Auto Sector Headed into a Ditch

04/04/2017 2:36 pm EST

Focus: STOCKS

Mike Larson

Editor, High Yield Investing

Mike Larson of Weiss Ratings asserts: Stay away from major auto manufacturers like Ford and GM...auto dealers like Group 1 Automotive (GPI) and AutoNation (AN)…and auto lenders like Ally Financial (ALLY).

Car-pocalypse. Auto-mageddon. Peak Auto. Whatever you want to call it, it’s here.

US auto and truck sales sank to a seasonally adjusted annual rate of 16.5 million in March, according to Ward’s Automotive Group. That represented a 5.7% drop from February, and left sales at their lowest level in just over two years.

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By manufacturer, sales at General Motors (GM) rose a much smaller-than-expected 1.6% from a year earlier, while sales at Ford Motor (F) skidded 7.2%. Fiat Chrysler (FCAU) sales fell more than 5%, while foreign automakers like Honda Motor (HMC) and Toyota Motor (TM) reported small declines.

As troubling as those figures are, it’s the numbers behind the numbers that look even worse. J.D. Power said average incentives rose to $3,750 per vehicle last month. That’s equivalent to 10.3% of sticker price, the highest level since recession-plagued 2009.

Inventories of unsold cars and trucks are at their highest level since then as well. GM alone is sitting on 98 days’ worth of inventory–far above the 71 days in March 2016.

I’ve been fairly bullish on the broad averages for the last several months, and even more excited about the prospects for “Trump Sectors” like financials, infrastructure, and defense. But I’ve been warning about our nation’s auto bubble for more than a year now.

The fact is, car lenders got every bit as aggressive with auto lending in the past few years as their mortgage industry predecessors did in the early-2000s. Loan delinquencies are now rising in response, and the problem is only going to get worse as those loans season and hit their peak-default years.

Meanwhile, thanks to record-high levels of leasing over the last couple of years, a glut of nearly-new cars is flooding the market. Result: Used car prices just dropped 8% year-over-year in February, according to the National Automobile Dealers Association. That was the biggest decline since November 2008 when the economy was in the throes of the last recession, and something that will drive up loss severities for over-exposed lenders.

My advice: Stay away from major auto manufacturers like Ford and GM...auto dealers like Group 1 Automotive (GPI) and AutoNation (AN)…and auto lenders like Ally Financial (ALLY). They look like they’re headed into one heck of a deep ditch.

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