Earlier this week, automakers reported the best month of car sales in nearly 10 years, as the seasonally adjusted annual rate increased to 17.8 million in May from a 16.5 million rate in April.
For context, this was the best month for car sales since the summer of 2005, when manufacturers unveiled employee pricing discounts to entice buyers into trucks and SUVs at the height of the housing boom.
This time, discounts are playing a role, but easy credit is doing the heavy lifting: Zero-rate financing and long-term loans are becoming the norm as average selling prices swell.
That’s part of the reason why the boom looks threatened and why stocks like Ford Motor (F) and General Motors (GM) are rolling over. F stock, in particular, is looking ugly after breaking down out of a long rest near its 200-day moving average going back to February.
Data from Experian sets the scene:
- Average new auto loan terms have hit a record high of 67 months.
- Loans with terms from 74 to 84 months made up 30% of all new vehicle financing, a new record.
- The average amount financed totaled $28,711, a new record.
- The average monthly payment for new vehicles was $488, a new record.
- And the percentage of all new vehicles leased instead of purchased was nearly 32%, a new record.
It will be increasingly difficult to sustain this pace of auto sales without a significant wave of wage gains, a long-standing promise yet to actualize in this recovery. Already, there is evidence of increasing auto loan delinquencies and signs that lenders are dipping down too far into the credit pool.
Back in March, analysts at Goldman Sachs noted that 21% of new U.S. auto sales in January were funded by a subprime loan, well above the pre-recession norm of about 16%.
The long-term outlook is challenging as well, as evidenced by the research of Barclays analyst Brian Johnson as reported in Bloomberg recently.
The Bloomberg article by Keith Naughton, quoting the Barclays report, noted the following:
- U.S. auto sales may drop about 40% in the next 25 years because of shared driverless cars, forcing mass-market producers such as GM and Ford to slash output.
- Vehicle ownership rates may fall by almost half as families move to having just one car. Driverless cars will travel twice as many miles as current autos because they will transport each family member during the day.
- Large-volume automakers will need to shrink dramatically to survive. “GM and Ford would need to reduce North American production by up to 68% and 58%, respectively,” Johnson wrote.
- And, the kicker: When most vehicles are driverless, annual U.S. auto sales will fall about 40% to 9.5 million, while the number of cars on American roads declines by 60% to fewer than 100 million.
The driverless car is a really big deal, and it’s going to happen. So, while it’s great to see families driving around and enjoying their new vehicles, investors need to look around the corner and prepare for the next trend.
And it’s not Ford’s subprime-funded F-150s but the stocks of companies that are poised to profit from the sea change, such as Mobileye (MBLY), that are going to benefit.
Research: Anthony Mirhaydari
Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Check out his Top Stock for 2015 here.
