Watch the market carefully

December 29, 2008

Below is a question that I recently received, along with my answer:


You made a presentation to our 20 Group in Chicago and recently Scott Norman sent your letter referencing companies warehousing used vehicles that would be sold in the first quarter of ’09.  This would increase the devaluing of used vehicles in general.  Where and who are the companies that have all this inventory, or is this just a general observation and opinion?

 Matt, thanks for your question.  Auto manufacturers, captive finance companies, rent-a-car companies and general business corporate fleets comprise the bulk of the vehicles that are now being sold at auction in mass quantity.  These companies will all have taken write downs on the values of their vehicles by December 31 at which point they are only interested in converting the assets to cash and achieving liquidity. 

This mass dumping has already begun and the deflationary effect is apparent.  I have unofficial information that Chrysler has 134,000 such vehicles, Ford 80,000 and GM somewhere in between.  The European luxury import lines also seem to have their proportionate share in the queue for sale.  Yesterday I spent some time analyzing run lists from auctions around the country for the next two weeks.  By analysis and projection, I think that 50,000 GM vehicles and about that many for both Ford and Chrysler will be offered for sale in January.  Obviously they will all not sell, but this morning I received information from a high level auction executive stating that sales over the past two weeks (conversions vs. no-sales) are “up, way up.”  While sales that are up from the perspective of the auction may seem good, it’s really bad news for dealers.  The fact that sales at the auction are up suggests that the sellers have placed a very low floor price or no floor price at all.  This supports my thesis that once the corporate entities that own the vehicles have taken the write-down, their only interested in the cash.  The deflationary knife is falling, and falling quickly.

Recent reviews of run lists show ’08 Chevy Impala’s and Pontiac Grand Prix’s selling at auction in the mid $8,000 range.  I think they might even go into the $7,000 range before it’s all over.  Stop for a moment and think about that.  An ’08 Impala or Grand Prix could be purchased for about 1/3 of its new counterpart.  I’m also told on good authority that a similar effect is present on late model European luxury cars.  The bottom line is you just can’t be caught long on any of these vehicles, otherwise you’ll own them wrong, way wrong. 

There are, however, some segments that are showing strength.  Currently, values of trucks and 4-wheel drives are strong.  I think that this is due to the unusually harsh early winter and historically low gas prices.   I personally believe that chasing these vehicles is a bad bet.  I say this because traditionally spring comes early to the automobile markets and gas supplies will tighten and prices will likely rise somewhat by mid to late spring.  In light of these conditions I would renew my prior recommendations as follows:

1. Take the loss now, right now, on any aged units (over 45 days) that resemble at all, the types of vehicles that are being auctioned.  Do this by employing the “whole-tail strategy.”

2.  Resist the temptation to buy deep, in spite of what seems to be prices that are too good to believe.  For at least the next 30 days, the correct operating assumption is that they’ll be much cheaper two weeks later.  Buy more frequently.

3.  Do not allow any vehicle under, any circumstance to exceed 45 days in inventory.   The correct operating assumption is that if you do, you’ll be upside down.

Upon request, I’d be happy to supply you with pricing and purchasing bench marks that are yielding optimal results.