Optimism is Hard Thing of Which to Let Go � The Car Sales Recovery Surprise

The Wall Street Journal just ran a story that started like this:

“Just a few months ago, optimism was rising in the auto industry that new-vehicle sales would make a strong rebound this year after falling to historic lows in 2009.  New data, however, suggest the recovery isn’t as strong as it appeared earlier in the year. The increase in auto sales in the first five months of 2010 has been driven by higher sales to rental-car companies and other commercial fleets—not sales to consumers, who are now showing signs of more pessimism about the economy, as well as a halting interest in buying new cars.”

Okay, here’s what I want.  I want to know if there is any regular person out there that was optimistic about car sales, or anything sales, just a few months ago.  Do you even know anyone that bought a new car this year?  I know an awful lot of people and I had to think and think to come up with one.  And they replaced a car that was almost ten years old.

Everyone else I know is still driving whatever they leased last time around, which is why we still see so many BMWs, Mercedes Benz, and Lexus driving around.  As those leases come up, my bet is we’re going to see fewer higher end models and more models made by Ford and Hyundai.

In 2009, car sales went down like a Senator in an airport rest room.  As I recall, the second half of 2008 didn’t set any sales records either.  And as this year began, unemployment was still rising, foreclosures were still going on essentially unaddressed, the banks were reporting record profits without having to do any of that messy lending stuff that always gets them in trouble, and everyone I know was and is cutting back on everything.  So, why in the world would anyone have cause to be optimistic about auto sales?

The first time I saw the Q1 2010 car sales numbers, all I said was “fleet sales, rental car companies, replacing inventories after skipping last year for the most part.”  Then I went back to playing “Words With Friends” on my iPhone.

Now here we are in June, halfway through the year, and the Wall Street Journal, that bastion of financial knowledge and business acumen is reporting that “new data is suggesting that the recovery isn’t as strong as it appeared earlier in the year.”  When did it appear strong, fellas?  What’s the deal?  I’’m starting to think no of you get out much.  Is that it?  You just live in your little bubble and have no idea what’s going on in America?

From the WSJ story:

“We’re still waiting for consumers to come back into dealerships,” Mr. Hoffecker said in an interview.

I’ll be you are, Mr Hoffecker, whoever you are, but I hope you’re not actually waiting at a dealership, because it’s going to be some time before your expected guests arrive in any significant number.  You can probably head on home and someone can call you when they arrive.

Here’s the WSJ again:

“In the year’s first five months, auto sales rose 17% from a year earlier to 4.6 million cars and light trucks, according to Autodata Corp. But the rise has been fueled by commercial customers that had all but stopped buying last year during the recession and are now finally restocking their fleets. Fleet sales are up 32%, while sales to individual customers at dealerships have increased just 13%. More importantly, retail sales remain at low levels compared with historical standards.”

I’m sure they are, but why is anyone the least bit surprised by this, and more importantly, is anyone actually unsure about future sales trends?  Because they shouldn’t be.  It’s not a mystery what’s ahead in the auto sales world.

Here’s the WSJ:

“Concern about weak retail sales hasn’t escaped auto makers. George Pipas, the top sales analyst at Ford Motor Co., said he is seeing evidence that consumers are deferring decisions on major purchases, in large part because home values and income growth haven’t rebounded.”

“These are two things that really have to happen before you will see auto sales move up more significantly,” Mr. Pipas said.

That’s right George, the housing market and incomes would have to reverse their current courses and recover… that would help, anyway.  But it’s not going to be like you remember it, say, for the last 20-30 years.  Nope, those days are gone for a long, long time.

In fact, I’m 49 and it would not surprise me one bit to find that Americans don’t buy new cars every three years again for the rest of my lifetime.  Last year I bought a Suburban… you know… GM had stuff on sale… and I did so because I plan to keep it at least a decade, and hopefully longer.  And I’m not alone in my thinking.

Here’s the WSJ explaining why they were so confused earlier in the year…

“Earlier in the year, the recovery in auto sales appeared to be stronger. The role of fleet sales in the rise wasn’t clear at the time because some automakers don’t break out their fleet and retail totals, making industry figures hard to come by.”

Tell you what WSJ people… next time feel free to call me on stuff like that.  I don’t depend on automakers breaking things out, I actually have functioning eyes and ears and I use them pretty much all the time.  For example, I haven’t looked at any reports, but I’m here to tell you that vacations to Hawaii are way down too.  Anyone care to bet against me on that?  We can wait for the report to come out to settle it.

Here’s the WSJ again:

“Then in March, sales rose 24% and hit an annualized rate of 11.8 million—the highest since September 2008, except for when the government’s cash-for-clunkers program caused a spike last August.  The strong response to Toyota’s incentives seemed to indicate consumers were again willing to spring for new rides. Instead, the incentives now look like a one-time boost whose effect has now faded, said AlixPartners’ Mr. Hoffecker. “We felt better in the January-February time frame,” he said.”

Did you feel better then?  Wow.  That’s amazing to me, assuming you’re telling the truth here.  Did you feel better about real estate sales right before the tax credit was set to expire too?  Because that’s the other industry that really, really doesn’t want to let go of optimism.

For months I’ve been telling people that there is no real estate market, and for months those in the industry have been telling me they’re selling houses like hotcakes.  I’d argue with them more, but it always feels like I’m talking a 5 year-old out of believing in Santa Claus or the Tooth Fairy.  Why do it?  They’ll only start crying and then I’ll feel badly, so I just say… “Oh wow!  So, that’s good then.”

It’s not a real estate market when the government is giving away $8,000 or $6,500 to buy a house, and then buying ALL of the mortgage backed securities, and telling Fannie, Freddie and FHA to write anyone breathing with essentially no money down, but make sure they have a paycheck stub.  And predictably, FHA one-year re-defaults are already at roughly 10% last time I looked which was only a month ago.

On top of that, the only people selling are those that absolutely have to, and the only people shopping are looking to steal something.  Oh, and then there’s the “shadow inventory” of homes the banks have taken back but aren’t on the market, which is HUGE, and what about the homes where no one has made a payment for over a year but the banks haven’t gotten around to foreclosing on as yet.

That’s not a real estate market and no one has the slightest idea what they’re home is worth today, except that I’d say it’s a safe bet that it’s less than they think.

But when the tax credit just ended on May 1, 2010, and sales dropped off a cliff by something close to 15% as I recall, there were actually people acting like it was a surprise.  Like they thought that government propped up mess of a market was actually recovery type demand for houses?  Seriously?

The next time houses are selling like hotcakes, I’ll likely be in the market for something in Sun City Arizona, where I’ll turn in my car keys, get in my golf cart and go hangout at the clubhouse before playing a little bridge with the other septuagenarians.

Last one from the WSJ…

“While vehicle sales aren’t rising as fast as the industry would like, Mr. Hoffecker said automakers’ finances are nevertheless strong. The deep restructurings by General Motors Co., Chrysler Group LLC and others have enabled them to earn money even at low levels of new-car sales.”

You see… the industry knows what’s ahead: “low levels of new-car sales.” That’s why they’ve restructured to profit under those conditions.  I’ll bet they weren’t surprised by the new data that threw you for a loop.  The industry knows it, the government knows it, and most certainly the people know it… hell, I’d even bet the bankers know it, but I can’t be sure about that because I don’t understand how their species thinks.  It’d be like asking me what my pet frog is thinking right now… no idea.  He looks happy, but it could just be gas.

My forecast would be that we’ll see something like half the number of auto dealerships in the future, certainly quite a few less Mercedes Benz dealerships, and that a big percentage of those working in the real estate industry won’t be for much longer either.  I’m sorry to have to say that, but I’d feel silly saying anything else.  Auto industries don’t restructure to earn profits at low levels of sales for no reason.

You know why that is?  Because optimism really is a hard thing of which to let go, but once you do, you can start back on a path to success.  Until then… well, hang onto your hats ‘’cause it’s going to be one heck of a bumpy ride… in our race to the bottom.

Mandelman Out.