CS FirstBoston on U.S. New Car Market: Uh-Oh

by Robert Farago

March 23rd, 2009 10:20 PM

cs firstboston on u s new car market uh oh

Our regular CS FirstBoston mole has sent us an update on their analysis of the U.S. new car market. Bottom line: it’s going to get a lot worse before it gets even worserer. So, he asked rhetorically, is this a good time for the taxpayer to “loan” money to Chrysler and GM? Only if you define “good” as “worst possible.” Sorry, was I talking about ROI? My bad. In terms of bailing out automakers without a hope in hell of turning a profit for years to come, these are the good old days.

• We are slashing our forecast for 2009 light vehicle sales to 10.4 million units, down from 12.0 million units previously. Details of the changes in the factors that plug into our demand model and account for the revision are as follows:

• Unemployment rate. Labor market developments have been worse than expected, resulting in an increase in our 2009 unemployment rate forecast to 8.8%, from 8.2% (full year average).

• Real income growth. Our forecast for 2009 real disposable personal income growth falls to 0.8%, from 2.5%, partly reflecting higher unemployment and partly as a result of a disappointing economic and tax stimulus package

• Home price growth. Our home price growth forecast slips to a decline of 7.0%, from our previous forecast of down 5.0%. The FHFA House Price Index posted a decline of 4.5% in 4Q08, and recent NAR data suggests declines are accelerating in Q1.

• The outlook for 2009 production is similarly impaired. We now expect North American output of 9.2 million units in 2009, down from our previous view of 10.6 million. We will introduce new quarterly production estimates in mid-April, as part of our Q1 earnings preview report.

• We are also issuing a revised longer term U.S. sales forecast calling for 12.5 million units in 2010 (down from prior 13.3 million) and 13.8 million units in 2010 (down from prior view of 14.1 million).

• Our new sales forecasts exclude any would-be effect from a possible scrappage program that provides government incentives for consumers to replace older vehicles with new, more fuel efficient models. The current proposal in Congress is likely to be viewed as expensive and protectionist, in our view, and faces formidable hurdles to becoming law.

• We also believe that the TALF program will not result in a meaningful increase in demand, as the deterioration in employment and consumer confidence may trump an increase in credit availability.

• Our Consumer Watch Scorecard was mixed in the latest update, with four factors improving and four deteriorating. The overall implications for light vehicle demand are still severely negative, with all eight Scorecard factors in the Minus column.

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Charleywhiskey on Mar 24, 2009

CSFB neglected to mention the 800 pound gorilla in the room, that being our federal government’s insatiable predilection to fix the unbroken. Leave the markets alone and things will eventually get better. But saddle the market with insane dicta from the EPA about trace gasses and fanciful notions of 100 mpg cars from the children in Congress, and all bets on a recovery are off.

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Phil Ressler on Mar 24, 2009
However, what Detroit is experiencing is closer to Creative Destruction. Given a long enough event horizon auto manufacturing (as a percentage of GDP) will more them likely return to historical levels - the catch is that it won’t resemble anything that we’re familiar with from the 1980’s and 90’s. Steel remade itself. US chip companies (and I don't mean Frito-Lay) remade themselves. Manufacturing as a whole expanded its percentage presence during the 1990s. We don't have to duplicate the '80s and '90s in auto manufacturing to realize renewed domestic vigor in the sector. In fact, the 80s/90s should not be the aspiration. Detroit can, and should strive to, do better. The impact of real estate on the auto market as a whole still has yet to be completely played out. Yes, there is are speculative overhangs in places like SoCal and Florida - but more importantly prices in the “normal” markets have also collapsed. Check out housing prices in in Cleavland, Detroit, actually anywhere in the mid west. That’s a lot of people. A precipitous loss of housing wealth rattles people and then they eventually get accustomed to truncated market value and realize that their wages allow them to continue participating in the economy, after a period of adjustment. Moreover, housing will rebound, albeit unevenly according to location and type. I've been through this before, having a house in a coastal market decline in value below its purchase price and even under its mortgage value, then see value reflated in recovery some years later. In California, I figure a homeowner is vulnerable to being under water on their property in any three year period, but will be in the black for any ten year span. People can learn again to put housing in proper perspective. People bought plenty of cars before it was easy to pay for them with extracted home equity. The car market will begin its recovery before housing does, as the habit of raiding equity to meet transportation needs fades and people revert to more normal and sustainable behavior. The transportation needs aren't going to abate, population is growing, and reasonable credit will return. Take my long lost father Warren Buffet. It’s his cash - no debt, the he invests in companies. If your perspective is sound and Detroit is 18 months from an economic rebound then GM stock at $3 is a gift from the heavens. So why isn’t he buying car companies? GM's rebound may take longer than 18 months. They may still struggle to keep market share in the early stages of an upturn. Even WB himself admits he's wrong sometimes, missing an opportunity or making a bad bet. His history is in what he achieves through a portfolio, not as an oracle of certainty on every stock. To a lot of financial people, making cars is just too much work and is too content-intensive as a means of making money. Their witholding of capital is no indication of the economic value of the endeavor; only of their assignment of value to it. Is WB buying Honda or Toyota? No. He's not playing the sector. I could not help but notice that you did not provide any data on how GM and ChryCo are going to pay back the Gov’t money.Until they do, it’s a bailout. Don’t kid yourself. And before you say “It helps workers…pay taxes….reduce unemployment…” that argument is equally applicable to Honda’s made in Ohio. A loan not otherwise available through the supposedly merit-based commercial finance sector is a bailout from both circumstantial trouble and prior mistakes. I have no reservation about the term "baoilout." But bailouts are also bridge financing in this case, intended to provide operating cash through a market disruption and a period of wrenching reform. That the wrenching reform has been necessitated by prior mistakes is irrelevant. Once the decision was made to bridge these companies, the first focus is survival and stabilization. Then operating correction. Then revival of competitive postion. And finally path to profitability. In the earlier stages, the bridging entity cannot know enough about the latter stages to impose a repayment schedule. But the lack of one does not mean they can't or won't be repaid. And as I've written elsewhere here, I'd be happy to see 20, 30 or 40 year loan terms. I'm unconcerned about automotive bailout repayments at this time, both as an observer and a (substantial) American taxpayer. They are cheap defense against the greater aggregate costs of implosion. As discussed elsewhere on TTAC it’s not so much Domestic vs Imports anymore - rather Union v Non Union. If supporting Union workers is your objective - that’s fine, just be upfront about it. Just because it's been discussed on TTAC doesn't make it so. I don't have any specific agenda to support the UAW over other workers. I do however respect the economic leverage of US headquartered manufacturing, all other aspects being equal. Hondas made in Ohio aren't equal to Malibus, as the total economic leverage of the Malibu purchase is greater. While it's quite possible that any resurgence in Detroit's market share would cut into Honda's and possibly trade some Honda domestic employment for D3 jobs, the net is a gain to the overall economy. Phil

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