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?
- 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
- 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. **
- 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