The US Auto Industry is about to Implode - Michael Alkin

The US Auto Industry is about to Implode – Michael Alkin

so I spent 20 years in the hedge fund business looking for things at inflection points companies like or industries like uranium when they're down in very long bear markets or companies that are trading near peaks and industries that are trading near Peaks now what I realized with Wall Street and the investment community is when things were at Peaks they look good until they're not we move this could we get a little help here moving it forward so what we're gonna talk about is history repeats itself but it often it doesn't repeat but it often rhymes so what I'm talking about that is in cyclical industries when things are going well the street tends to extrapolate the current environment into the future and that what we're seeing right now I want to talk about an industry that I think is about to implode and I want to talk about the US auto industry it's about 5% of US workforce it represents 3 percent of GDP about 150 billion dollars a year worth of exports and about half of the companies in the Dow Jones Industrial Average rely upon it as you can see it's had a huge move you that chart doesn't go back to oh 9 but it bottomed out at about 9,000 units nine million units and it's now up to 18 million units on an annualized run rate average price of vehicles have increased from third twenty eight thousand to thirty six thousand a twenty seven percent increase which has been a huge huge boost to the automakers margins the part makers margins and everyone else it's been driven by jobs rising wages low gas low interest and in recovery of the housing market is driven to shift into the SUV vehicles so everything in the industry is soared but there's something that's interesting that's developing is right now for the average incentive for vehicle is 40 300 bucks per unit now that is out of the last 18 months 17 times it's averaged over ten percent and they're still having a hard time moving units as the this our this year was down a couple of percent and is projected to be down next year so something's unusual when you see the big three us makers when you have record units and you're seeing sales down 2% 1% fiat-chrysler eight percent there's something that's hiding out there on the horizon if you look at the all the makers in the US you could see there's a lot of red on that chart despite sales so what drives the US auto market it's used cars it's the pricing of used cars that drive it in the last recession used car prices fell off a cliff new car volumes were very low at nine million so you didn't have a lot of trade ins into the market so you had a very limited supply and once you got that limited supply you started to see used car pricing start to surge its supply demand so when we think about buying a car leasing a car it comes down to one thing for the average person it's all about the monthly payment so as used-car prices are increasing we have high used car values it leads some more equity in the car which leads to higher residual values the difference between the price of the car and the residual value is the gap determines your monthly payment mix in some low interest rates and you had really low monthly payments with those low monthly payments you've had a lot of car sales and a ton of trade ins so if you think about it am I going to buy or lease I could buy a forty five fifty thousand dollar car where I could lease it for four hundred bucks a month they becomes a no-brainer after a while so what's happened you've seen a huge surge in leasing if you look from 2012 because residual values are adjusted up by the manufacturer as the values are going up in used cars you've seen a tremendous amount of cars being leased well that's fine but look it's become like crack for the car makers look at General Motors in 2009 lease penetration rates were 2% there now 27% Ford up to 23% from 5% so what's driven that leasing low interest rates and now you have millions of cars coming off lease that are going into either the user or the wholesale market and that's starting if you look back in the chart earlier use car pricing it is starting to roll over very hard now here's something interesting and it kind of reminds me back to something around the global financial crisis low interest rates easy money that's the amount of money spent on borrowing for the auto sector it's up to 1.2 trillion dollars in debt it's gigantic 20% of that is subprime auto 23 million consumers hold subprime auto loans mainly auto finance companies at 70 percent market share have 200 billion of that market and that's those are credit scores under 620 between 620 and 660 it's 435 billion about a third of the market is in subprime okay so what does that mean global financial crisis we saw subprime declines at about 10 percent in the auto market right now they're sitting in the nine percent range so they're climbing very closely so what's happened the auto lenders the banks the credit unions they're cutting back and it's becoming much more difficult to get loans does this start to sound familiar to what we saw in the in the global housing crisis right so we have record lease explorations pressuring used-car prices residual values follow car follow the car values the affordability gap because of lower car lower used car prices is widening less cars are going to be sold subprime auto delinquencies are going to climb through the roof auto manufacturers have become increasingly and heavily dependent on leases and subprime customers and if you think about the sector's how one if you own stocks in this area or you think about shorting stocks it's it's across the entire auto sector from car makers to auto finance to auto parts to auto retailers all are trading at peak margins the fundamentals are signalling that trouble is ahead and the stocks have not yet reacted as the stocks are hitting at highs another sector I think that has been a beneficiary of yield tourism I call it and easy money flowing into sectors has been the consumer staples sector and one of the things I say a lot is don't confuse a brand you know for a stock you should own until now it's been a huge run the last 15 years you've had dramatic cash flows strong earnings and investors and they pay a super-sized dividend of about two and a half percent annually compared to interest rates now and you've also had those yield tourists people who couldn't afford to keep their money at zero interest in the bank they come in and buy these stocks and they say you know what I used these brands every day how bad could it be I trust them right so called safe investments you've seen money pouring in been a heck of a run if you own the consumer staples ETF it's been a monster move the problem is valuations are at record highs now you never short a stock because evaluations valuation means nothing who is anyone to determine what somebody's going to pay but when the fundamentals are starting to show a different story then that's when it matters but the growth doesn't support these valuations norther the fundamentals and I think you're going to see a tsunami of earnings misses over the next 12 months and the demographics so what's the problem the demographics these companies are getting squeezed by both sides there's ninety some odd million Millennials and there is 70 some-odd million baby boomers at the top end you have the baby boomers everyone knows we've got an aging world the cohort of people turning 65 and older is rising dramatically it's the fastest growing cohort of population but that's just us here that's in many countries and as we get hold older our spending habits change we spend 40 percent less from age 45 to 74 you peek at 70 thousand dollars per household and you go all the way down to 40 and you spend less on consumer stuff you spend more on insurance and healthcare and everything else for instance spending on food declines 35 percent from 80 400 to 5,500 retirees spent a lot less on soap an ordinary household sundries now you multiply those spending cuts in the u.s. by 50 million retired people that's a 1 and a half trillion dollar cut to consumer spending and that hurts also retirees they're more health conscious and and and they're they're using less of what the big guy sells right so instead of eating Oreos at night they're rotating into fruit the big guys don't sell fruit that's not how these consumer staple company built their business the bigger issue for the brand marketers are the Millennials they're a nightmare for them these are folks born 1980 to 2000 it's the biggest in the US history there's 93 million of them more than half of them don't trust any of the brands that their parents bought I grew up trusting my parents brands but they don't trust what what these kids don't trust what we trusted their affinity for technology's completely reshaping the way they buy they buy they have more choices and they willing to spend less everything is at the ins fingertips they could comparison shop and they experiment with new brands all the time they don't want a story that they read it they don't even watch TV they don't want a commercial on TV telling them what to buy they want a local organic homegrown story and that's what they rally around so how did the big brands respond to this they say okay well we're gonna go buy those brands you know what they do they pay big stupid fancy multiples of earnings or cash flow and once they buy the company the Millennials rotate out into finding the next new one so these deals normally don't work for them but what happens Wall Street does what Wall Street does they just turn a blind eye because the numbers have been okay stocks keep moving higher but look at these numbers average sales growth two and a half percent for the past three years which is half the growth rate of the SMP cash flow growth has grown just 6% much slower than the overall market now so what was the playbook how did the companies continue to grow earnings over the last several years very simple coming in at a global financial crisis they cut a tremendous amount of sgna and that helped their margins they used their very clean balance sheets to go out and take advantage of very low interest rates and add a lot of debt to their balance sheets to go and buy back stock when you reduce the share count your earnings go up so declining sales gets offset by cost cuts and a share buybacks but here's the problem the balance sheets of many of the big guys are getting to the point where it's hard for them to go borrow more they've already learned that buying what the what the Millennials want doesn't work and they have no answer to offset the declining baby boomers and what you can see here is when you look at into the year cy1 cy+ – those are the estimates from Wall Street revenue ebody they're starting to decline yet the stocks haven't reacted yet and one thing I can tell you is when those numbers start to come down and they start to miss earnings you're going to see that these stocks get sold off hard and these stocks have a lot of people in there that don't they are just owning them because they're tourists they're getting the dividend yield and as soon as something happens it's going to be Kate borrow the borin door on the downside and these stocks are sitting at nosebleed levels so there you have it the Otto cycle I think is that the margins have peaked you've got declining fundamentals and the same with the thing with the consumer staples

45 thoughts on “The US Auto Industry is about to Implode – Michael Alkin

  1. Perhaps if they didn't build such embarrassing utter crap they wouldn't have this problem (GM , Chrysler, Ford)

  2. Millenials just don’t let boomers scam them into buying bullshit like every other fuctard generation

  3. You have to be a FOOL to buy a new car or lease it. Best value it to buy a 2 or 3-year car and let some other suckers take the loss.

  4. I am generation x here, I never trusted companies. In my experience in management, good decisions to be competitive is like trying to start a fire with a match in the rain. Incompetence and narrstic desires is paramount in upper management, they look at things and buy them with out taking into account the downside. I warned them when they were making minor equipment changes about a loss of efficiency and increased cost of operation by 30%. I was told it was done as a cost savings, so I tried showing the math indicating it was impossible for any savings. I was told I was wrong, it's not what we pay you for. End result 45% added cost after they started adding more useless crap to offset the loss they caused. Not sure what they messed up in the last 5 years, but their track record was flawless in mistakes then. Smart people look at what they want to and can be easily controlled to buy crap a company don't need, under the guise of savings.🤔

  5. It would be awesome if he could do a presentation about real estate as well. Boomers retiring in droves and not enough young generation to buy their overpriced houses.

  6. Like the slide shows 'Things can look really good… until they don't'

    Can we get a little help with tech support here please

    ROFL !!!

  7. Guy has to read the slides to know what they say in his own presentation? And we're supposed to find him credible? If this guy wants to be taking seriously he should get his shit together with the slides BEFORE the presentation.

  8. 12 months later & I'm still hearing the same thing. If it's collapsing then let's get it going already. I'm ready to bet against it all in 2019

  9. We’re all fucked.
    In the land of the free.
    Hahahaha . The debtor,
    brought to bear 160
    Years of Jacksonian greed!!!
    Confratulations. Brothers and sisters
    all of them. Not black, nor white.
    What evil wrought, the pursuits
    from the hearts of men!
    Why slave one color to one cart.
    When you can turn its wheels with children.
    Through the transfer of energy from the
    Tide, of the generation.?! All of them.
    Equally, with a principal interest in freedom.

  10. It's pretty easy to see when these big companies are running dirty schemes. The cars are overpriced & they have been bullying people into getting loans through the dealership. When I bought my car a couple of years ago, I had to fight with them to be able to pay cash for the car at the price they had it tagged at. It used to be that they'd sell you the car at a more reasonable price if you payed cash; now these clowns will tell you to your face that they want to milk more money out of you by making you a loan. It's mental illness on the part of the company & the consumer. What a surprise that the dude working at Walmart can't afford to make the payments on the trendy $40,000 pickup truck the clown car salesman convinced him to get a loan for!

  11. This guy seems really smart, his predictions about auto industry is 100% correct, I wish what he has to say about the Housing market.

  12. Ford Gm and Chrysler have intentionally backed off electric car production while China and Japan have made giant steps leaving them far behind! Buying fake Quality Awards from JD Power won't get them out of the decline! Chevy Volt was not pushed and no commercials on Electric Cars!!!

  13. Terrible analysis on why the auto industry will not do well. It’s more of a template for consumer cyclicals instead of specifically the auto industry. For example, using the 2008 subprime example is not relevant because banks were highly levered back then. The auto industry isn’t highly levered.

  14. Simple just boycott vehicles made in Mexico for $2 an hour. If a GM vehicle VIN number starts with a 3, it is made in Mexico don't buy it.

  15. Millennial is the most horrible term ever created by a crazy person.
    A millennial can be a 39 year old person who haven't had internet until he was 20, started leaning it, adopted and saw old and new world.
    But it can also be a 19 year old kid, who literally grow up with internet and never used cash in his entire life, totally different people.
    It should be divided into 2 categories: pre-internet millennial and post-internet millennial.

  16. Used car prices are in the toilet. New trucks are worth 50% of sticker the minute they drive off the lot. Automakers need to cut back production.

  17. Born in the late 60's. I'm Driving a 1994 Honda Civic. I have NEVER owned an American car. I saw the absolute CRAP by parents drove in the late 70's and 80's (Ford Granada and Tempos).

  18. Pretty weak argument presented, if it was that easy to predict the future, why isn't Michael Alkin rich beyond belief? The dude has a net-worth that is less than 1/2 his home value, just another dude selling FEAR, don't buy it. The guy isn't even good at managing his own money, why would you take his advice to manage your own:

  19. This is NOTHING.

    Over the next 15 to 20 years, 50% of all jobs will be eliminated by artificial intelligence and robotics with little to no net replacement. Result: drastic consumer spending across the board.

    Losers: just about everything.

    Winners: low cost service and product categories in the entertainment category, such as computer gaming, legal recreation drugs, movies, music, discount discount store retailers, used clothing outlets, Kraft Dinner (that's a joke in more ways than one), etc.

    Bottom line: poor people don't buy houses, cars, an other expensive goods and services. They don't go to university or go on costly vacations abroad. Therefore, many traditional blue chip stocks will take a big hit, and many corporations will face bankruptcy altogether. Furthermore, don't see many nations (most of which are technically bankrupt) implementing workable universal basic income provisions to offset this trend. In addition, those who have jobs can expect to experience significant wage suppression from desperate, unemployed workers willing to work at a fraction of what they're earning to put food on the table. This will lead to financial chaos, but alas the banker will inflate his way out of it clandestinely, thanks to laws put in place back in 2008. Result: the divide between have and have-not will continue to expand accordingly.

    Like it or not, we are entering a period that will see the greatest economic dislocation bar none.

    Revolution anyone?

  20. I hate to bring up the uncomfortable, but Millenials are hardly saving and with the debts many have have slight purchasing options. Their "moving around" isn't some anti-corporate gesture, it's just trying to be able to pay for needed things. The chief cause of this is the disappearance of the median income job and Millenials are in their salad years! As to noble boycotts and the like, I can't see it. Every day another socially/environmentally, etc. responsible company fails from lack of interest. All the service businesses which typically were owner/operator operations have declined, from tailoring and shoe repair to catering and restaurants (really an impossibly long list). Should we say that our economy isn't serving a sufficient percentage of voters? Might that explain some of the recent political insanity?

  21. I studied in IT and got a 50k degree (which is actually cheap these days) and the job offers I'm getting are contract work at 15 an hour with no benefits. How is this sustainable? If I wasn't fortunate enough to come from a family that allowed me to leave college with no debt I would be in a bad place. Housing is out of reach, so is a new car. We're in big, big, trouble.

  22. I think a huge impact that he should have touched on at least briefly, is the fact EVs and Plug-ins are becoming the next mainstream transportation device. Right now, I.C.E.s are now the horse and buggy when the first mass produced autos rolled out.
    Many Gen Xers, Y's, and Millennials- are holding onto their currents ICEs waiting for EVs and PHEVs to come down in price or even be available in their market. This will compound the issues he brought up.
    I think 2018 will be the peak sales year of the ICE- especially in the terms of market percentage.
    Some are ahead of the curb in this, some have actively buried their heads in the sand. I'm not going to feel bad for the ones that don't succeed because they couldn't see the last 20 years of writing on the wall.

  23. Sure, no answer between the Boomers and Millennials … except the 70 million Gen X in their 30s to 50s. Technologically savvy, highly educated, an outsized portion of income. But, hey, let's just… ignore, or forget, that Gen X even exists, despite the fact that it's as central to every aspect of the country's economic and financial present and future as are Millennials.

  24. Electric Vehicles – over 10% of buyers are holding off car purchases until they see what happens with EVs. Look for a car buying spree once mfgrs offer lots of EV choices…

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