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Slowing Auto Industry Another Warning?

  • Written by Syndicated Publisher No Comments Comments
    January 7, 2014

    Here we are in 2014, and as we’ve been saying, it is our expectation that 2014 will not be anything like 2013, that at some point during the year the market will experience a serious decline, quite possibly of bear market significance.

    We have provided the reasons for that expectation piecemeal in various updates and on the blog, including but not limited to: high market-valuation based on the CAPE P/E ratio and price/book value ratio; the age of the bull market; the fact that since 1934 the average market decline within the second year of the Four-Year Presidential Cycle was 21%; the high level of investor bullishness; that the Fed which has provided the main fuel for the five-year bull market with increasing amounts of QE stimulus, has now reversed the process and will be providing decreasing amounts of stimulus in 2014 aimed at having it at zero by summer.

    The importance of the increasing amounts of QE stimulus can be seen in the way the market has enjoyed a continuing bull market even as the economy remained anemic, and earnings growth has been in a steady decline.

    Let’s also look at the historical main driver of the economy, consumer spending, and particularly at the main drivers within consumer spending, autos and the housing industry.

    Consumer Spending.

    Consumer spending accounts for roughly 70% of the economy, and therefore a good percentage of business profits.

    As Reuters recently reported, retailers have been forced to discount heavily in an attempt to maintain market share during this holiday shopping season, which is resulting in thinner profit margins.

    Jim McNerney, head of the Business Roundtable, and CEO of Boeing, says, “Every member of the Business Roundtable, which represents about half of the U.S. economy, is facing pricing pressure.”

    Meanwhile, the recent reports on 3rd quarter GDP growth showed a surprising jump in business inventories, indicating excessive sales expectations, which also adds to pressures to lower prices and therefore profit margins to get rid of the excess inventory.

    Within overall consumer spending, the two major driving forces for the economy are housing and the auto-makers, as was seen when housing and auto sales collapsed the economy into the 2007-2009 recession, and then led the way out of the recession (thanks in no small part to the massive government bailouts and loans to the auto-makers, and massive stimulus for first-time home-buyers and rescue of mortgage-backed securities).

    Automakers have been reporting impressive sales since 2009, but as we’ve all seen in the auto ads, manufacturers have recently been providing incentives averaging $2,500 per vehicle, and financing as low as 0%. Analysts are beginning to worry that the incentives signal a return to the practices that eroded industry profits in the year before the 2007-2009 recession.

    If auto-makers are once again needing margin-reducing incentives to entice auto-buyers, that’s not encouraging for the economy or their earnings in 2014.

    And even with the incentives it was reported yesterday that auto sales, although positive for the year, slowed significantly in December, and some auto analysts expect sales, which have been averaging more than a million vehicles a year since 2009, may slow to as few as 500,000 in 2014.

    Meanwhile, there is still a question of whether the housing industry, which was stumbling in the summer and fall since mortgage-rates began rising, has really recovered and is back on a growth path.

    It was reported this week that Pending Home Sales ticked up slightly, 0.2% in November, to 101.7, the first gain in six months, but only fractionally above the 10-month low of 101.5 in October.

    And the Mortgage Bankers Association reported mortgage applications fell again last week, this time by 3.5%. Its MBA Purchase Index, covering only applications for mortgages to be used in purchasing a home (excluding apps for refinancing existing loans), has fallen steadily since March (when mortgage rates began to rise) to a 13-year low.

    And home-builders are reporting a noticeable decline in traffic by would-be buyers.

    Meanwhile, 30-year mortgage rates have risen by 35% from 3.35% earlier in the year, to 4.53% this week. And it was reported this week that home prices were up again in October, making for a 12-month increase of 13.6% from October, 2012, the biggest 12-month gain since the top of the real estate bubble in 2006.

    So, it isn’t as clear that all will be as well going forward as analysts excitedly looking through the rear view mirror claim, as they extend the trends of 2013, in the stock market, home sales, auto-sales, etc., in a straight line into the future, forecasting more of the same through 2014.

    We remain in the market’s favorable season, and our technical indicators remain on last fall’s buy signal. But it is no time to let Wall Street lull you into a false sense of optimism and confidence. It’s more like a time to plan ahead and prepare for changes you may want to make at some point to protect profits, or even make gains with downside positions.

    Are you aware that just a 20% decline in the Dow would wipe out its entire super gain of 26% in 2013?

    Other Voices:

    Sam Stovall, chief equity strategist at S&P Capital IQ; “This mid-term election year could end up being similar to prior mid-term election years. . . . I would tend to say that the market is headed for several declines of at least 5%, if not ten to twenty percent, sometime this year . . . . . . I would be careful of the 2nd and 3rd quarter, or that ‘sell in may’ period for the coming year.”

    Associated Press: After four years of strong sales increases — and limited discounts — as the economy improved, U.S. demand for new cars and trucks is expected to slow this year. . . . . the industry got a taste of what’s to come when December sales slowed to a crawl. . . . Alec Gutierrez, senior analyst for Kelley Blue Book, expects U.S. sales to increase by around 700,000 to 16.3 million in 2014. That compares to increases of more than 1 million each year since 2009.”

    Peter Boockvar, chief market analyst at Lindsay Group: “QE doesn’t create a safer world, it is just a temporary high and the danger always comes on the flip side when it is pulled back as has previously been seen. . . . It’s blasphemy, I know, to call for a down year. . . . I already hear the heckling – as I did in ’06 and ’07.”

    To read my weekend newspaper column click here: Will The Market’s 2013 Winners Also Be Winners In 2014-

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

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