Slowing Down

With US dealership inventories at 88 days on February 1st – 60 days is healthy – we are seeing a possible mismatch of sales relative to production. Yes, there's been bad weather across much of the US, and that kept shoppers away. This past week, though, I visited a half-dozen dealers while car shopping and used that as an opportunity to listen to them. What I heard suggests this is not a temporary blip.

...deals are on the way: if I could put off buying a car, I would...

First, the factory is hiking dealers' sales targets, and getting pushback: late 2013 is as good as it's going to get, and no, we aren't likely to do better. Of course every dealer wants a lower target, and they rightly fear the "ratchet effect" of overperforming leading to higher targets, even if their success was a result of idiosyncratic factors, such as hiccups at a local competitor or a sales blitz that worked in volume terms but not in profitability so won't be repeated. Still, my reading is that dealers aren't seeing the same sort of foot traffic, and they don't think it's just the weather. Furthermore, that is consistent with other macroeconomic indicators such as wage growth, interest rates and housing. Growth is anemic.

Federal Agency Should Stop Playing Guessing Games

David Ruggles

Here I'm posting a few points I made in "Federal Agency Should Stop Playing Guessing Games" published February 21st in WardsAuto.com. You can read the full article on Wards.

The Consumer Financial Protection Bureau has socked Ally Bank with $98 million in penalties and restitution requirements as part of a consent agreement stemming from unintended discrimination involving dealer-assisted car loans.

Ally facilitated discrimination, according to a CFPB analysis using “proxy methodology” that presumes to determine who is and isn’t a member of a government-designated “protected class” by means of a borrower’s first name, last name, zip code and other variables.

....

Talking Macro: WREL show February 20, 2014

Here are notes from my weekly radio show on WREL Lexington, Virginia. The actual show seldom covers all of the topics I prepare, as what I discuss depends in part on questions from the host, Jim Bresnahan. What follows is thus expands on what I said or prepared to say.

The Economy

The Fed released its January minutes that suggests a pragmatic approach to policy targets.

Toyota's Profits, Nissan's Lack

One year ago – 2012Q4 that is – Toyota lost money in North America, and made only modest amounts of money in Japan. Today is much different, in contrast to Nissan. Bloomberg nails the source: the yen boom.

Yes, the Japanese economy and the US economy are both doing better, and so therefore should Toyota. But others were profitable in the US in late 2012, and Toyota has not gained market share. My scan of Toyota's financial statements (with glances at those of Ford and GM) suggest the entire gain is due to a more favorable exchange rate. (I have yet to look at the reports of stock analysts to see their take.)

From Toyota's perspective this should be a cautionary tale. They now are rolling in profits, and have the opportunity to continue a restructuring pushed by Akio Toyoda, the firm's near-eponymous chairman. But it does suggest two big problems.

Interest Rates and Employment: The Taper's Well Camouflaged

Protect Tapirs: http://www.tapirs.org

Tapirs are well-camouflaged. So's the taper: you have to look for it. That should not be surprising to anyone who lets their view of the world be affected by data, rather than the pop version of a simplistic model.

...the taper's well-camouflaged...

First, the data; I present 1 month, and 1-, 5-, 10- and 30-year interest rates, pulled from the Treasury's Daily Yield Curve web page. Interest rates are certainly up over the nadir of 2012, but casual reading of the graph suggests at best a modest impact (see the Wikipedia entry on the three US rounds of "quantitative easing", or the analysis of economist's such as that of James Bullard at the St. Louis Fed). In the background of course is the continued slow growth of the economy, which at its current pace of job creation will take until 2019 to bring us back to normal. Meanwhile, there are no signs of an uptick in inflation (and in Europe, a few whiffs of deflation).

Mitsubishi Motors: Going, going ... gone?

Mitsubishi Motors Corporation (MMC) is trumpeting record profits. I'm not convinced things are so rosy: they've also just restructured debt, with its four main creditors – and largest shareholders – taking an average 25% haircut on their preferred shares, to the tune of ¥95 billion (US$950 million), something made clear only in its Japanese-language filings. Perhaps they want a tax writeoff and figure their last bailout won't be recouped. But it also provides MMC with a clean ownership structure that would make a sale easier. Whether anyone would want to buy them is less clear: the company has a stormy history that includes 2 failed sales and an unenviable strategic position. They aren't unique in this; many other small firms have failed or changed hands in the past half dozen years. But they're more likely to be a Saab story than any of the other Japanese bit players.

...they're more likely to be a Saab story than other Japanese bit players...

Mitsubishi Motors' origins saddled it with an inefficient structure. During World War II Mitsubishi Heavy Industries (MHI) made munitions ranging from warships to the Zero fighter. After 1945 the US Occupation split up the firm into 3 pieces, each of which made different sorts of motor vehicles – three-wheeled cars, scooters, commercial trucks – as they struggled to find things to sell in the grim 1940s and early 1950s. After the Occupation ended MHI's former pieces merged. The end result was the Mizushima plant in western Japan producing minicars ("kei" cars), Okazaki in central Japan making passenger cars, and Maruko in Tokyo (eastern Japan) making trucks, all within the larger MHI with its industrial machinery, shipbuilding and heavy equipment operations.