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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (15918)	6/26/2004 11:59:39 AM
From: ild	Respond to of 110194

From Fleck's reader: A Business Car-eening Toward Trouble As readers know, I've been talking quite a lot about the lunacy in the housing market. I thought that today I might share an insight into some of the silliness taking place in the car business. This comes via an email I received the other day from a very smart Rap reader. In addition to having been a successful money manager, he was the longtime owner of an auto dealership, which he recently sold. His comments provide another data point for how folks continue to use debt to live beyond their means. He also shows how auto companies continue to borrow from future growth by resorting to ever-riskier incentives in an attempt to make their quarter -- which is an example of blowing up your business in the long run to make it work well in the short run. Anyway, here's his email: "There is a major problem building in the car business, largely ignored by those focusing on the housing and stock-market bubbles. Because the automobile business is such a large part of consumer spending, if it develops a glitch, the whole economy will take a major hit. More than 35% of new-car buyers are upside-down (owe more on their trade-in than their old car is worth). "No sweat! Eager bubble-headed lenders simply add the payoff balance to the new loan, creating an even more lopsided future upside-down condition, stretching out the payment terms even further, in order to keep the monthly payments within already-stretched credit limits. Many deals are extended leases with overstated residual values and limited mileage allowances. This trick puts the buyer even deeper in the hole. "Meanwhile, the idiots running the manufacturers keep jacking up their cash-back terms, thus driving down used-car trade-in values and off-lease residuals. Not long ago, $50 cash-back would fill the showrooms. Now, $7,000 cash-back draws a yawn. Not long ago, financing terms were considered stretched at 36 months. Now they can run 96 months without blinking an eye. "This kind of nonsense has an end game somewhere, and I don't want to be there when it suddenly hits. Someone, somewhere is going to decide to keep his car until the last payment, then sit back and enjoy an equity-based vehicle. When that happens, car sales are going into the toilet for several years, until the cycle can be reloaded with a legitimate financial basis. There seem to be some who believe the business/automobile cycle has been repealed. WRONG! Merely postponed and extended by your merry band of lunatics at the Fed."