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Wednesday, January 16, 2008 6:23 PM

Luxury Vehicles and Auto Loans Feel the Squeeze

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The Wall Street Journal is reporting Lax Lending Standards Could End Up Fueling Sudden Acceleration in Auto-Loan Delinquencies.

In the waning days of the housing-market bubble, lenders lowered their standards, and that made the downturn worse. There is growing evidence that standards also came down for auto loans, and rapidly rising default rates could be the next dilemma for the staggering financial sector.

The amount of auto loans that were past-due or written off as a loss moved sharply higher in the last part of 2007, according to analysts.

2.06% of prime auto loans made in 2006 were more than 30 days past due in November, according to a Standard & Poor's Corp. survey. That past-due number for loans in their first year exceeds the historical high rate recorded in 2001 -- and it is well up from the 1.75% for prime auto loans made in 2005, S&P says.

The past-due numbers for loans made in 2007 are even worse than the 2006 credits -- a trend that exists for both prime and subprime loans, according to S&P.
Luxury Vehicles Feel The Squeeze

Auto Woes do not stop there. Things are deteriorating even on the high end. The Wall Street Journal is reporting Auto-Sales Angst Reaches the High End.
Several auto-industry executives are signaling increasing pessimism over what is already expected to be a weak year for car and truck sales, with some suggesting economic difficulties could be affecting upscale consumers more than expected.

"We already have a depression in the housing industry and a recession in the auto industry," said Michael J. Jackson, chairman and chief executive of AutoNation Inc., at an interview at the North American International Auto Show here. He added, "We'll see if it spills over into a full recession, but the economy is very vulnerable right now."
My Comment: We are in the first inning of the worst recession for over 20 years.
The latest sign of trouble: Luxury-car sales, which some had hoped would hold up, are now showing more pockets of weakness. The figures follow last week's move by jewelry retailer Tiffany & Co. to cut the top end of its profit forecasts, a potential sign that affluent Americans are also being hit by the weakened housing market.

James Selwa, president and CEO of Maserati North America Inc., said sales of his company's cars are continuing to rise, but noted they sell for over $100,000 and typically appeal to people who have more than $10 million in assets and are unlikely to feel much of a pinch in any economic downturn.

But he is now seeing signs of economic stress among people one rung down on the economic ladder -- a group he calls the "mass affluent." These are consumers who typically made money in the stock market's run-up in the 1990s, bought expensive homes, refinanced their mortgages and now are getting squeezed.

"They are feeling a lot less wealthy now," Mr. Selwa said.
My Comment: It was all a mirage. People felt wealthy because of rising real estate prices. Watch that "wealth" vanish when housing prices return to 2000 prices. In turn this will add to "boomer anxiety" and worries about the stock market.
Dieter Zetsche, chief executive of Mercedes owner Daimler AG, said he doesn't expect the U.S. economy to fall into recession and believes the Federal Reserve will cut interest rates.
My comment: Dieter Zetsche is in complete fantasy land.
There is no doubt 2008 will be difficult for mainstream auto makers, especially Detroit's Big Three. Ford Motor Co., which lost $12.6 billion in 2006 and is likely to report another loss in 2007, expects industrywide sales of cars and light trucks to slow significantly in the first half of the year. Ford, General Motors Corp. and Chrysler LLC have already planned major production cuts in the first quarter in anticipation of the slump, but may be forced to increase incentives to prop up demand.
My Comment: I agree with that in spades and then some. Ford and GM are both in deep, deep trouble.

Cowboy Daydreams

Dorin Levin is dreaming when he writes Ford, Dodge Pickup Trucks Ride on Cowboy Daydreams.
Chances are you don't really need a pickup truck, never mind the fantasies of chasing stray cattle or dragging home a 500-pound generator from Home Depot.

But if you've just got to own one, 2008 might be an excellent time.

If you're a rancher, farmer, plumber or the like, replacing a beat-up truck might make a lot of sense this year. Dealers should have a surfeit of inventory and may be willing to grant discounts on top of those offered by the manufacturer.

And for those who love trucks just because they're cool, impracticality may have just gotten more affordable.
Never a better time NOT to buy

There was never a better time to postpone a car or truck purchase than now.

We are headed into a consumer led recession of major magnitude. Truck prices will drop like a rock. Business activity will slow and jobs will be lost. Most people think they "need" things they don't.

How many think they "need" an SUV? For what? We were a family of 6 when I grew up. There was no such thing as an SUV and no "need" for one either. We got along just fine without one. Now a family of 3 "needs" an SUV. Go figure.

Car Finance Company AmeriCredit Downgraded

Car finance company AmeriCredit's rating was cut on economic concerns.
Analyst Scott Valentin cut his rating to "underperform" from "market perform," noting that the company's delinquencies in December were about 15 percent, which he expects to lead to a 7 percent loss rate in 2008.

AmeriCredit customers typically have spotty credit histories, making them more susceptible to higher prices or a weaker job market. This subprime category is where mortgage lenders turned for growth during the housing bubble that burst when the risky loans started defaulting at high levels.

Valentin expects the anticipated economic slowdown to hurt the consumer's ability to remain current on all types of loans, leading to more delinquencies and fewer loan originations. He slashed his earnings forecast for the company in 2008 to 97 cents per share from $2.10 per share.
Given that AmeriCredit was trading over $25 as recently as last July, this downgrade is more than just a little late. AmeriCredit is now trading in a 5 day range of $10 - $12.

What's That Smell?

Joann Muller writing for Forbes on The Automotive Industry 2008 seems to get it.
If you think General Motors is out of the woods, think again. Sure, it finally has its labor costs under control following 2007's historic agreement with the United Auto Workers. New vehicles, like the Cadillac CTS and Chevy Malibu, are the latest in a string of terrific models.

But GM still has to figure out how to make money. Trouble is brewing in its finance arm, GMAC (GJM), once the cash cow. Bad mortgages in its Rescap subsidiary are dragging down the carmaker's entire operations, even though GM owns only 49% of GMAC. No doubt there's more bad news to come.

Every time GM starts to look good, something comes along to kill the enthusiasm. Rescap has that smell.
Rescap, GMAC, GM, and Ford, all suffer from the same small problems.
1) None of them know how to make money
2) None of them is likely to figure it out before they go bankrupt

I do not know how long bankruptcy takes given that GM has a propensity to pull rabbits out of a magic hat. However given that we are heading into a consumer led recession of enormous proportion, the last rabbit may have finally been pulled.

Between Ford and GM, I still expect Ford to go first. This could take years and is arguably best watched from the sidelines. There is no reason to be invested in this sector and that includes Toyota.

Mike "Mish" Shedlock
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