More Trouble Ahead for Automakers
A big divergence in 'soft' data... Is the U.S. economy slowing again?... Another 'sharp' drop in auto sales... More trouble ahead for automakers...
A troubling new sign for the U.S. economy...
Regular Digest readers may recall the big divergence between so-called "soft" economic data – survey-based indicators like consumer or business sentiment – and "hard" (or quantitative) data. As we noted in the April 3 Digest...
As you can see in the graphic below, soft-data measures have soared since November's election. But hard-data measures have yet to follow...
According to new analysis from Morgan Stanley economists, this "gap" between soft and hard data has never been greater.
What accounts for this difference?
It's simple: Businesses have cheered President Trump's proposals to cut taxes, loosen regulation, and boost growth... But expectations alone haven't been enough to "move the needle" on the economy. And until one of more of these proposals come to fruition, that's unlikely to change.
Since then, the gap between soft and hard data has persisted...
And now, another divergence – between two widely followed soft-data indicators – has appeared alongside it...
On Monday, the Institute for Supply Management reported its Manufacturing Purchasing Managers' Index ("PMI") – which tracks the sentiment of purchasing managers across the U.S. manufacturing industry – rose to 57.8 in June. This is its highest level in nearly three years. As Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, noted in the report...
Manufacturing expanded in June as the PMI registered 57.8%, an increase of 2.9 percentage points from the May reading of 54.9% and its highest level since August 2014 when it registered 57.9%, indicating growth in new orders for the 10th consecutive month.
A reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting.
That same day, competing data firm IHS Markit published its own Manufacturing PMI for June, and its results were vastly different...
IHS Markit said its PMI fell to 52.0 last month, down from 52.7 in May. While this level still officially represents "expansion," this PMI has now fallen for five straight months. And June's reading represents the weakest improvement since before last fall's presidential election. As Chris Williamson, chief business economist at IHS Markit, explained in his report...
Manufacturers reported a disappointing end to the second quarter, with few signs of growth picking up any time soon.
The PMI has been sliding lower since the peak seen in January and the June reading points to a stagnation – at best – in the official manufacturing output data. The survey's employment index meanwhile suggests that factories will make little or no contribution to non-farm payroll growth in June.
Forward looking indicators – notably a further slowdown in inflows of new business to a nine-month low and a sharp drop in the new orders to inventory ratio – suggest that the risks are weighted to the downside for coming months.
Any good news was saved for inflation, with price pressures easing substantially in June on the back of waning global commodity prices.
Today, the gap between these two measures is the largest since 2011...
This is unusual.
As you can see in the following chart, they tend to move together over longer periods of time...
This means we'll likely see the divergence close in the coming months. And given the continued weakness in "hard" data measures, we'd bet it closes to the downside.
The bad news for autos continues...
Speaking of economic weakness, the latest data show U.S. auto sales plunged again in June. As industry-data firm WardsAuto reported on Monday...
U.S. light-vehicle sales weakened more than expected in June...
June's seasonally adjusted annual rate ["SAAR"] of 16.4 million units was the lowest since the same total in October 2014, and well below year-ago's 16.8 million. It also marked the sixth straight year-over-year decline.
The year-to-date SAAR through June was 16.8 million units, 2% below year-ago's 17.1 million and a 3-year low for the period... Despite big production cuts expected in the latter half of 2017, the industry will need relief on the retail side if it is to get bloated dealer stocks in line with demand this year.
Worse, the decline isn't only being fueled by a slowdown in retail sales. It's also being driven by an intentional pullback in sales to rental-car companies. As the Wall Street Journal reports...
While retail demand is losing steam, each of Detroit's players also reported significant reductions in deliveries to daily-rental companies, long the Motor City's biggest customers.
Sales to Enterprise Rent-A-Car or Hertz Global Holdings traditionally were a way for auto makers to keep factories rolling even as dealership traffic slowed. But an excess of that business has dented profits, auto makers say...
The fleet-sales pullback is having a disproportionate impact on wider volumes. Sales to retail customers at dealerships are down less than 1% over the first six months of the year, but sales to nonretail customers such as government fleets, commercial buyers and rental-car companies are off 7.8%, according to J.D. Power.
Why would automakers intentionally walk away from a huge source of new-car demand? Stansberry's Investment Advisory subscribers already know the answer. As Porter and his team explained in the October 2016 issue...
The rental-car industry is a model of capital inefficiency. This industry requires massive cash outlays every year to continually replace its aging fleet of cars. After all, customers don't want to drive a five-year-old, beaten-up Ford Focus...
These companies spend billions of dollars each year replacing their older used cars... They partially pay for these massive ongoing purchases by selling their older used-car fleet.
Most of their used-car sales happen in open market auctions... Rental-car companies also sell their used cars back to auto manufacturers. The carmakers agree to buy them back at set prices a few years after the initial new car sales. Rental-car companies call these "program" cars. Today, about 45% of their cars are program cars. Generally, they sell all fleet vehicles within three years.
In short, it appears automakers are stepping away from low-margin fleet sales in a desperate attempt to boost falling profits. Unfortunately, that means giving up one of the biggest sources of new-car demand, while inventories sit at record highs and retail sales are rolling over.
It's truly a no-win situation. Expect more pain ahead for automakers.
New 52-week highs (as of 7/4/17): none (U.S. markets were closed for Independence Day).
In the mailbag, several subscribers respond to Porter and Steve's advice for a young subscriber. Send your questions, comments, and concerns to feedback@stansberryresearch.com.
"Porter's and Steve's advice to Tim Miller is exactly why I subscribe to your research. You provide many opportunities to learn and advise with an enlightened self interest for the long term. As Bill [Bonner] says, win-win." – Paid-up subscriber Bob Miller
"Dear Porter and Steve, I love you guys, great service, great insight, great advice. But I was surprised about your advice to a subscriber to save at least $50,000 in cash before ever buying any equity investment.
"This may work for people who have the kind of family background and job where they can be very confident they can save up $50,000 in cash, with no debt, by the time they are 30. But nowadays, unfortunately and tragically, given the economy we have, many people are not getting out of debt *at all* until rather later in life. They may not even be able to save up as little as $15,000 or $20,000 in debt-free cash until they are 35 or 40 or even older.
"Telling those people to stay all in cash until they have $50,000? I don't think it makes good financial sense for them. For them, in reality, the best way that they can hope to *get to* $50,000 is by making some well-chosen equity investments, such as the ones you recommend in your services. Of course they need to keep a bigger cash cushion, at least $8,000 – $10,000. But at their age, they should be investing the rest of their money in *something*.
"Jim Rickards says when you save up $10,000, buy one 1-ounce gold coin and keep the rest in your checking account. This makes a lot of sense to me. But above that level, I think a person should slowly begin investing in stocks, even if at first it's just the S&P 500 ETF and the Vanguard REIT ETF. Beyond that, I don't think there's any harm in a person with $15,000 – $20,000 investing modest amounts in some of Steve's basic recommendations such as DXJ for Japanese stocks or FXI for Chinese stocks.
"Yes, there is some risk involved for a person in that situation to buy such stocks. But I am afraid there is even more risk involved in staying all in cash throughout the Melt-Up and the Melt-Down and everything that is going to happen after that – even if it is all in cash at $20,000. Just my two cents. Keep up the great work." – Paid-up subscriber Geoffrey Caveney
Porter comment: Geoffrey, ask around. Find out how many people can actually make money buying stocks during their first three to five years investing. You'll be surprised.
Most people don't know anything when they start. Nothing. They get killed. Waiting five years to put their money at risk – while they learn and paper trade – is the best advice they will ever receive.
"To Porter and Steve... Your Friday's advice to a young subscriber who is eager to learn and become a good investor was outstanding. You are both standing on a high moral ground by advising him in an honest, truthful manner what learning steps are required before one can even consider becoming a lifelong investor. Although you are both excellent investment analysts and businessmen, you also have a noble, highly principled character that showed in your response to this young person's questions.
"You did not put on a business hat and tried to sell a product that may not be appropriate for him; instead you put on a teaching, mentor hat to show that you care and want him to learn and succeed. I already respect and admire your publishing work, but now I also respect and admire your humanity. It is rare in today's world to see self-made wealthy men to stoop down and show so much care and interest in this young person. Your actions speak volumes to me. Continued best wishes to both of you." – Paid-up subscriber S.P.
Porter comment: We started at the same point as that young man and many, many people were kind and generous to us.
In my case, that started with the man who adopted me when I was three and raised me. It continued with Steve Sjuggerud, who taught me surfing as a kid and finance as an adult and then got me my first job as an analyst.
Next came Bill Bonner and Mark Ford, who not only put their capital up for my first business, but stuck with me through a long and expensive legal fight with the government.
There have been dozens of others along the road who have given me their help and friendship, asking nothing in return.
We know from long experience that the path is long and twisting. Your client today might very well become your partner tomorrow ... and what you have today can disappear in a flash.
But you can always be kind.
Regards,
Justin Brill
Baltimore, Maryland
July 5, 2017