When you have 120 dealers looking at the same exact car on a Monday morning, you have three options if you plan on buying a car.
After I saw a 2003 Infiniti FX35 with 220,558 miles sell for $9100 plus the auction fee, I left for good.
Right now we are in the midst of tax season. A time when millions of consumers get their tax refunds from Uncle Sam and, on average, spend it all within a 72 hour period. A few pay off their debts. A few more buy top of the line televisions, cell phones, and electronics. The rest put a thick down payment on an older used car that is now being financed for anywhere between three to six years.
A luxury SUV like the Infiniti can be sold for stupid money at the moment. We’re talking a $1500 down payment and about $85 a week for 36 months. On the miracle that the buyer makes a full payoff on the loan, you’re looking at about $15 grand in total once you calculate all the tax, tag, title, finance charges and assorted other bogus fees that are usually levied onto that number.
Is it a terrible buy for the consumer? Of course! But in the end, an affordable monthly payment in exchange for the impersonation of wealth is the only thing that will truly matter to them.
You may think this is a suckers bet par excellence, and you would be right.
But there are plenty of other suckers that were down the line last week. Consider these prices…
1999 Lincoln Town Car, Cartier Edition: $3200, 206,789 miles.
2002 Lexus ES300, scraped on one side: $3300, 274,166 miles.
2007 Chevy Tahoe LT, Rough interior: $11,000, 248,804 miles.
Who would finance any vehicle that is already well north of 200k?
A lot of companies will if the potential level of return is attractive enough. Dealerships will keep the riskier deals on their books for a few months, and then sell many of the potential dogs for a pre-determined price to a finance company. That company will, in turn, sell it to a Wall Street firm that will package it into a conglomeration of ‘asset backed securities’, where it will be given a credit rating. Then it will be marketed to a variety of buyers in the finance world far and wide.
Does this sound familiar to you? It should. Yes, these are the type of seeds that sprouted the sub-prime mortgage crisis and the near ruin of our economy. But the same mechanism of buying and selling these automotive assets also serves a vital purpose for every automaker that finances or leases their vehicles.
Every automotive manufacturer has one thing in common. They want to sell their ‘paper’ so that they have the financial resources needed to keep building their business. Toyota, GM, Honda, VW, Nissan… even the smaller automakers such as BMW and Mazda require plenty of liquid cash to survive.
They can’t pay their people in IOU’s any more than the consumers who are currently financing their vehicles. So they will sell the paper to those buyers who are willing to accept the risks.
There is no shortage of takers. This article offers plenty of the basics of the ‘prime’ world of automotive remarketing which historically involves selling far lower risk deals at reasonable returns.
But if you are to get one thing out of an obscure part of the automotive industry, read and dwell on this quote…
“For the most part we have seen a reversion back to the kinds of underwriting standards we saw five years ago, before the crisis, and for that we are not unduly concerned,” says Glenn Costello, senior managing director at Kroll.”
Mr. Costello may know a lot about the fundamentals of this business from a pure numbers perspective. But if I were a buyer of those securities, I would be real careful of buying anything that carries the same type of risk as the vehicles I saw go through the block.
The number of sub-prime deals for automotive asset backed securities has more than doubled in little over a year. The quality of those vehicles has not followed the same path. From what I see at the auctions, they are getting far worse in condition and mileage.
I am not one to recommend shorting specific companies. But if I were to short anything in this business, it wouldn’t be an automaker. Not by a longshot.
I would be looking squarely at those companies that either retail to sub-prime customers, or finance companies that specialize in the higher risk areas of this market. When it comes to late 2014 and all the delinquencies begin to be removed from the credit reports of those who got hit during the last financial storm, you are likely going to see a swarm of new car buyers abandoning the crappy old sleds for new metal that may even cost less on a monthly basis.
Of course the loans will likely run in the six to eight year range by then. But hey! New wheels! And the cycle will begin anew.