Money and Markets: Investing Insights

Forget the Hype Artists – This Auto Exec Says Business Stinks!

Mike Larson | Friday, April 22, 2016 at 4:30 pm

Market Roundup Dow 18,003.75 (+21.23) S&P 2,091.58 (+0.10) NASDAQ 4,906.23 (-39.66) 10-YR Yield 1.89% (+0.02) Gold $1,234.20 (-$15.10) Oil $43.72 (+$0.54)

Corporate America is full of lying, cheating, swindling, overhyping executives. They’ll tell you everything is great and the future is rosy … right up until the day they release an earnings warning or the FBI shows up at the boardroom with a set of handcuffs.
So I find it incredibly refreshing when one actually tells it like it is. That’s exactly what AutoNation CEO Mike Jackson did on a CNBC appearance this morning. He didn’t mince words about the auto business right now, admitting it stinks just like I’ve been saying.
His key points:

Automakers are manufacturing way too many cars for the level of real demand that’s out there.

Actual retail sales were flat in the first quarter, so the carmakers are jacking up sales to rental-car fleet operators and others to artificially inflate volume. The problem? Those sales are much less profitable.

They’re also throwing record amounts of “cash on the hood” to move metal. Incentive spending is up 14% year-over-year … and just hit 9.6% of asking price. That’s the highest ever.

Are manufacturers making too many autos?

But even that isn’t enough. So manufacturers and dealers are now rolling out extraordinarily generous lease programs to help strapped buyers. Leasing transactions now account for 32% of new sales, far above the typical 20%.

Jackson went on further to call it a “particularly challenging environment” that has “bigger issues than the weather,” one excuse some have turned to in order to explain away problems. Lastly, he said:
“I was here at the beginning of the year, and everybody was popping champagne corks over the record year of 2015 and saying happy days are going to be here again in 2016. And I sort of said nah, I don’t think so.”
Look, I’ve been talking for a while about the threat of “Peak Auto.” The basic idea is that … once again … too much easy money from over-aggressive central bankers inflated an unsustainable bubble. It encouraged auto lenders to give car loans to anyone with a pulse, just like mortgage lenders did in the early 2000s. That artificially inflated sales to unsustainable levels, and now the bust has begun.

“Too much easy money from over-aggressive central bankers inflated an unsustainable bubble.”

But this time, it wasn’t just autos. The biggest flood of easy money and credit in world history inflated an “Everything Bubble” – in tech unicorns, in junk bonds, in M&A, in debt-funded stock buybacks, in commercial real estate, and on and on. So anyone who tells you the down cycle in credit is just about oil is out of their mind!
My take: Stay the heck away from any stock tied to this industry – car makers, car dealers, parts companies, industry suppliers, consumer finance companies and banks with heavy auto exposure, you name it.
Or if you’re more aggressive, consider targeting their shares with select investments that rise in value as these stocks fall. You can find out more by watching my blockbuster documentary, “The Unseen Hand,” online.
What do you think? Is Jackson right? Is this industry facing an epic bust? A casual slowdown? Or a bright future? What do you think of stocks exposed to the sector? Are they beaten down enough that you want to start bottom fishing? Or is there more pain coming down the pike? Hit up the comment section and let me hear your views on this important topic.

Our Readers Speak

My colleague Mike Burnick penned a piece yesterday on “The Doubt-Filled Rally,” and asked whether it would continue as short sellers covered … or succumb to lousy fundamentals.
Reader Chuck B. offered this take: “The way it works in the markets is that investors who go short in a rising market eventually cover their shorts (losing money, of course). They maybe even buy rising stocks. THEN the markets fall, giving out a big last laugh of triumph.”
Reader Dennis M. said that stocks ultimately can’t keep advancing without a solid foundation underneath them. His comments: “What are the fundamentals? There aren’t any that are driving the market up, unless foreign instability fears are just forcing foreign money into the U.S. market on a ‘just buy anything’ basis.”
Reader Jim also slammed the rally, saying “S&P earnings are down the last three quarters and will continue down for a fourth. This hasn’t happened since 2009. When earnings are falling and prices are rising, what happens to P/Es? This has all the markings of a bear market rally.”
Lastly, Reader Carl offered this perspective: “The traditional fundamentals only set a floor to the market. We are way above that now. There’s so much money competing for returns that prices are driven higher due to the whims of group psychology.
“People invest rationally, but the reasons behind those rational decisions vary in every possible way. If you can figure out what group-think is dominant, you can win. But conditions change, so you aren’t likely to win repeatedly.”
I appreciate you sharing those viewpoints. I have a slightly different view of what might have driven this market rally. European Central Bank President Mario Draghi unveiled a plan a few weeks ago to buy European corporate bonds in addition to government bonds.
That caused a bunch of investors to front-run the ECB by dog-piling into corporate and junk bond ETFs and mutual funds, not just in Europe but here in the U.S., too. That caused credit spreads to compress TEMPORARILY and underwrote a stock market rally, as stocks (especially those of overleveraged corporations) tend to follow credit.
But look at the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). After that huge rally from the February lows, it suffered a sharp intraday reversal on Wednesday, then dipped a bit more yesterday. That could be signaling that the Draghi effect is running out of gas. After all, this is the absolute WRONG point in the credit cycle for us to see durable improvement in spreads.

Other Developments of the Day

If you read the fine print detailing the ECB’s corporate bond-buying program, you find it has some interesting problems, according to Bloomberg. There are serious questions about what the ECB will do if it owns a slug of bonds issued by a company that runs into trouble.
Specifically, it may be forced to sell if earnings and debt problems worsen, and the company gets downgraded by ratings agencies. But it will likely have trouble finding buyers except at deeply discounted prices. That’s because the ECB’s own rules allow it to own a huge percentage of any particular bond issue. Can you say “unintended consequences?”
Here’s another huge unintended consequence, this time in China. Turns out that the flood of easy money that Chinese central bankers have unleashed there isn’t finding its way into the real economy, at least not in a healthy way. It’s fueling a secondary bubble in big-city real estate … and a huge surge in commodities futures trading.
As Bloomberg notes, “The great ball of China money is moving away from bonds and stocks to commodities.” Not because of real fundamentals, but because they’re going up in price. Analysts are seeing massive price and volume surges in everything from futures on steel rebar, cotton, polyvinyl chloride, and iron ore in China, because small investors are “going nuts.” I’m sure that’s going to work out great in the long run!
Lastly, I should mention that yet ANOTHER central bank – the Bank of Japan – is trying to cook up yet another batch of new ideas. The latest is reportedly a scheme to extend negative rates to banks who agree to loan that money out.
We won’t know for sure until we get the results from the BOJ’s policy meeting next Friday. But at this point, you have to wonder why they even bother. I mean, the BOJ has literally been “stimulating” the economy for 20 years with radical policy … but not having any lasting impact whatsoever.
So we have radical policymaking in Europe, China, and Japan – all of which is having unintended consequences and failing to accomplish much beyond temporarily juicing asset prices. What do you think about that? Is it nuts? Or am I being too pessimistic? Will any of this stuff work? Share your thoughts below when you get a chance.
Until next time,
Mike Larson

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.