Stop Making Sense

By: Chad Hudson | Wed, Jun 4, 2003
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(UNEDITED)

May auto sales came in at an annual rate of 16.1 million units, which was a little better than expected and just a bit below the 16.4 million vehicle rate in April. The level of incentives continues to be the main focus, especially for the three domestic manufacturers. The Big Three are having to provide more incentives to consumers than the Japanese manufactures, yet each of the Japanese Big Three (Honda, Toyota, Nissan) were able to increase sales more. Below is a table listing May's year-over-year results for most of the car makers along with some comments gleaned from the company's press release.

Automaker May Sales Comments
GM +4.0% Avg. Incentive $3,919
Ford -5.8% Avg. Incentive $3,624, cutting production 15%
DaimlerChrysler -3.3% Avg. Incentive $3,522
Honda +18.0% Avg. Incentive $1,022, "best-ever May"
Acura -2.1% "all-time monthly record"
Toyota +6.1% Avg. Incentive $2,259, "best-ever sales month"
Lexus +5.3%  
Nissan +6.7% Avg. Incentive $1,509
Infiniti +6.7% "best month ever"
Mazda -11.0%  
Mitsubishi -30.8%  
Subaru -1.0%  
Isuzu -43.1%  
Suzuki -15.6%  
Volkswagen -16.2%  
Mercedes +2.1% "year-to-date record"
BMW +5.0%  
Volvo +57.5%  
Audi -1.9%  
Jaguar -14.2%  
SAAB +13.1%  
Porsche +29.2% "second best U.S. May sales results"
Land Rover +2.3%  
Hyundai +1.4%  
Kia -7.0%  
Industry Total +0.5%  

The Acura "all-time" record looks incorrect since sales decline. Most automakers reports the percent change adjusting sales for the number of selling days in a month. This year there was one more selling day in May than last year.& Acura actually sold 266 more cars this year. Chrysler - "We are in the midst of an extreme incentive war." Mercedes said, "To put this momentum in perspective, in just five months we have sold more vehicles than we did in all of 1995."

Both ISM surveys increased in May. The manufacturing index rose four points to 49.4 and the non-manufacturing index increased 3.8 points to 54.5. While the manufacturing index remained below 50, it was a point better than economists forecasted and was the first increase since the 4.7 jump in December 2002. The 6.7% increase in new orders was the highlight of the report, which was the first increase since December. It is also worth noting that no component that was very strong. Imports were the strongest component at 52.2 and employment continues to be the weakest component.

The service sector of the economy is stronger than the manufacturing side, which has generally been the case since the non-manufacturing index was created in 1997. The 3.8 point increase was the biggest one-month jump since May last year. Economists were encouraged by the drop in prices paid to below 50. This was the first time since February 2001 that prices paid actually contracted in the service sector.

In a sharp contrast to last month, announced layoffs dropped 53% from April. Sounding more upbeat than I can ever recall, John Challenger, CEO of Challenger, Gray, said, "The missing-in-action kick-start that will propel the economy out of the doldrums may be close at hand." Just last month, Challenger said, "The sharp increase in job cuts last month should server as a warning that it is premature to conclude that the quick end to the war with Iraq will bring a quick turnaround in the economy and job market…With the strength of the economy still in doubt, it is unlikely that companies will be in a hurry to undertake expansion and job creation." Even after the March report that showed layoff announcements declined 38, Challenger was muted, "Corporate America is stuck in limbo…The one thing we do not expect is significant job creation." It looks like there is a possibility that the employment report released this Friday will show that there was actually job growth in May. Of course those jobs might all be mortgage brokers.

The Mortgage Bankers Association application index launched to new highs. The purchase index jumped 16% to 460.5, eclipsing the previous record by over 10%. The refinance index soared 13%, also reaching record territory.

Similar to home sales, RV sales are doing very well. Thor Industries, the leading manufacturer of recreation vehicles, announced that its sales increased 19% for the quarter ending April 30, 2003.

During the recent housing boom, furniture sales have dramatically lagged housing sales. Tuesday, Furniture Bands, the country's largest furniture maker, hosted an analysts meeting where it lowered second quarter revenue and earnings guidance. Instead of low single digit revenue growth, the company now expects sales to dip by mid-single digits. Furniture Brands said this will causes EPS to be $0.42 to $0.45 per share, about a nickel lighter than expected in April.

Consumer activity appears quite confusing. On one-hand consumers are buying houses at a record rate, yet furniture sales are stagnant Recreation vehicle sales are soaring, yet Harley-Davidson reported a decline in US sales for the first time in almost ten years last quarter.

It is highly likely that companies have expanded into the consumer sector aggressively and now the pie is getting chopped up into smaller and smaller pieces. Retailers spent the past several years expanding aggressively. Even if personal consumption only modestly, there will be a lot of retailers that will not be able to match the performance of the past five years.

The market continues to rally and is starting to be reminiscent of the "good ol' days." After a slight pull back in the middle of May, stocks have roared higher with the Dow Jones Industrial Average closing above 9,000 for the first time since August 2002. The last time it crossed 9,000 it was just for a day. Will history repeat itself? We will find out tomorrow. Right now there is not a lot of market action that is encouraging for short sellers. Not only have heavily shorted stocks continued to outperform the rest of the market, but companies continue to be able to raise money. Last week, Ask Jeeves raised $100 million in a convertible deal. This is the same company that has had its stock price plummet from $190 to $0.75, and has since had a very impressive rebound. This year the stock has rallied over 1,000%. Additionally, companies are back on the acquisition bandwagon. PeopleSoft announced it is buying JD Edwards for $1.7 billion. And Palm is buying Handspring in a much smaller deal. I'm also hearing from a lot of trading desks that investors didn't believe in the rally when it started and are now having to jump in. Maybe that signals that the rally is almost over.

Additionally, the small cap stocks are getting bid up by traders in anticipation of the Russell 2000 reconstitution. The official announcement of which stocks will be added and removed from the index is not until June 13. Since Russell will base its decision using market capitalizations as of May 30, most Wall Street firms have already published a list of the probable companies that will be added and deleted. With any index reconstitution or rebalancing, traders buy the stocks are will be added and short the stocks being deleted. The Russell reconstitution makes it a little more difficult since the stocks being dropped are small and illiquid. In order to hedge their risk, some traders will short the Russell through derivative products and just buy a list of the companies being added. The actual change to the index will be June 30, so expect a volatile month in the small cap area. The Russell 2000 has already posted 11 consecutive up days.

May was an important month to gauge how the economy performed since it was the first month without any war influence or a lot of adverse weather. If auto sales are indicative of economic activity for the month, May could surprise a lot of economist.


 

Chad Hudson

Author: Chad Hudson

Chad Hudson
Mid-Week Analysis
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