Why I’m Shorting Cash for Clunkers
Cash for clunkers, you’d think it’s the biggest thing since sliced bread, but it isn’t. In less than one whole week, Americans tired of their old beat up cars raced to dealerships, virtually erasing the $1 billion that Congress put in the “CARS” bank account. But is it really all its talked up to be? Or is there a better chance at making money SHORTING automotive stocks than there is to long them?
Removing Inventory Only
For the most part, the cash for clunkers program is doing very little to stimulate demand at factories. Instead, the program is helping to remove dealership inventory. As such we should expect that the program will do very little for the profits at automobile manufacturers and parts suppliers, this means the operating profits for most companies will get little more than a short term bump, if anything.
Tomorrow’s Demand, Today
The cash for clunkers program offers incentives of $3500 or $4500, meaning that people who are willing to utilize the program have a car with a trade-in value of less than those respective amounts. Consider this, how many cars are valued at such low levels, and what would you expect their condition to be? Terrible? Barely legal? Likely, and chances are the owner was going to have to buy a new car in the future anyway. I’d bet that most people using this program would have bought a new car within the next 12-18 months even if it never existed. So we’re bringing next year’s demand to this year, that’s going to do very, very little in the long term.
Whoopty doo, or should we say, hoopty doo?
Look, the propoganda is already brewing regarding cash for clunkers’ immediate success. In one article it was stated that cash for clunkers is responsible for a 1.6% SURGE in Ford’s car sales year over year. A 1.6% “surge” is little more than a blip on the radar, practically nothing from an investor’s point of view.
Sorry Ford
So I’m still holding onto some $2.50 calls I purchased way back for $1.35, but at their present value of $6.25 each, I’m sorry to say, I’ll be dumping every bit. The recent run in price for Ford comes solely from investors going nuts about this cash for clunkers program. Regardless of this recent goldrush, in the short term, you’re still a garbage company, and I fully expect that you’ll soon be back in the $6 range where you’ll stay for quite some time.
Autoparts makers overboard!
There is no better company to be selling short right now than those that make auto parts. As a whole, they have literally EXPLODED in value due only to a short term boom in orders. The unfortunate thing about this is that we have to look beyond the boom and be ready for the future bust. The American auto industry is up, but it’s not out of the slump just yet. The natural leverage in these companies provided a hell of a run, but if you’ve got any brains, you’re dumping these stocks like crazy!
I agree 100%. Ford is setting itself up nicely for a few good short opportunities. It might hit ten and then should fall back down to the 7-8 range.
The cash for clunkers program has been touted as a success, and it may be, but the question is “a success for whom?” If you think that the answer is the American people your are dead wrong! Oh sure politicians can authorize handing out $4500 of our money, be astonished that people want it and then declare the program a success. The rest of us can think a little clearer and come out with an answer based in reality.
Rent Control is a prime example
One such example is “rent control.” In NYC and many towns in NJ rent control is alive and well and a matter of much debate. Without getting into the details I will just give you quick sketch of the situation.
Rent controlled apartments benefit those who live in them. The tenants tend to stay in them for very extended periods and in fact their “right” to “rent control” can be inherited by the tenants children. The result is that those apartments ,two thousand, three, four whatever the number, are effectively taken of the market and no longer available to be rented. The law of supply and demand tells us that when supply is lowered but demand stays the same or goes up prices increase. NYC residents pay higher rent prices than they would in a free market because the City Government took action to benefit a certain segment of the city’s population. If you doubt that prices would decrease if rent control was abolished just check out rent prices in Boston. That city has ended the practice of rent control and rent prices have lagged behind NYC. Further, and more important, the distribution curve of available apartments is much more leveled indicating more apartments available at lower prices as opposed to NYC. The NYC graph has a spike indicating that most of the apartments are the very high end of the market. The graphs show that while rent control benefits a certain segment those that it hurts the most are those unable to pay the sky high rents on luxury apartments thus hurting precisely the economic class that it aimed to help.
Black Markets and crime As William Baumol told so many millions of us in our freshman year this kind of government action also results in black markets and the criminal element also tends to benefit. In the apartment rent control racket there is an entire black market who caters to providing such apartments to would be renters. For a price you get whatever apartment that just became available. Why would anyone believe that dismantling yards, used parts dealers and God only knows who else will find a way to benefit form the cars that are supposedly “crushed?” How much will we spend to combat that?
Same thing is happening with used cars The same scenario is now being played in the used car markets This is USA Today, quoting Kelly Blue Book analyst, Alec Gutierrez, “prices for used cars will go up as much as 10%!” No surprise there, its just the law of supply and demand coming in on the heels of the “Cash for Clunkers” program. The United States used car market generated total revenues of $173.2 billion in 2008, representing a compound annual rate of change (CARC) of -0.4% for the period spanning 2004-2008. Using these figures, the Cash for Clunkers program cost the US taxpayer $3 billion dollars in initial outlay and then an additional sum of up to $17.3 billion dollars in price increases. More to the point the price increases are most evident in the lower end of the used car market affecting same cars that those who cannot afford a newer car will purchase. Once again the poorest among us gets shafted. Isn’t that just like all the other successful government programs?