Published March 06, 2017

This Iconic American Company Just Flashed a Major Warning

By Justin Spittler

The year was 1984.

The Boston College Eagles were trailing the Miami Hurricanes 41-45 in the fourth quarter.

There were six seconds on the clock. The football was at Miami’s 48-yard line.

Boston College needed a miracle.

It put three wide receivers on the right side of the field. All of them had the same job: Sprint to the end zone.

Doug Flutie, Boston College’s star quarterback, took the snap. He rolled out to his right and hurdled the ball as far as he could.

The ball floated through the air for what felt like minutes. It eventually glided past two Miami defenders…and into the arms of Boston College wide receiver Gerard Phelan as he fell down in the end zone.

Boston College pulled off the impossible. It won the game as time expired…

• Today, people call this the “Miracle in Miami”…

It’s one of the most memorable plays in college football history.

But it almost didn’t happen.

You see, the “Hail Mary” is an incredibly risky play. It almost never works.

Teams only run it when they have no other option. It’s an act of desperation.

I bring this up because the same thing happens in business all the time.

Companies take desperate actions when their backs are against the wall.

Sometimes it works. Most of the time it doesn’t.

Today, we’re going to tell you about a giant U.S. company that just threw its own Hail Mary. As you’ll see, this desperate act could be an early warning sign for the U.S. economy.

I’m talking about General Motors (GM).

• GM is one of America’s most iconic companies…

It’s been in business for nearly a century. It’s survived two world wars, the Great Depression, and the 2008–2009 financial crisis.

Today, GM is being put to the test again. Its pickup sales are plunging.

Last year, GM sold 4.3% fewer Chevrolet Silverado trucks than it did a year ago. Sales of its GMC Sierra model fell 1.1%.

To offset weak sales, GM has offered generous “incentives” to new buyers. These include low interest loans, discounted leases, and “cash back” offers.

For its Silverado model, GM is offering an average incentive discount of $6,996. It’s offering a discount of $5,315 for its Sierra.

Those discounts are 56% and 82% higher than what GM offered a year ago. That’s a huge spike for such a short period.

• GM hopes these incentives will attract more buyers…

But here’s the thing about incentives.

They eat into a company’s profits. Because of this, companies usually only offer big incentives when they’re struggling to move inventory.

And GM isn’t the only major car company that’s desperately trying to sell cars, either.

Forbes reported last week:

To maintain U.S. auto sales at the present high volume give or take a few percentage points, analysts said automakers are resorting to an average discount of about 10 percent off suggested retail price.

That’s the highest level of incentives for the month of February since 2009, according to a joint forecast by J.D. Power and LMC Automotive.

Keep in mind that the U.S. economy was in its worst economic downturn since the Great Depression in 2009. Very few people were buying cars. Car companies had no choice but to use incentives.

Today, it’s a much different story.

U.S. auto sales have climbed eight straight years. Last year, the industry sold a record 17.55 million vehicles.

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• And yet, car companies are still using incredibly generous incentives to move inventory…

This tells us they’re desperate.

But that’s not the only reason to be worried about the auto market…

U.S. vehicle sales are falling. Last month, light vehicle sales fell 1.1% from previous years. Car sales plunged 13%.

Americans are falling behind on their auto loans. The value of auto loans delinquent by 30 or more days jumped to $23.27 billion during the fourth quarter of 2016. That’s the most since the third quarter of 2008.

Delinquency rates for low-rated borrowers also hit the highest level since 2009 last quarter.

Vehicle inventories are piling up. Last month, dealerships had enough inventory to last them 78 days. That’s up from 70 days a year ago. A rising inventory level means factories are building more cars than dealerships can sell.

In short, the auto industry has big problems.

If these problems persist, companies like GM may have to use even more incentives to attract buyers. Unfortunately, we don’t think the auto industry will be as lucky as Boston College was in 1984.

At best, these desperate measures will buy the industry time. But they certainly won’t prevent it from crashing.

Keep this in mind if you have major car stocks in your portfolio. You should also take a good look at any bank stocks you own. Banks with large car loan portfolios could also suffer heavy losses if more Americans stop paying their car loans.

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Chart of the Day: More Bad News for the Auto Market

The U.S. auto loan market has exploded.  

Today’s chart shows the value of outstanding U.S. auto loans. You can see this market has nearly doubled in size the last few years. It’s now a $1.2 trillion market.

To pay this off, every licensed driver in the U.S. would need to chip in about $6,100. In other words, the industry is built on debt.

At the same time, the auto loan market isn’t nearly as big of a threat as the U.S. mortgage market was a decade ago. That’s because the auto loan market is about 87% smaller than the mortgage market.

Still, this isn’t something you can afford to ignore.

If Americans stop paying their car loans, they’re going to stop paying their mortgage, credit cards, and auto loans, too. In short, the auto industry’s problems could soon show up in other parts of the economy. 

Regards,

Justin Spittler
Delray Beach, Florida
March 6, 2017

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