David Desmarais Takes Me to Task for Mis-Timed Predictions

Yesterday I received a copy of a letter written by David Desmarais stating:

Gentlemen,

My apologies in advance but I need to make you aware of something.

See the articles below. Dale is 100% wrong about his “Danger!” statements. I just spoke to the West Coast Credit Manager of Chase Auto Finance. They haven’t used NADA values in a year, are still using Black Book and are advancing well over “70% of average wholesale” across the board. Based on what’s going on at the auctions today is the wholesale market softening or are cars going for clean book +++? Are you stuck paying top dollar because you didn’t overstock when the market was soft? Is this the type of ‘out-of-touch’ advice you’d want for your most critical investments?

Sorry, it just bugs me when someone passes along internet gossip as fact and doesn’t see what’s happening in the real transactional world.

In response, Matt Murphy at Falmouth Toyota replied as follows:

Guys – Personally, back in May I too was positive the wholesale market was going to slow down. And January?….Please. Who knew what was going to happen back then? What’s going on now has no precedent in the 20 years I’ve been in the business.

Matt, thank you very much for your support, now it’s my turn!

David Desmarais – congratulations on your perfect 20/20 hindsight. You definitely exemplify the best traits of a Monday morning quarterback. Since you profess to have a better sense than me of the “real transactional world”, please inform all of us when or if you ever think the used vehicle wholesale market will level out. Are you suggesting that used vehicles are no longer depreciating assets? Do you believe that what goes up doesn’t have to come down? Please give us your expert opinion, I will now clarify mine.

David, today’s used car market is an efficient market and used vehicles are much less individualistic and more like commodities. In any efficient commodities market volatility is inherent. Consider the oil, gas, metal or grain markets. These are all efficient markets that are volatile by their nature. Because of market efficiency and product commoditization volatility is the new order in the used car market.

Think about the radical fluctuation in values in the last half ’08 for SUVs and fuel efficient vehicles. Consider what seems to be irrational exuberance in the wholesale prices of used vehicles in the first half of ’09. Think about how difficult it is for third-party guides to keep up with current valuations. These are all signs that the used car market today in inherently volatile.

Volatile markets are inherently risky markets and risk often equates to loss. This was the basis for my warnings and previous postings and articles. Used car dealers recognizing that today’s market is volatile must make a fundamental decision as to whether they are speculators or retailers. If they want to be speculators, i.e. buying as much inventory as they can in anticipation of future higher markets as you suggest, then they must be prepared financially and psychologically for the inevitable boom and bust cycles of a gambler.

If on the other hand, used car dealers perceive themselves as retailers, then they must prudently manage the risk inherent in the market. From my perspective, this means moving from money to metal, from to money to metal and so on as quickly as they can. They simply can not afford to be caught long on yesterday’s inventory.

It is in this spirit that I issued cautionary warnings to dealers. If you want to take me to task for being wrong on the timing of my predictions, have at it. But if you’re suggesting that dealers should not have concern or sensitivity that what goes up will come down, then I think that you are misguided. Simply criticizing me for being wrong on the timing of my prediction is in the words of John Adams when referring to Thomas Payne, “Being better at tearing down than building up.”

David Desmarais, please clarify the justification for your position that dealers should stock up when the market’s soft so they don’t have to get stuck paying top dollar later. Specifically, are you advocating that dealers be speculators, and if so please accord them the respect of your expertise by providing them with proper timing for acquisition and disposition. Until you clarify your position and/or provide reliable guidance on market timing, I will continue to caution dealers to behave as rational retailers should in a volatile market.