3 Reasons for a Used Car Shortage
Buy Ford, Short AutoZone
The last time I went to the Manheim Auto Auction was 2005.
Times were good. The Fed housing bubble created a refi ATM, which folks used to buy or lease new cars.
The original Manheim Auto Auction was founded in 1945. By 1959, it was the largest Auto Auction in the world. The company now has 130 locations around the world... but their flagship at its original location in Manheim, Pennsylvania, is still the largest.
If you like cars and know a dealer who can get in, you should go. The place is awesome. It's a giant, dirty garage in the middle of a vast parking lot.
There are 33 lanes; cars come in one side and go out the other as dealers inspect them and toss out bids.
The key is to get there early so you can inspect the cars. With the sun breaking through the pine trees, you crunch through the dirty snow and find the ones you might buy...
There are no margins on Hondas and Toyotas, so you stick to the Fords, Nissans, and BMWs.
The higher you move up in cost, the larger the percentage discounts.
Used car dealers have more margin selling $40,000 cars than they do $10,000 cars. However, they are harder to sell.
Traditionally, most used cars cost between $5,000 and $10,000 and are three to five years old.
In 2005 I bought a three-year-old optioned-out minivan for $15,000. Original sticker was $33,000. It had 27,000 miles on it — a great deal by anyone's standards.
At the time, 22 of the auction lanes were open and cars were moving through every few minutes. Except for exotics, you could buy any make and model from the previous 20 years.
When I went last week, they had four lanes open and the cars moved by slowly. The old air of propriety had been replaced by sad desperation. The old guys smoked and leaned against the yellowing walls, the young guys fiddled with their smartphones.
They were depressed.
You can't sell used cars if you can't buy them at a large discount from new ones...
It's Sandy's Fault
Three things have killed the used car market:
Cash for Clunkers took all the low-end inventory off the market.
The recession depressed the new car market for the past four years; subsequently, used cars are harder to find and more expensive.
Hurricane Sandy destroyed between 230,000 and 260,000 cars up and down the East Coast, but mostly in New York and New Jersey.
These cars have to be replaced. As you might expect, new car sales are booming.
Bloomberg reports from Long Island:
“I’ve been in business since 1964, and I’ve never had a month like this before,” said Gary Schimmerling, president of the dealership in West Babylon, New York.
He will probably sell more than 250 new vehicles this month, versus 100 in a typical November.
Replacement demand from owners of damaged vehicles and purchases deferred by the super-storm that slammed the East Coast could boost U.S. car and light-truck sales in November to the best monthly pace in more than four years, according to a Bloomberg survey of analysts.
Back on Track
In 2011, new car sales were up 10% to 12.77 million — the best year since 2007, when 16.8 million cars were sold.
This year, cars sales are starting to look even better...
Through November, sales are at an annualized rate of 15.46 million (up from a 14.87 million annualized rate in September).
Growth in car sales is due to a legitimate business-cycle/inventory-based recovery coupled with low interest rates and greater confidence by the lenders.
The average car on the road is now 11 years old — a big increase from the historical average of eight years.
At some point, buying new is cheaper than fixing old.
The biggest seller in today's market is the Ford F-Series pickup. Ford has sold 56,299 of the solid trucks — well above the Chevy Silverado and the Honda Civic (both of which have sold 30,000 units).
Ford (NYSE: F) has the second largest market share in the United States after GM, and plans to ramp up its production in the U.S. by 11%.
The stock trades with a forward P/E of 7.87 and has a dividend yield of 1.70%.
The company recently reported its 14th consecutive profitable quarter.
The upshot here is that newer cars will replace older cars. The average age of the U.S. car fleet will drop. Fuel economy will improve; gasoline consumption in the U.S. will continue to drop.
One way to play it is to short AutoZone (NYSE: AZO) (in yellow) and buy Ford (white and red):
All the best,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.