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Signs Of The Time, Part 19

Last summer, my 1995 Toyota Corolla was acting up so I took it to the shop. While waiting for the repair to be completed, another customer tried to make conversation with me. Trapped in the waiting room, this arrogant son of a b***ch felt compelled to point out to me how great his sport utility vehicle was, and actually had the nerve to call my ride “a piece of s**t.” Needless to say, it took every last bit of self-restraint to stop myself from pummeling this flaky Baby Boomer from the suburbs right then and there, so much so that the shop mechanics, who overheard the “conversation,” later told me they were getting ready to jump in lest I killed the guy in the waiting room. Not good business, obviously.

As for this fool’s beloved sport utility vehicles, well, the market has seen better days. This morning, CNBC’s Nick Bunkley wrote:

The market for sport utility vehicles is starting to look a lot like the housing market, spreading pain to consumers, automakers and dealers. Even the vocabulary is sadly familiar.

Bloated inventories? Days spent on the market? Well, in July, General Motors dealers had a 174-day supply of the Yukon XL/Suburban on hand, on average, up from a 92-day supply a year earlier.

Inventory of the Chevrolet C/K Suburban nearly doubled over the same period, to 116 days from 63 days.

Just like hapless homeowners, countless car owners are now “underwater,” driving vehicles that are worth less than the balance on their car loans.

And just like desperate homeowners, the sellers of SUVs are having to painfully cut asking prices.

Bunkley noted:

In their heyday, sport utility vehicles brought hefty profits to automakers.

But today those companies are slashing output and closing plants amid plummeting demand — only they cannot act fast enough to prevent a logjam of the vehicles already produced and in the pipeline. Sales of SUVs are down 32 percent so far this year, and were off 43 percent for July.

It’s not like dealers haven’t been lowering prices to get rid of these things. From the CNBC piece:

On average, new sport utility vehicles sold for 20 percent below sticker price in July, according to Edmunds.com, a Web site that gives car-buying advice to consumers.

That, in turn, has decimated prices for used SUVs. Ultimately, car companies are the ones that will pay, because they will have the new SUVs on their hands as well as the used and leased ones.

As for hapless SUV owners trying to unload their vehicles these days? Bunkley offered up a typical example of what they’re finding in the marketplace:

For instance, Michael Kohan, a recent graduate of Hofstra University’s law school, decided that hundreds of dollars a month filling up his 2006 Land Rover LR3 would be better spent paying down his student loans.

He calculated that his vehicle — loaded with luxuries like a navigation system, xenon lights, parking assist sensors, heated leather seats and three sunroofs — should be worth at least $31,000, according to the Kelley Blue Book.

But with a V-8 engine that gets only about 14 miles per gallon, Mr. Kohan, 24, decided to list his LR3 on eBay and Craigslist for $18,000. And yet, he told a reporter this week, “As low as I set the price, you’re the first person to call.”

My question is, what is a 24-year-old doing driving around a luxury SUV like a Land Rover?

Source:

“The SUV Market Has Collapsed”
Nick Bunkley
CNBC, August 13, 2008

SUV Owners Remain Defiant Despite $4 Gasoline

Sounds like America’s love affair with the sport utility vehicle isn’t going away anytime soon. Back on June 5, the Chicago Tribune ran a piece about SUV owners who continue to drive on despite $4 gasoline at the pump. Robert Channick and Wailin Wong wrote:

But on the streets of suburban America, the gas-guzzling Suburbans, Durangos and pickup trucks roll on, sometimes driven apologetically, sometimes defiantly…

The U.S. is a country that has always been enamored with its cars, and the American love affair with the SUV has gone on strong for two decades, thanks to low gas prices and the consumers’ sense that the large trucks were the safest, roomiest way to transport suburban families without resorting to the totally unhip minivan. Car buyers also found they liked sitting up high, and SUVs allowed them to ride comfortably above other traffic.

Yet the SUVs hold on the American psyche remains too strong to be broken completely—even at more than $4 a gallon.

Interestingly, Channick and Wong wrote:

As for the dwindling group of unrepentant SUV owners, they might actually strengthen their resolve in response to high gas prices and the recent backlash “around the ostentatious consumption aspect, not only of gas, but metal and all the inputs of automobiles, and around the safety issues,” said S. Lochlann Jain, an assistant anthropology professor at Stanford University who’s taught a course on car culture.

“Once people get into a defensive posture, I think it can be harder to give that up.”

Jesse Toprak, an analyst with Edmunds.com, told the Tribune reporters:

You’re always going to have that subsegment that’s going to want their big, boxy, all-American tank.

Jim Hossack, vice president of auto sector consulting firm AutoPacific, elaborated:

SUV says America. It says John Wayne. It says freedom. It says outdoors.

With the price of gas at $4, this is what it says to me:

Source:

“Not all ready to ditch their SUVs”
Robert Channick, Wailin Wong
Chicago Tribune, June 5, 2008

Consumers Buying What They Need, Not What They Want

This afternoon I read an interesting article by the Associated Press’ Jeannine Aversa about consumer spending at a time when the U.S. economy is slowing and prices for items such as food and gas are rising. According to a recent government report on retail sales, clothing stores, furniture and home furnishing retailers, electronics and appliance stores, building materials and garden supply places, and health and beauty shops were among those merchants who saw their sales drop last month. Sales at bars and restaurants posted a modest increase from the previous month, as did sporting goods, hobby, book and music stores.

Aversa noted how consumers are changing their spending habits:

• 60% of the American public say they are now less comfortable buying a big-ticket item, such as a home or a car, than they were just 6 months ago, according to the RBC Cash poll conducted by Ipsos, an international polling firm, earlier this month. 12 months ago, 48% said they were less comfortable about making a major purchase.
• 53.6% of people surveyed focused more on what they needed, rather than what they wanted, when they went shopping over the last 6 months, according to BIGresearch, a firm that tracks consumer behavior. Pam Goodfellow, a senior analyst at BIGresearch, says the focus is more on smart shopping and bargain hunting.
• Because declining home prices and rising prices at the pump cannot be controlled, consumers are “controlling the little things… filling up the cart and putting things back at the check out,” said Candace Corlett, principal at consulting firm WSL Strategic Retail. She warned, “They are learning restraint and that is deadly for commerce.” Although, most Americans aren’t giving up things like medications, cell phones, and cable TV.

Photo by Ruth Elkin, stock.xchng

The research firms pointed out specific areas that were suffering from the pullback in consumer spending. 35.2% of people polled were scaling back vacation plans, according to BIGresearch. WSL Strategic Retail said fashion accessories, home decor items, premium brands of food and specialty coffees, eating at restaurants and take-out foods, and tickets to entertainment, are the top areas where consumers are cutting back.

Marshal Cohen, chief retail analyst at consumer and retail research firm NPD Group said video games, toys, and skin care products are the three areas he believes are least likely to see spending cuts.

Source:

“People’s decisions to cut back add up to weaker economy”
Jeannine Aversa
Associated Press, April 25, 2008

Who’s To Blame For The High Price Of Oil?

I read the following the other day in a grocery store publication on Chicago’s northwest side. Regarding the high cost of oil and gasoline, the bureau chief of the paper wrote:

Whew! What is the answer? I think we should contact our elected officials, both state and national, and let them know we, the taxpayers, need some relief. Yes, I know about Bush’s economic stimulus package that is on the way- but I don’t want to put it all in my gas tank.

There’s no use arguing with most Americans over who’s to blame for high oil and gasoline prices. In their minds, “Big Oil” is the culprit, with a dash of President Bush, his oil buddies, and every level of government sprinkled in for good measure. But before you forward on that e-mail about a “gas station holiday” to five of your friends, consider this: Could it be possible that the high price of crude oil is mainly due to the basic principle of supply-and-demand? Just a thought. Bloomberg’s Mark Shenk wrote today:

China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4 percent, according to the International Energy Agency in Paris.

And here in the good old US of A?

U.S. demand will contract 2 percent to 20.38 million barrels daily, the IEA says.

Shenk noted that economic growth in China and India of more than 8%, coupled with increasing car ownership among the countries’ combined populations of 2.45 billion people, will more than compensate for declining demand in the United States. According to the IEA, global oil use will increase 2% this year largely because of emerging market growth.

Regarding the topic of car ownership, China’s passenger car sales jumped 22% to 6.3 million units sold last year. Reuters’ Joe Mcdonald reported on the Chinese auto sector today, and wrote:

Auto sales in China are booming, with analysts and automakers forecasting growth at 15-20 percent this year. But demand for the biggest vehicles is even stronger, with sales of luxury cars and SUVs expected to surge by 40-45 percent…

“Chinese buyers typically like bigger cars and they have the resources to go for them,” said Tim Dunne, J.D. Power’s director of Asia-Pacific market intelligence.

Source: China Daily

Mike Wittner, head of oil research at Societe Generale SA in London, told Bloomberg:

Does the U.S. matter anymore? Has the U.S. mattered for the last few years? It is debatable. As far as the oil market is concerned, demand growth is going to be continued to be driven by China and the Middle East.

Still feel like contacting your elected officials?

Sources:

“Emerging Market Oil Use Exceeds U.S. as Prices Rise (Update2)”
Mark Shenk
Bloomberg, April 21, 2008

“Gas guzzlers a hit in China, where car sales are booming”
Joe Mcdonald
Reuters, April 21, 2008

Vanguard Founder Says Recession Odds At 75 Percent

Earlier today, CNN Money posted the answers to questions Fortune readers asked of John Bogle, the 78-year-old founder of mutual fund giant Vanguard. With $1.3 trillion in assets, Vanguard is now the second-largest mutual fund company. Bogle talked about the odds of a U.S. recession, the U.S. housing market, the subprime crisis, and challenges to the U.S. economy, among other issues.

What are the odds of a recession right now?

I would put the odds of a recession at 75 percent. This economy is very much consumer-based, and I believe that 70 percent of the GDP is consumer spending. That’s a very high number. Two things are happening there: Consumers have fewer resources because from 2001 to 2005 they took $5 trillion out of real estate. That will not recur. This is a big drop. We also see weakness in auto sales and retail spending - we even see it at companies like Starbucks. There is another, equally important factor in consumer spending, and that is confidence. Consumers are not going to spend if they are worried about the future.

Will the real estate market improve anytime soon?

It doesn’t look so good. I really don’t see it improving soon. At some point homes will have to be built. But right now there is not much incentive to build new places when there are so many old places on the market. When those lines cross I don’t know. It’s complicated by the fact that many people have gotten into ARMs [adjustable-rate mortgages] who didn’t know what they were doing. I don’t know what is going to happen to those people when lenders foreclose. When banks were community banks, they were more careful. But when banks sell loans in a bundle, they are clearly not going to be concerned about mortgage quality. So we have to have a better system in the future to make sure we have a much better element of credit quality in mortgages.

How does the U.S. subprime mess compare with other crises you have seen in your career?

I’d say the most similar example was the S&L crisis of the late ‘80s and early ‘90s. The issues were somewhat the same: Institutions borrowed short and lent long.

The immediate concern for most investors is the subprime market, but over the long term what do you see as the biggest challenges facing the U.S. economy?

Externally, we are faced with $1.5 trillion already poured into Iraq and Afghanistan. So you have enormous expenditures in a corner of the world that is important to us, but it is very unwise to think we can bring democracy to a place that doesn’t share our values. There are also the challenges from low cost production in China and India. At home, we have a tremendous future financial problem with the federal deficit. We’ll have to take action on Social Security someday. Government spending has gotten to the point where we will have to either cut spending or raise taxes. Another problem is this deadlocked Congress. And I see the quality and caliber of our presidential nominees, and I am not impressed.

It raises the question of whether this country is even able to run itself anymore.

Paulson Predecessor Says U.S. Recession Likely

In Sunday’s Financial Times (UK), former U.S. Treasury Secretary Lawrence Summers said that the odds now favor a U.S. recession that will slow growth significantly on a global basis. Summers, who served with the Clinton administration and now teaches at Harvard University in addition to serving as a managing director at hedge fund D.E. Shaw Group, concluded that the U.S. economy will stall out, based on the following:

1. The U.S. housing slump marches on.

Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels. There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years.

2. The U.S. financial sector will be rocked— hard.

Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall. Estimates vary, but there is nearly universal agreement that – if all assets were marked to market valuations – total losses in the American financial sector would be several times the $50bn or so in write-downs that have already been announced by big financial institutions. These figures take no account of the likelihood that losses will spread to the credit card, auto and commercial property sectors. Nor do they recognise the large volume of financial instruments that depend for their high ratings on guarantees provided by credit insurers whose own health is now very much in doubt.

3. Credit, necessary for economic expansion, will become tougher to come by.

Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years. Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall.

Add the following:

Then there are the potentially adverse effects on confidence of a sharply falling dollar, rising energy costs, geopolitical uncertainties especially in the Middle East, or lower global growth as economic slowdown and a falling dollar cause the US no longer to fulfill its traditional role of importer of last resort.

And you have the recipe for an economic recession in the United States. Summers said:

Even if necessary changes in policy are implemented, the odds now favour a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.

Auto Sector Affected By Housing Slump

The “mainstream news” constantly reminds me that not only has housing bottomed (according to such reliable and unbiased sources as the Treasury Secretary and real estate industry leaders), but that the soon-to-be-over housing decline poses no threat to the broader U.S. economy. Today’s Wall Street Journal analyzed the relationship between the U.S. housing and auto sectors, and concluded that:

The housing market has already taken a toll on auto sales, as weak home values dim consumer appetite for big-ticket purchases. But as more economists predict continued housing weakness, auto sales could remain under pressure the rest of the year.

According to the Journal, some auto sector analysts are forecasting car and truck sales at their lowest rate in a decade.

Mike Jackson, Chief Executive of AutoNation Inc., the largest U.S. car dealership chain, told Reuters today that, “We don’t see light at the end of the tunnel yet, we still have a lot of difficulty to work through. As best as we can tell, we see no indication it’s going to get any better this year.” Stagnant home prices combined with resetting adjustable rate mortgages have resulted in consumers with reduced or negative equity in their homes, according to Jackson. As a result, “Those consumers are not willing to make any big ticket purchases.” Reuters noted that the two markets most affected by the housing slump are California and Florida, which account for about 50% of AutoNation’s new vehicle revenue and 20% of total U.S. new vehicle sales. In an apparent correlation to housing, industry new vehicle sales declined 14% in Florida and California in the second quarter while AutoNation’s sales dropped 16% in both states.

The profitable pickup truck segment is also getting hit hard. According to the Wall Street Journal, slowing home construction is decreasing demand for pickups. Autodata Corp. reports that pickup sales are off 3.8% this year (5.6% by Detroit’s Big Three). Bear Stearns analyst Peter Nesvold told the Journal that, “Continued housing weakness will likely further weigh on truck demand.”

All I can say (sing?) at this point is, “Like a rock.”