By Jeff Sanford
Toronto, Ontario — April 17, 2018 — In this week’s Tuesday Ticker, stock market volatility continues, the peak in auto sales comes into view, the RV market continues to boom.
Volatile triple-digit swings in major stock markets continue to whiplash investors. The Dow recently reversed a 400-point rally in just one hour when news emerged about an FBI raid on Trump’s lawyer. The Trump Bump is done and gone. A theme in the investing press now is the increasing loss of faith in the president. Global fund managers are talking about getting out of U.S. assets. The S&P 500, a broad measure of the U.S. market, is now off about 10 percent from its peak of January 26. On the other hand the S&P 500 is also trading at about 16 times the earnings, which is a more rational value for the well known stock market valuation method known as the Price-to-Earnings ratio. After the recent declines that widely followed the ratio is now in line with the long term historical trends.
Is the expected peak in auto sales beginning to pass? Last year OEMs sold a record number of vehicles (17 million) in North America. Many expect that figure to fall this year. This past week GM announced some fairly large layoffs at major prodcution plants, suggesting sales are contracting. As sales contract the OEMs are again offering big discounts to buyers. GM has just announced $10,000 bonuses on a major SUV. This will likely be good for those selling used cars. According to reports the supply of lightly-used cars and trucks was tight because automakers had drastically cut back on bargain leases during and after the Great Recession. Auto makers began offering incentives again through the middle of the decade leading to a big spurt in auto sales. But now many of the vehicles sold then are coming off-lease and flooding used car markets. Apparently it’s time to get a good deal on a used vehicle. According to one report, by the end of 2019, some 12 million low-mileage vehicles will come off leases that were signed between 2014 and 2016 era.
One-time Trump advisor, Carl Icahn, is reportedly selling his stake in auto-parts maker Federal-Mogul to competitor Tenneco for $5.4 billion. One of the reasons for the sale: The customers of Federal-Mogul, auto parts retailers like AutoZone and O’Reilly Automotive, were not happy that the billionaire owned both the supplier of parts and competitors. Icahn has many auto-related holdings, including distributors like Auto Plus and the retail chain, Pep Boys, which also sells to collision repair shops. Having one person own so much of the entire chain had many feeling nervous. The sale is said to be welcomed by many at the retail level.
It seems the RV market continues to boom. Last year Collision Repair magazine ran a feature highlghting the heavy workload at some of Canada’s RV collision repair centres. Now that the baby boomer demographic has hit retirement age the sale of recreational vehicles has been soaring. More proof of this appeared in a recent story about the town of Elkhart, Indiana, which is the self-proclaimed “RV capital of the world.” The town is home to several RV manufacturers. Work orders are piled so high right now that it is said high-school students in the town are skipping college to go straight into RV factory jobs that offer huge pay and benefit packages. There are for-hire signs along roadsides. Dealerships are sold out of new pickups being bought up by flush young workers. Low-end employers like fast food outlets are offering $150 signing bonuses. A new McDonald’s was recently unable to open as the franchisee couldn’t find anyone willing to work for minimum wage. The boom won’t last forever, but it will likely be a few more years yet. It was only last year that the first boomers turned 65 and so there are many more to retire yet. But as the number of people in the U.S. applying for social secturity surges to 10,000 a day, Elkhart, a town with an unemployment rate of 20 percent in 2009 has seen that rate drop to 2 percent this past January. Enjoy the boomer boom while it lasts.
The CEO of massive Switzerland-based commodities trader, Glencore, warned last week China could be holding most of the world’s supply of cobalt, a key metal for electric vehicle batteries. The CEO of Glencore, Ivan Glasenberg, was quoted as saying, “If cobalt falls into the hands of the Chinese, you won’t see EVs being produced in Europe. They are waking up too late. I think it’s because the car industry has never had a supply chain problem before.” Conventional vehicles have always been heavy on steel, glass and rubber. Those commodities are widely available, but the era of sophisticated electric engines will see new demand for not just cobalt, but more exotic substances like the so-called Rare Earth Metals, including the elements dysprosium, neodymium, yttrium, dysprosium and terbium. The prices of these commodities have been rising as many assume a boom in electric vehicle production is near. Indeed, investment advisors are beginning to recommend the stocks of commodity producers again for the first time in years. In the early 2000s the price of metals boomed before crashing after the Great Recession of 2008. Now some managers are prdecting commodity prices will advance by 10 percent this year. How all of the new demand and supply will work out is anyone’s guess. In the case of the Rare Earth Metals many worry that China also has a lock on this market. In the 1950s Mao Tse Tung made the mining of the rare earths a priority. He considered the Rare Earth’s the metal of the future, and so China has ended up the world’s major producer of these metals that are used in making batteries for electric cars and windgenerators. But Japan last week announced that it has found a massive supply of Rare Earth Metals off its coast, deep under the ocean floor. If the price of the metals rises high enough deep ocean mining of the elements would become profitable. So it remains to be seen how far prices can rise in the metals sector, but it does seem there is a bit of a boom sentiment reminiscent of the early 2000s returning to a market that has been fairly quiet for a couple years now.
Poor Elon Musk. Now he’s being compared to John DeLorean, who was, of course the last guy to infamously and single-handedly start-up an auto company to build a fantastically sophsticated car, the gull-wing Delorean made famous by the Back to the Future movies. But that company flamed out after a couple years. Many are now expecting Musk’s Tesla to do the same. The company’s shares are now the single most shorted stock on the New York Stock Exchange (a bet that the stock is going to drop in price). As the company fumbles on its attempt to build a highly automated factory to build its Model 3 vehicle it’s become apparent the plans aren’t working out. This week it is being reported that a tool and die shop near the Tesla plant has stacks of Model 3 parts piled up outside of it. Apparently Tesla is having to ship parts to the shop to have them retooled to make them useable, the automated processes in the factory not being able to do the job. Shares in Tesla are dropping after hitting a peak this past summer. A full quarter of the outstanding shares in the company are held by short-sellers. That’s not a good sign. The bond rating agency Moody’s has also downgraded the stock recently, reducing the outlook on Tesla bonds from ‘stable’ to ‘negative.’