Three Reasons It May Be Time To Short Automobile Stocks

As always, take this with a grain of salt given my past history of investment advice.  I am frequently correct on my calls to short something, but tend to be really early, such that a person (ie me) can likely be short-squeezed into oblivion before the fall takes place.

That being said, I think autos would be a good short.  Why?

  1. They are riding positive sentiment, based on a strong October.  But October was strong because it had 5 weekends rather than 4 and recent results reflect a lot of channel stuffing.   Shorting means finding the top, and this feels like the top
  2. I would be stunned if the Volkswagen emissions cheating is limited to Volkswagen.  Volkswagen is not unique -- Cat and I think Cummins were busted a while back for the same thing.  US automakers don't have a lot of exposure to diesels (except for pickup trucks) but my guess is that something similar was ubiquitous.  **
  3. Apparently, the recent rebound in auto sales has been driven by a huge spurt of sub-prime lending that looks remarkably similar to the housing market 7 years ago:

This comes against a backdrop of rising US auto sales (see the numbers for October, out earlier today) and it's not difficult to explain the gains. Just take a look at the following data from Experian on the lunatic loan terms being extended to borrowers (from Q1):

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

** Postscript:  The biggest problem with the emission cheating is that it caused the world to under-estimate the cost of emissions mandates.  When performance of cars starts to drop noticeably when emissions cheating is fixed, it will be an eye-opener

  • marque2

    I got myself an 84 month loan last year on a car. I figure if the bank is only going to charge me 1.6% a year, I may as well string it out. I am paying less for my car loan than even my student loans (2.15%)

  • ErikTheRed

    I agree. All of our cars are company cars, but even our small business corporate loan rates and lengths for autos are mind-bogglingly lenient. I'm happy to take them (yay, cash flow!), but them seem pretty insane for the other side.

  • Dan Wendlick

    An 84 month loan on a car make sense, if you are going to hold onto the car that long. If you want to replace it at 5 years, expect to come up with cash at trade-in or else roll the debt. Either way you're not saving money, just delaying the day you pay it.

  • DirtyJobsGuy

    I got a barebones rental at Hertz the other day with crank windows and no auto door locks. It was a blast from the past and surprisingly annoying in service. Cars with any level of these automated features and decent performance will run beyond what a lot of the market can afford (even for Korean OEMS), so the long term financing boom. Add in the mandated new features (rear backup cameras, extra airbags) and this will continue to rise. The longer terms may be just the result also of lower incomes in the USA. Any kind of economic recovery with wage growth would back off the longer terms.

  • Matthew Slyfield

    No loan for anything is going to save you money. I am not aware of anyone who thinks that and anyone who does is a moron.

    Also you are delusional if you think you can save money by replacing a car every 5 years. (I don't know anyone who does that either)

  • Michael Moran

    The question is price of oil. Period. Consumers use gas price savings to buy cars (and make car pay), and lower gas prices encourage them to buy bigger cars which are more profitable to car makers. Very unlikely car makers crash unless oil prices rise.

  • CapnRusty

    And those emission standards that VW was violating? The purpose was to stop global warming. You remember global warming don't you, the thing that was going to kill us all eighteen years ago, before it quit?

  • herdgadfly

    Sometimes it is hard to remember why it that we are attempting to drain the swamp. My local election happened on Tuesday and and news reporters happily told us that early voting had increased by a large percentage because of more election locations offered but then told us that the total votes cast represented only 20% of registered voters - the lowest on record for our community.

    We spend a fortune registering visitors to the Dept of Motor Vehicles, then wonder why these folks don't vote. Progressives are so intelligent!

  • Nick P.

    Are those auto loan numbers strange?

    I honestly have no idea, besides my home mortgage I don't borrow money.

  • xtmar

    Disagree, at least in part. While some auto emissions are harmful from a global warming perspective, their carbon emissions are more a function of their fuel economy and CAFE. Most emissions are more concerned with smog prevention, though that's largely been beaten, and reducing the levels of harmful byproducts, like NOx and particulates, that are produced.

  • slocum

    I don't think this will be a problem for gas-powered vehicles. Emissions control for diesels is a much harder problem. This may end up killing the popularity of diesel autos in Europe and cause a lot of turmoil in their auto industry, but I'd expect the effects in the U.S. to be relatively small. I also don't see the increasing loan-length as a serious problem given that the useful life of modern cars is growing at least as fast. Still, though, I wouldn't be surprised if a downturn in the auto industry is coming (there's pretty much always a downturn coming after several years of prosperity).

  • markm

    No, NOx and particulates are not contributors to global warming. In fact, by discouraging the use of small diesel engines and reducing the efficiency of both gasoline and diesel engines, the emission standards increase CO2 emissions. If the EPA actually believed AGW was dangerous, they'd believe that the VW cheat saved many more lives than the 60 that increased NOx emissions are estimated to have killed. Government regulation is not about saving lives, it's about _power_.

  • Eau de Javelina

    Ford for instance is selling at projected forward PE of 7.65! Hardly seems like euphoria to me. Instead it seems like a lot of this bad news (sub-prime auto loans) is priced into the stock already.

  • markm

    If you can put a _necessary_ expense on a 1.6% loan and use the money you'd have been otherwise been paying towards that expense to paying down a pre-existing 2.15% loan, you will save money in the long run. However, very few people actually meet both conditions. Given a low-rate, low-down-payment auto loan, they'll buy a car they couldn't otherwise afford, instead of buying the minimal (nearly always used) car that will meet their needs. And if they avoid that trap and actually have more disposable income, they'll almost always live higher and blow most of it, rather than paying down the more expensive loan as quickly as possible.

    The only people I know who would avoid both those traps are scrooges like me - but I'd have done everything possible to avoid or minimize the first loan, and would have been very reluctant to have two outstanding long-term loans at the same time. I think I did have a mortgage and a car loan at the same time once, at a point when any more car trouble would have endangered my job, but the 5 year car loan was paid in 2 years, and the 30 year mortgage in 10 years.

  • markm

    If crank windows bother you, wait until you get electric windows that don't work - or that roll down by themselves when you go over a bump. I also hate automatic door locks ever since a Dodge Caravan locked itself, with the keys in the ignition, while I was scraping ice off the windows.

  • irandom419

    That is why off years they like to put levies on ballots, the low turn-out makes it more likely. I vote no on everything until the PERS issue is resolved.

  • Matthew Slyfield

    "instead of buying the minimal (nearly always used) car that will meet their needs."

    Actually, long term, a used car can cost more in terms of maintenance than you would have spent on a new car.

    My family has had terrible luck with used cars (and most were bought through dealerships).

    I have owned two used cars. The first, I had to repeatedly replace the alternator on. Until one shop finally found that there was a short in the wiring harness that was frying the alternators. The last one, the transmission self destructed on me after around a year. I had to spend $3k to put a new transmission in it.

    My brother and sister-in-law are currently nursing two used cars, sinking %500-1000 a year into each in repairs while claiming they can't afford a new (or newer) car.

    Also, different people have different needs.

  • Matthew Slyfield

    "but them seem pretty insane for the other side."

    Unlike mortgages, there is no government or government sponsored entity guaranteeing auto loans for low income buyers. So the car dealers and the companies writing the loans have to see an up side, even if you can't.

  • CapnRusty

    Markm & Xtmar: I stand corrected.

    Additional research shows me that I confused nitrous oxide (N2O) with NOx, the former being classified as a greenhouse gas. However, that research also revealed that while diesel fuel has a higher per-liter energy content and thus produces more CO2 per liter, a diesel engine is much more efficient, and a diesel-powered vehicle produces less CO2 per mile than a gasoline-powered vehicle. Earlier diesel engines produced the element carbon ("soot") during warm-up, with the possibility that little black particles in the air were contributing to global warming. Better technology has reduced these emissions of soot.

    Of note is the fact that NOx emission standards in the US are four times more stringent than those in Europe.

    Xtmr: There is a misleading tendency in much reportage about climate change (formerly known as "global warming") to use the term "carbon" when what is meant is "carbon dioxide." The ordinary man on the street probably knows "carbon" as that icky black stuff that comes out of the tail pipe of a city bus, and he thinks of it as pollution, which should be eliminated. He confuses that with carbon dioxide, which is odorless, colorless and essential to life on earth (the increase of which in the atmosphere is credited with significantly increasing the world-wide production of edible grains).

  • Mike Powers

    It is kind of unfortunate to find that the performance gains of the past decade were accomplished through cheating. I was kind of glad to think that manufacturers had solved the "emissions versus performance" problem.

  • Jeff Bishop

    It requires many years of 500-1000 dollar repairs to add up to the price different of a new car vs a used one. My trusted mechanic's guideline was that as long as you're spending less than 1000 per year in repairs, you're better off keeping your older car.

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