July 5, 2017
June auto sales on a “SAAR” basis (seasonally adjusted annualized rate) fell 1.2% from May to 16.5 million “SAAR.” The non-SAAR number available from sources like Autonews.com show a 3% year over year drop from June 2016. The year over year comparison for the same month eliminates seasonality and it eliminates statistical errors compounded by the annualization calculation.
It was the 6th month in a row that auto sales declined. June’s 16.5 million SAAR was 11.7% below the all-time high of 18.7 million SAAR (December 2016). This is a large decline that is not being given much attention in the financial media.
But it’s worse, especially for the domestic OEMs (GM, Ford, Chrysler). GM’s sales dropped 4.8%, but its car sales plunged 38.2% (truck sales were up 11% with huge incentives). Ford’s sales fell 5%, truck sales were up 2.2% but car sales tanked 23%. Chrysler’s sales were down 7.4%. These numbers are on a year over year basis for June.
Sales are plummeting despite the fact that automakers spent a record amount on cash incentives. Financing terms for the subprime debt being used to pay new cars continues to loosen. The average monthly car payment increased to $517 from $510 in May and the average term rose to a record 69.3 months and the total amount financed hit another all-time high (just under $31,000). You’ll note that subprime delinquency/default rates are starting to approach 2008 levels.
As auto sales decline, auto manufacturing output will decline and production capacity will be shut down. All of this deteriorating economic activity in the sector will affect employment negatively. GM announced last week that its goal is to reduce the days inventory from 105 at the end of June down to 70. Note that GM had previously it would have its days inventory down to 90 by the end of June. The 105 days inventory is an all-time high. The last time it approached this level of June 2007. Clearly the optimism in the industry and on Wall Street is still far too high. With sales declining it will become harder to reduce inventory without substantial production cuts. We can expect another round of big production cuts to be announced in the next 4-8 weeks from the industry, if not sooner.
US Dollar weakness – The U.S. dollar closed Q2 with its biggest quarterly drop in seven years, falling more than 6% during the quarter, which is a huge move for any currency let alone the world’s “reserve” currency. Compounding the bearish message of the dollar’s decline is the fact that this occurred during a period of time when the Fed is supposedly tightening money supply, which should drive the dollar higher.
I would suggest that the dollar’s decline in the context of a “hawkish” Fed reflects the growing systemic dysfunction and fundamental deterioration of the economic, financial and political condition of the United States. At some point the stock market will “take notice” of the falling dollar – as it did in 1987 when the Dow dropped nearly 25% in one day – which will trigger an abrupt sell-off like the two that occurred last week but which, unlike last week, won’t be followed with a “V” bounce the next day.
A portion of the above analysis is an excerpt the the Short Seller’s Journal.