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Car Trouble
New York: April 13, 2009
By John Stephenson

More than fifty years ago, Charles Wilson, the then president of General Motors, said “What’s good for General Motors is good for the country.” Like America’s housing industry, Detroit’s big three automakers grew on the back of loads of cheap credit and a willingness on the part of consumers to trade-up during the good times. But with sales slumping badly, the 2002 to 2007 annual average car sales of 16 million units is beginning to look like the lofty stock prices of early last summer — a bubble.

The car leasing market is all but dead. The bundling of car loans and the securitization of these obligations is also a dying business and none of the 12.5 million Americans currently out of work are going to be buying a car any time soon. Over the last decade, more than two-thirds of all vehicle sales in North America were debt financed, with leasing accounting for more than 30 per cent of the total. Not only that, but American consumers are holding on to their cars for at least eight years now —a lifespan that will only increase as this recession drags on.

Americans are driving less — some 100 billion fewer miles than they drove in 2007, even with a greater than 50 per cent haircut in the cost of gasoline. Vehicle sales are way down, including sales of hybrids which are off more than 30 per cent from the year before. And when the recovery ends, don’t look for Americans to hit the highway in droves as oil prices will likely spike since oil supply has come off faster than drivers have left American roads.

The combination of consumers deeply in hock and higher fuel prices, suggests that when the economy begins to grow again, production from Detroit may stabilize at an annual rate of 6 to 7 million cars a year, well below the 1999 peak of 13 million cars. With the average vehicle plant in North America producing some 250,000 cars or trucks a year, half of these plants may be permanently shuttered as Americans adjust to a new economic reality. Plant closings of that magnitude would imply additional layoffs in the auto sector totaling 200,000 workers. The good times for the U.S. auto industry are likely in the rear view mirror as higher oil prices and uncompetitive manufacturing conspire to reduce the size of the future U.S. auto industry drastically.

American consumers are scrambling to pay down their debts as fast as they can. Merrill Lynch estimates that the U.S. debt-to-income ratio rose as much in the last seven years as it did in the prior 39 years, suggesting that the American consumer is maxed out. Homebuilders are taking a record amount of time to find buyers for newly constructed homes with the average time a new home sits on the market soaring to 9.3 months. U.S. unemployment currently stands at 8.1 per cent and Merrill Lynch is forecasting that by the end of 2009, the official rate will top 10 per cent.

Unlike the past, this recession has impacted the finances of consumers and businesses alike. There is no major country globally that has been left untouched by this recession, suggesting that a recovery will be a long time in coming. Consumers and businesses will be forced to sell assets, pay down debt and increase savings to put their houses in order. This will be a long, drawn-out process. Merrill Lynch is currently forecasting that this recession will drag on for a staggering 45 months or just shy of four years. If these estimates are to be believed, we will be facing tough times for years to come.

Recently, the stock market seems to be shrugging off the bad news and is content to focus on the fact that the bad economic news seems to be decelerating. Perhaps. But while the stock market may be putting in a short-term bottom, the likelihood that we are out of the woods is too close to call. One thing is for certain; the American automotive industry isn’t getting off the mat any time soon.

With the recent communiqué from the G20 meeting calling for $750 billion in additional funding for the International Monetary Fund (IMF) — much of it being directed toward shoring-up economies in the developing world, global trade is back in vogue. That’s good news for commodities, particularly the badly mauled energy and agricultural sectors which will be a big beneficiary if the bulls on Wall Street are right and this turns out to be merely a global recession rather than a global depression.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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