardly a value investing opportunity for investors. Could you imagine the great market oracle, Warren Buffet swanning in and buying up stocks in the auto sector. Somehow I don't see that happening, particularly when you have got a major player like Ford slashing their profit forecast.

So what is going on? Again, the pieces just don't fit and there’s an element of contradiction in the macro data (referring to the economy) which is indicating that the US economy appears to be gaining momentum and the micro economic data (in this case auto companies) warning of a profit margin squeeze.

Could a sub-prime lending crisis be rearing its head again, but this time in the form of auto loans?

Remember sub-prime mortgage lending back in 2008, which was the root cause of the previous 2008 crisis.

Sub-prime lending is a type of loan that is typically offered at a rate above prime to individuals who do not qualify for prime rate loans. These type of borrowers are often turned away from traditional lenders because of their low credit ratings or other factors that suggest they have a reasonable chance of defaulting on the debt repayment.

There is an obvious motive to make loans to risky borrowers, the reasons being that they pay the lenders more in interest payments. These interest payments can often amount to thousands of dollars during the life of the loan. Loose monetary policy, which kept interest rates low, might also have spurred on risky lending in the automotive market.

In other words, what we could be seeing is a debt fueled bonanza in auto sales, where easy credit has pumped up the sub prime loan market. Remember John Paulson, a little-known hedge fund manager who smelled trouble in the US housing market back in 2006 and bet against the housing market by accumulated Credit Default Swaps. At the time, all the major “experts” continued talking about the unstoppable property market boom. Paulson, a rebel with a cause, was a lonely voice back then, but when the sub prime bubble popped in 2008 this guy raked in for himself a massive 3 to 4 billion USD. It has been dubbed the trade of the decade. Guess what? Now Paulson is betting against the auto loans and he'll probable add a few more billion to his wealth when that bubble pops too.

Anyway, back to auto sales. In the EU the market for autos doesn't look very robust either.

New-car sales in Germany, France and Italy all fell slightly in August, a seasonal weak vacation month throughout Europe,

Passenger-car registrations in Germany dropped by 0.4 percent to 213,092 vehicles, partly because the same month a year earlier had one more working day, the Federal Transport Agency (KBA) said today. Through August, German registrations increased 3 percent to 2.02 million vehicles, it said.

Registrations in France fell 3 percent last month to 83,340. With one less selling day compared with last August, adjusted sales last month rose 2 percent in France, accoding to the CCFA industry association. Registrations for the first eight months rose 2 percent, the group said.

In Italy, vehicle sales slid 0.2 percent to 53,191 last month. Eight-month sales are up 4 percent to 925,393 units. Spain bucked the downward trend with August sales up 14 percent to 45,355. Spain was helped by a government subsidy scheme that gives buyers of new vehicles a 2,000-euro rebate for turning in old cars.

But overall auto sales in the EU continue to remain subdued and while the data coming out of the US relating to auto sales appears good, when you look behind the figures and see what is propping it up, then maybe it might not be as good as it seems.