THE CAR SALES BUBBLE: “JUST TELL ME WHAT YOU WANT AND THEN SIGN THAT LINE AND I’LL HAVE IT BROUGHT DOWN TO YOU IN A HOUR’S TIME”

5/23/13

I’ve said it before (CAR LOANS:   TAKE MY MONEY…PLEASE!,  5/6/13 and  IMPORTED FROM DETROIT:   MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8, 4/25/13), this car market scares me, even as we approach a 15 mm unit year for U.S. light vehicle sales.

What I have long referred to as Ben Bernanke’s War on the Elderly, but what most people call QE III or “unconventional” monetary loosening, has created plenty of bubbles, and not all of those bubbles are in financial assets like treasuries, corporate bonds, and dividend paying stocks.   One of the most dangerous, though not quite as salient, bubbles is car sales; nothing moves cars like cheap financing.   With the economy still just dragging along, and the prices of cars continuing to go up, especially as incentives are being reduced, affordability is only being sustained, and enhanced, through cheap credit.  It is this artificial affordability that is driving car sales.  All this talk of pent-up demand has some justification; the fleet is indeed old.   But, as I said in my aforementioned 4/25/13 post, just about all of that pent-up demand would stay pent-up if money weren’t so cheap; cars last, and run like new, a long, long time nowadays; yours truly knows this from personal experience.  And while all the latest geegaws are nifty, impressive, and nearly awe-inspiring (See my already seminal 5/20/13 piece, I TEST DROVE A KIA TODAY…), people can, and would, do without them if cheap money didn’t make them even more tantalizing.

With the “domestic” car companies ramping up production by canceling the longstanding Detroit tradition of summer shut-downs, it’s hard to be sanguine about the car business.  At some point, credit has to get more expensive and/or less available.  Even without Fed action, long rates are up; the ten year treasury is up 35 basis points (“bps”) since the end of last month and the five year, a more relevant benchmark for car loans, is up 22 bps.  Without all this cheap credit floating around, what look like tight inventories might suddenly become fulsome as people decide that what was a necessity at one monthly payment is a luxury at an even slightly higher payment.

This post concerns the state of an industry more than the relative cheapness or richness of the “domestic” car company stocks; I don’t follow the car company stocks like I used to, though I am considering starting to do so again quickly.   That having been said, most of the experts are telling us that Ford (F) and General Motors (GM), despite their rather stunning increases of the last few months, are still very cheap with forward price/earnings ratios (“P/E”s) of about 10 times while prospects in the black hole of Europe improve, Chinese sales remain strong, and there is so much upside in the United States.   While 10 times forward earnings certainly look attractive, especially relative to an S&P 500 P/E roughly 50% higher, I might want to challenge at least two, and probably all, of the assumptions behind the earnings projections that form the denominator of that P/E.  

As long as Ben Bernanke’s punch bowl, composed largely of the sweat and the blood of those (especially the elderly) who’ve been prudent, or, in the Bernanke bizarro world, foolish, enough to save, remains full, car sales in the United States should remain strong, or at least respectable.   But as soon as Obsequious Ben takes away the punch bowl, or the markets get wise to him, car sales have nowhere to go but down.

While I’ll leave, for now, ruminations on the attractiveness of GM and F to the self-proclaimed experts, I’m not enthusiastic about investing in an industry that is flying high on the economic and financial equivalent of crack cocaine.  You can see how this argument could easily be extended to the entire stock market, but, again, calling markets is, as I have said so many times in the past, nearly impossible.  

GM                  $32.84

F                      $14.86

S&P 500:         1,652

Dow:                15,308