By: Craig Bowles
The leading automakers are scheduled to report monthly sales on Wednesday, November 1st.
- Automakers are expected to report a 17.6 to 17.9 mln seasonally adjusted annual rate (SAAR) for October sales. September’s 18.5 mln was assisted by replacements and shopping delays following hurricanes and October is expected to see some carryover. Increasingly aggressive incentives are being offered into year end due to pressure to clear inventory. “Even with production cuts this year, incentives are on the rise and have reached 11% of average transaction prices. This is an indicator that new-vehicle demand is still contracting, and production cuts could be on the horizon to prevent oversupplies,” according to Kelley Blue Book.
- Results for October 2017 have 25 selling days compared to 26 days in October 2016.
- Gasoline prices had moved up to around $2.40/gallon in April and May for a seasonal peak before falling to $2.23 by the end of June. (Current is $2.46) February 2016 was $1.70/gallon. (AAA)
- Kelley Blue Book expects slowing of 1% to 3% (was 4% last mth) in 2017, so ups the lower end of their expected sales range to 16.9 to 17.3 million. Rising supply and interest rate hikes remain areas of worry. Another headwind facing the industry is off-lease vehicles are returning to the market as low mileage, relatively-new used vehicles. According to Cox Automotive data, 3.6 million lease vehicles will return to the market in 2017, up from 3.0 million in 2016. The fastest-rising class of loans is now 73–84 months and already at nearly 1/3 of new vehicle loans. Interest rates on new-vehicle loans fell to a six-month low in July. (Edmunds)
- Auto loan defaults have been rising since 2014. (Bloomberg.com) US credit card debt has surpassed the financial crisis record. (zerohedge.com) Used-car prices made a new second quarter record high. (Edmunds)
- 2016 was the seventh consecutive year of annual growth and the auto industry’s longest such streak in more than 50 years. The NY Fed’s report focusing on how a rate hike effects the auto industry suggests that a 1% increase in rates would cause car production to fall at a rate of 12% a year and sales to fall at 3.25% a year
- US auto stock prices had been flat-to-lower since the end of 2013 despite strong sales but GM recently spiked. Zero Hedge has pointed out the reason for this is that the automotive inventory-to-sales ratio has been rising since 2011. (StLouisFed.org) Goldman expects pent up auto demand from 2009 through 2012 to be cleared through by 2017 and forecasts a 15 mln SAAR by the end of the decade. U.S. composite economic indexes show inflation indicators as the strongest and lagging indicators (includes services inflation and debt) outpacing the actual economy. Growth rates: Leading Inflation Index 5.5%, Leading Economic Index 4.7%, Lagging Economic Index 2.6%, Coincident Economic Index 1.9%.
Ford Motor (F) Expected Release Time: 9:15 a.m. ET
Overview: Ford Motor (F) Q3 earnings beat analyst expectations driven in large part by cost reductions from new CEO Jim Hackett and strong sales in North America. Revenue was $36.5 billion vs. $32.8 billion expected. Average transaction prices rose more than twice the industry average in the U.S. F-Series sales were up 14 percent. Rising prices have helped the F-Series truck sales drive profits but this is thought to be unsustainable. Expectations are for earnings to be 50% lower over the next 18 to 24 months due to heavy spending on the car of the future and more use of data-collection tools. Ford had an 81-day supply of vehicles as of September 1 and cut that to 72 days by October 1. (Ford.com) RBC doesn’t expect CEO Hackett “the change agent” to impact more than cost cutting until at least 2019 or 2020 as the company is still very early in a turnaround. Management has been reshuffled but everything takes time in this industry.
Technical Review: Ford shares have been trending lower but are testing a trend change. Seasonally, auto stocks favor the first half of the year after February. The stock has shown limited duration above $12.50 the last two years. (Chart courtesy of StockCharts.com)
Edmunds.com: 5.1% (Source: Edmunds.com)
Kelley Blue Book: 3.9% (Source: KBB.com)
True Car: x.x% (Source: TrueCar.com)
General Motors (GM) Expected Release Time: 9:30 a.m. ET
Overview: General Motors (GM) Q3 earnings beat analyst expectations helped by cost-cutting and a shift to higher-margin trucks and sport utility vehicles. The company reported a GAAP loss due to charges related to the sale of its European operations. is making progress on reducing inventory and Barclays expects an inevitable incentive push in the coming months (especially in large pickups). Pension obligations being underfunded by over $20 bln could complicate efforts to fix GM’s inefficient capital structure and unlock significant value for all shareholders. $3 billion in debt was issued to help with the pension problem which apparently is a part of new trend for pension strained companies. GM had a 104-day supply of vehicles as of August 1, the most since November 2007, and slashed that to 88 days by October 1. (GM.com) The company expects to get down to 70 days by year end. The worry is that high inventories could start a price war similar to what happened in 2007. General Motors plans to test thousands of driverless cars in 2018. General Motors agreed to pay $120 mln to settle ignition switch claims in 49 states. The defect has been linked to 124 deaths and 275 injuries. The company plans to launch 10 new electric vehicle models in China by 2020. India’s GM dealers are threatening to sue if not adequately compensated for being forced to close by year-end.
Technical Review: GM shares had found resistance at around $38 since early 2011 but higher lows since 2015 finally helped push through resistance in September and October. GM and Ford stocks tend to move similarly but diverged since mid-2016 when GM’s stock became relatively strong. Such a lengthy divergence between the two stocks is unusual and possibly more fundamental. Looking at a 5-year chart comparison, GM has caught up with the uptrending S&P. Auto stocks outpaced the overall market in 1972, 1987, 1993 and the late 1990s but lagged as Ford is now doing in 2007. 1986-87 similarly had leading inflation indicators showing strength and nobody was mentioning it on Santa Monica’s FNN which is now called CNBC. (Chart courtesy of StockCharts.com)
Edmunds.com: -7.3% (Source: Edmunds.com)
Kelley Blue Book: 0.5% (Source: KBB.com)
True Car: x.x% (Source: TrueCar.com)
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