Bloomberg: Fear of an Impending Car-Price Collapse Grips Auto Industry

[IK6SPEED]

Fear of an Impending Car-Price Collapse Grips Auto Industry
Car Sales Crash to 2010 levels

https://finance.yahoo.com/news/fear-...110000556.html

Bloomberg
David Welch and Keith Naughton
April 13, 2020

(Bloomberg) -- The auto industry -- already fretting lengthy factory shutdowns and depressed new-vehicle demand -- is starting to sound the alarm about a potential used-car price collapse that could have far-reaching consequences for manufacturers, lenders and rental companies.

Used-vehicle auctions are for now virtually paralyzed, much like the rest of the economy. The grave concern market watchers have is that vehicles already are starting to pile up at places where buyers and sellers make and take bids on cars and trucks -- and that this imbalance will last for months.

If that fear is realized and prices plummet, it will be detrimental to automakers and their in-house lending units, which likely will have to write down the value of lease contracts that had assumed vehicles would retain greater value. Rental-car companies also will get less money from selling down their fleet of vehicles, which are sitting idle amid a global pandemic that's been catastrophic for travel.

"Six months from now, there will be huge, if not unprecedented, levels of wholesale supply in the market," Dale Pollak, an executive vice president of Cox Automotive, which owns North America's largest auto-auction company, wrote in an open letter to auto dealers last week. "Cars are coming in, but they aren't selling. Today's huge supply of wholesale inventory suggests supplies will be even larger in the months ahead."

Lease Extensions

Automakers are doing what they can to limit the damage. General Motors Co. and Ford Motor Co.'s finance units already are offering customers one-month lease extensions. In addition to relieving pressure on consumers wary of going into showrooms, this will delay some of the influx of off-lease vehicles headed to auctions that are for now operating only virtually.

But these measures are unlikely to go nearly far enough to address the asymmetry between the supply of used vehicles and demand that is unlikely to rebound anytime soon given that almost 17 million Americans sought jobless benefits in just the last three weeks.

"There aren't a lot of people in gloves and masks running out to buy cars," said Maryann Keller, a former Wall Street analyst who's now an auto-industry consultant in Stamford, Connecticut. "Auctions are mostly shut down and they're filled with cars that have no buyers."

Residual Risk

Used-car sales fell 64% in the last week of March, according to Manheim. The Cox Automotive-owned auction company estimates that prices have fallen about 10% in recent weeks, though that figure is based on unusually low volume at auctions.

If that level of decline lasts or worsens, it could have huge implications for GM, whose General Motors Financial unit had $30.4 billion worth of vehicles leased to customers at the end of last year. If GM Financial needs to boost its estimate of how much those vehicles are going to depreciate in value, each percentage point increase raises the firm's expenses by $304 million, according to a regulatory filing.

GM assumed a 4% decline in residual values this year. If the 10% drop Manheim has seen recently persists, depreciation expense could counter the $1.9 billion that GM Financial earned in pretax profit last year, said Joel Levington, a credit analyst with Bloomberg Intelligence. Ford Motor Credit faces similar risk, he said.

Ford said Monday it's considering additional actions to raise cash after reporting a preliminary $600 million first-quarter loss. One option could be for Ford Credit to take advantage of thawing in the asset-backed securities market, Levington said in a report.

Rental-car companies that appealed to the Treasury Department and Federal Reserve as a group last month for loans, tax breaks and other forms of support await a similar fate. Hertz Global Holdings Inc., Avis Budget Group Inc. and Enterprise Holdings Inc. all are trying to find ways to unload some cars without taking too big of a hit, said Keller, a former Dollar Thrifty Automotive Group Inc. board member.

If Avis and Hertz have to sell cars at lower values, it will add to the costs of maintaining their fleets. A big drop in residual values comes straight out of the bottom line and can create liquidity problems, said Hamzah Mazari, a Jefferies analyst.

For Hertz and Avis, every 1% increase in fleet costs saps about $20 million from earnings before interest, taxes, depreciation and amortization, Mazari said.

Motivated Sellers

Hertz hasn't cleared out as many cars so far as Avis has, meaning it's holding more vehicles with few customers to whom it can rent them.

But rental companies that sold aggressively in late March as Covid-19 was spreading did so at a cost, said Jonathan Smoke, Cox Automotive's chief economist.

"Rental companies are motivated sellers," Smoke said. "They moved cars quickly but saw the impact on price."

Dealers also are looking to tap the used-car inventory sitting on their lots into whatever money they can muster. One of Manheim's biggest tasks now, Cox Automotive's Pollak wrote in his letter last week, is finding places to park the stream of vehicles headed for auctions.

"It's critical for dealers to recognize what may be an unpleasant truth," Pollak said. "It might take all the cash you can gather to sustain your business today and put it in a position to be viable when the market comes back."

(Updates with Ford's preliminary loss in the 11th paragraph)

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©2020 Bloomberg L.P

[MmmmmM2]

Good read! Thanks!

[NickyC]

I might have my M4 for another ten years, thank God I love it so much.

It’s a good thing I do, at this rate I’ll be living in it soon.

[Murf993]

And then there is this article.....I don't think we want to get too far ahead of ourselves yet.

Daimler restarting German factories April 20
The pandemic will not last forever.

https://g20.bimmerpost.com/forums/sh....php?t=1711236

[IK6SPEED]

Originally Posted by Murf993

And then there is this article.....I don't think we want to get too far ahead of ourselves yet.

Daimler restarting German factories April 20
The pandemic will not last forever.

https://www.barrons.com/news/daimler...20-01586358908

Yes, but at what volume? If they go back to February production levels, prices will collapse even more.

You are also assuming no supply interruptions, which is a fantasy.

The pandemic will not last forever, but the recovery will be a long time coming.

$1200 in stimulus money will not have people buying cars.

[Murf993]

Originally Posted by IK6SPEED

Yes, but at what volume? If they go back to February production levels, prices will collapse even more.

You are also assuming no supply interruptions, which is a fantasy.

The pandemic will not last forever, but the recovery will be a long time coming.

$1200 in stimulus money will not have people buying cars.

I'm no financial guy, I've read a few things that have said the recovery could be quick and other things that have said the recovery will be long and painful. Either way there isn't much you or I can do about that and I'm not sure that there's much point in my worrying about it. There was an article this morning in the Financial Post that predicts the real estate market will take a beating in the next 12 months. I'm just trying to stay positive.

[IK6SPEED]

Originally Posted by Murf993

I'm no financial guy, I've read a few things that have said the recovery could be quick and other things that have said the recovery will be long and painful. Either way there isn't much you or I can do about that and I'm not sure that there's much point in my worrying about it. There was an article this morning in the Financial Post that predicts the real estate market will take a beating in the next 12 months. I'm just trying to stay positive.

Simply look at change in Consumer Sentiment Reports over the last 4 weeks.

That controls the public spending and this is a big wake up call.

[Murf993]

Originally Posted by IK6SPEED

Simply look at change in Consumer Sentiment Reports over the last 4 weeks.

That controls the public spending and this is a big wake up call.

I get that the US drives a big portion of the global economy but not every country is handling the crisis the same way the US is from a stimulus point of view. I guess only time will tell really.

[IK6SPEED]

Originally Posted by Murf993

I get that the US drives a big portion of the global economy but not every country is handling the crisis the same way the US is from a stimulus point of view. I guess only time will tell really.

As you seem to put your faith in Barron's, suggest you read this.

Consumer Confidence Sinks, and the Worst Is Yet to Come

https://www.barrons.com/articles/con...an-51585672017

[Murf993]

Originally Posted by IK6SPEED

As you seem to put your faith in Barron's, suggest you read this.

Consumer Confidence Sinks, and the Worst Is Yet to Come

https://www.barrons.com/articles/con...an-51585672017

I don't put my faith in anything really. Like I said, I'm just trying to be positive since I don't know what I can achieve by worrying about something I have no control over.

[IK6SPEED]

Originally Posted by Murf993

I don't put my faith in anything really. Like I said, I'm just trying to be positive since I don't know what I can achieve by worrying about something I have no control over.

Then you need to be cautious.


https://www.axios.com/consumer-senti...4c487b504.html


There is an old saying. Plan for the worse, hope for the best.

[Tacoma]

Originally Posted by IK6SPEED

As you seem to put your faith in Barron's, suggest you read this.

Consumer Confidence Sinks, and the Worst Is Yet to Come

https://www.barrons.com/articles/con...an-51585672017

If there's one thing about this COVID-19 situation, is things move fast. This article you linked is 2 weeks old. Today, at least Goldman Sachs abandons its bearish outlook and the worst is behind us.

I'm tending to think similar as well that we've bottomed out. Recent quarantines in US and Europe appears to have stabilized COVID-19 initial infection spikes and once the stay-at-home decrees are lifted (this Spring hopefully), people will be out and about boosting retail (including cars), restaurant and other business activity.

The one uncertainty is how fast the newly unemployed will get back on their feet. Mitigating this is the poor unemployment numbers are likely already priced into the market.

[IK6SPEED]

Originally Posted by Tacoma

If there's one thing about this COVID-19 situation, is things move fast. This article you linked is 2 weeks old. Today, at least Goldman Sachs abandons its bearish outlook and the worst is behind us.

I'm tending to think similar as well that we've bottomed out. Recent quarantines in US and Europe appears to have stabilized COVID-19 initial infection spikes and once the stay-at-home decrees are lifted (this Spring hopefully), people will be out and about boosting retail (including cars), restaurant and other business activity.

The one uncertainty is how fast the newly unemployed will will get back on their feet. Mitigating this is the poor unemployment numbers are likely already priced into the market.

And this article, posted above, is 7 hours old.


https://www.axios.com/consumer-senti...4c487b504.html

GS also said the economy was essentially recession proof on December 31st and 2020 would not have recession. December 31st is interesting as it was the same day the WHO was notified about the spread in Wuhan.

https://www.cnbc.com/2019/12/31/gold...ion-proof.html

And I guess you have forgotten what happened in the last recession when GS said one thing publicly while doing just the opposite? Here's a story from 6 days ago.

https://www.reuters.com/article/us-g...-idUSKBN21P2G8


Does not matter what GS, Trump or Cuomo say. What matters is what the public thinks and we know what that is.

[Tacoma]

Originally Posted by IK6SPEED

And this article, posted above, is 7 hours old.


https://www.axios.com/consumer-senti...4c487b504.html

GS also said the economy was essentially recession proof on December 31st and 2020 would not have recession. December 31st is interesting as it was the same day the WHO was notified about the spread in Wuhan.

https://www.cnbc.com/2019/12/31/gold...ion-proof.html

And I guess you have forgotten what happened in the last recession when GS said one thing publicly while doing just the opposite? Here's a story from 6 days ago.

https://www.reuters.com/article/us-g...-idUSKBN21P2G8


Does not matter what GS, Trump or Cuomo say. What matters is what the public thinks and we know what that is.

I don't care for Goldman Sachs but why attack the messenger by posting links to 3 articles critical of them (so fast, within 3 min of my post!) instead of directly addressing the issue? The article did qualify that this was an about-face from their gloomy forecast last month.

I'm on the fence on this and have already stated my reasons for possibly a more optimistic view, so maybe it would be more purposeful if you can elaborate on why your pessimistic view is more realistic?

With due respect, for the sake of everyone's financials, I certainly hope you're wrong.

[IK6SPEED]

Originally Posted by Tacoma

I don't care for Goldman Sachs but why attack the messenger by posting links to 3 articles critical of them (so fast, within 3 min of my post!) instead of directly addressing the issue? The article did qualify that this was an about-face from their gloomy forecast last month.

I'm on the fence on this and have already stated my reasons for possibly a more optimistic view, so maybe it would be more purposeful if you can elaborate on why your pessimistic view is more realistic?

With due respect, for the sake of everyone's financials, I certainly hope you're wrong.

I've already summed it up in last posts.

Doesn't matter what GS, Trump, Cuomo, Fauci, Brix or anyone says.

What matters is what consumers believe and we've already seen a record drop in Consumer Sentiment which is echoed in many reports, with a large majority saying they will not discontinue social distancing even after Government says it's safe.

Over half expect to continue working from home in the future.

Plan for worse, hope for best.

[IK6SPEED]

Originally Posted by Tacoma

I don't care for Goldman Sachs but why attack the messenger by posting links to 3 articles critical of them (so fast, within 3 min of my post!) instead of directly addressing the issue? The article did qualify that this was an about-face from their gloomy forecast last month.

I'm on the fence on this and have already stated my reasons for possibly a more optimistic view, so maybe it would be more purposeful if you can elaborate on why your pessimistic view is more realistic?

With due respect, for the sake of everyone's financials, I certainly hope you're wrong.

New York Times

"Economic Pain will Persist Long After Lockdowns Ends"

30 minutes ago

Google it.

[chino101]

Nice read, thanks for sharing.

A reduction in used car prices would certainly benefit drivers that need a car but have limited funds, a reduction in income, or want to cut back on spending. But how many people will have the confidence to make such a large purchase with so much uncertainty for the future?

[IK6SPEED]

Originally Posted by chino101

Nice read, thanks for sharing.

A reduction in used car prices would certainly benefit drivers that need a car but have limited funds, a reduction in income, or want to cut back on spending. But how many people will have the confidence to make such a large purchase with so much uncertainty for the future?

What posters above fail to realize is Stock Market bottomed in March 2009 and took roughly 2 years before jobs started to even begin to recover. Took 4 years to get back to the baseline. And we are in a much more severe job loss situation now.

Just because GS flipflops on stock market bottom does not mean the economy and everything else is suddenly ok.