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Monday, June 30, 2008 

Vol. 4 No. 7

A Contrarian in the Market…for Cars & Trucks

Some of the best market performers are contrarians; those that don’t follow the crowd and buy value when its unpopular…could it work in the vehicle market as well?

It’s true, if you live long enough, you are around to see various market cycles and mass market psychologies repeat themselves. What really is amazing is that sometimes the same “mass hysteria” or extrapolating the line out from just a few data points sometimes happens on a regularly frequent basis, albeit, perhaps, sometimes extending out a bit more extreme than others. Did you ever notice how, despite any government regulation or legal penalties, we seem to have a crisis in business ethics every ten to fifteen years or so (before Enron and Tyco in this century, there was Drexel Burnham in the late eighties, before Drexel Burnham there was Overseas Investment Services in the early seventies, etc.). I read somewhere that this happens because it takes one business generation of executives to forget the infractions/penalties of the past, and so a new crop go through the same “excesses.”


“Never before in the history of the car business had there been such a violent change in the market as the one that occurred that spring”

Now with new truck and SUV sales falling an incredible 25% last month, and large car sales falling through the roof as well (with some car dealers not even accepting a trade in of a truck or large SUV these days), and, correspondingly, dealers out of stock on new small cars and manufacturers unable to meet demand, the phrase above sounds like it was snatched right out of today’s headline, doesn’t it?

Well, it wasn’t, it was actually written by Lee Iacocca in describing the automotive situation in the spring of 1979, in his 1984 autobiography. Then he was describing the large car/small car situation just after the Shah of Iran was deposed and the disruption of Iran’s oil industry threw the world’s oil markets into a panic. Then, as now, almost overnight large cars that had been in demand all of sudden couldn’t be given away, while small cars, which previously carried heavy rebates, and were a glut on the market, were snapped dup “by Americans desperate for fuel efficient vehicles.” Iacocca wrote that in the first five months of 1979, the small car share of the market “rose from 43 percent to nearly 58%.”

Now I wasn’t in the car business back then (believe it or not, I’m not that old), but I was old enough to remember the situation, and how, in fact, it is eerily similar to the herd mentality we are experiencing today, as evidenced by the reversal in new and used vehicle interest and buying patterns. As I recall then, as now, the price of hard commodities and precious metals also skyrocketed.


Will History Repeat Itself?

The fact is, all of the dire predictions of the price of oil only going up, and the world running out of fossil fuel immediately within the decade turned out to be very wrong. The price of oil fell like a stone in the ensuing years (I don’t remember anyone predicting that it would happen in 1979), and within a few years Americans were back to buying large vehicles, then in the mid-eighties Chrysler came out with the minivan, later that decade the SUV was born, and all of sudden the larger the people mover, the higher the demand and status (and the Ford F-150 became the highest volume vehicle for now how many years running?…except of course this year the record looks like it will be broken).

As Iacocca said, “Somebody yelled: ‘April Fool’s! Gas is cheap again, so give us big cars!”


So…

I’m not predicting fuel is going to get any cheaper anytime soon, nor am I trying to assert that the world is not ultimately running out of fossil fuels. All I’m trying to say is that this immediate “panic” on the world oil markets is a representation of a classical cyclical market run, and that, well, frankly the oil producing countries are taking full advantage of this perceived immediate shortage and world turmoil to maximize the price run up (ask yourself, why hasn’t the oil supply run up to meet the immediate demand, it isn’t because the world is now all of sudden out of oil…). This, in turn, has caused the consumer panic, which, in fact, has lead to the crash (yes, it’s literally a crash) in the value of any vehicle that gets less than about 25 miles to the gallon, and the commensurate increase in sales for almost anything small and fuel efficient.

I recently read a story in a trade paper that reported on the run in old economy cars of the early 90’s on eBay Motors and elsewhere. Old Geo Metros, Honda CRX HF and any diesel powered Volkswagens are selling for $1,000 to $4,000 above Kelley Blue Book value! – this despite having even “more than 200,000 miles on the clock and rust holes big enough to drop a wallet through.” This is hysteria folks, pure and simple.

Baring having any of these old fuel beaters in the garage ready to sell, I suggest that the real value these days is in larger more high end, late model used vehicles, the kind that have gone down with the general market but that aren’t that bad on gas.

Now I know this goes against conventional wisdom, and people are talking about $7.00 a gallon gas by next year, but that’s what contrarian trading is all about, right? In securities or cars…

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