By Justin Spittler, editor, Casey Daily Dispatch
The auto boom is over…
For the better part of the last decade, the U.S. auto industry has been on fire.
Sales have risen eight straight years. Last year, the industry sold a record 17.55 million vehicles.
When an industry booms like this, people lose touch with reality. They act like the good times will never end.
But they always do.
Investors learned this the hard way with internet stocks in 2000. Over the next two years, the average internet stock plunged 78%. Many dot-com darlings went to zero.
It happened again in 2007 when the U.S. housing market collapsed, which blindsided millions of Americans.
• Today, it’s the auto industry that’s unraveling before our eyes…
This is a serious problem.
It could even be a sign that a major financial crisis is around the corner. I’ll explain why in a minute. But first, let’s look at what’s wrong with the auto industry.
• U.S. auto sales have plummeted…
Below, you can see that U.S. auto sales have nosedived this year.
Last month was actually the worst month for U.S. auto sales in two years. And that’s not even the worst part.
Sales are now down 10% since the start of the year. That’s the biggest three-month decline since 2009.
Keep in mind, the U.S. was in its worst economic downturn since the Great Depression back then. Today, the economy is supposedly doing fine.
But the auto industry tells us a much different story.
• U.S. carmakers have slashed production…
You can see what I mean below.
This chart shows how many vehicles the U.S. auto industry manufactures each month.
In January, the industry manufactured 18% fewer cars than it did in January 2016. That’s the biggest year-over-year decline in domestic auto production since September 2009.
This is a major red flag.
If auto sales were merely hitting a rough patch, companies would maintain current output levels. They wouldn’t be slashing production like they are right now.
This tells us carmakers see dark clouds on the horizon. Unfortunately, it may be too late to prevent a full-blown crisis.
• U.S. auto inventory levels are soaring…
The chart below shows the industry’s inventory-to-sales ratio. This key ratio compares the number of cars sitting on lots with the number of cars that dealers have sold.
When the ratio is falling, it means dealers are working through their inventories. When it’s rising, dealers are struggling to sell cars. Business is bad.
This ratio has surged higher over the last few months. It’s now at its highest level since the 2008–2009 financial crisis.
• Keep in mind, U.S. carmakers are doing everything they can to sell cars…
They’re offering low-interest loans, discounted leases, and “cash back” offers.
But none of these gimmicks are working.
It’s now clear that the auto industry isn’t headed for a “soft landing.” It’s going down in flames.
Now, you may be thinking, “So what?”
Maybe your job has nothing to do with the auto industry. Maybe you don’t own any car stocks.
If so, good for you. You’re in a much better position than a lot of people. But that doesn’t mean you’re in the clear.
• The auto industry is closely tied to the health of the stock market…
When it’s doing well, stocks rise.
You can see what I’m talking about below. This chart compares the S&P 500 (green line) with monthly U.S. auto sales (blue line).
Notice anything? These two lines have practically moved in lockstep since 2010.
This makes a lot of sense. People buy cars when they feel good about the economy. They buy stocks when they feel good about the economy.
There’s just one problem. This relationship has broken down.
Auto sales are tanking. Yet, stocks keep rising.
This isn’t sustainable.
If people aren’t buying cars, it’s likely because they’re worried about their own finances or the economy.
Unless this changes soon, people are going to start taking fewer vacations, too. They’re going to eat out less. They’re going to take fewer trips to the mall.
In other words, the problems in the auto market right now could soon infect the rest of the economy.
• Some people will call me a “fearmonger” for saying this…
They’ll say the auto market isn’t big enough to spark a major financial crisis.
But those people aren’t seeing the big picture.
You see, the auto industry isn’t the only part of the economy that’s in trouble. The entire U.S. economy is sinking into an ocean of debt.
• The good news is that there’s still time to protect yourself…
Here are two ways to get started…
Lighten up on car stocks. This includes General Motors (GM) and Ford (F). These iconic American companies will have serious problems on their hands if auto sales keep tanking.
Avoid lenders who have made a lot of car loans. Credit rating agency Moody’s recently explained why:
The combination of plateauing auto sales, growing negative equity from consumers and lenders' willingness to offer flexible loan terms is a significant credit risk for lenders.
You should especially avoid Ally Financial (ALLY) and Santander Consumer USA Holdings (SC). These companies are two of the most fragile auto lenders. If the auto industry doesn’t rebound soon, both companies could take heavy losses.
Delray Beach, Florida
April 10, 2017
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