It’s nerve-wracking to live in the historical moment of an epic turning point, especially when the great groaning garbage barge of late industrial civilization doesn’t turn quickly where you know it must, and you are left feeling naked and ashamed with your dark worldview, your careful preparations for a difficult future, and your scornful or tittering relatives reminding you each day what a ninny you are to worry about the tendings of events. Persevere. There are worse things in this life than not being right exactly on schedule.
Moments ago GM reported that February total sales in February dropped 1% Y/Y to 222,2014, beating expectations of a 7.7% drop (if the same beat was not matched by GM's key competitor Ford, whose February sales dropped 6.1%, below the 5.3% expected, and Volkswagen whose US sales tumbled 13.8%). The bounce was largely thanks to Buick sales which posted an 18.8% increase in February. However, the actual sales were largely irrelevant. What was notable is the following number: 805,769. This is the number of units in dealer inventory at month end. This was an increase from the 780,140 in January and is the largest ever channel stuffing print yet recorded by the post-bankruptcy GM in history.
Step aside long-time hedge fund hotel darlings Apple and AIG, and make room for...
With inventories of unsold cars at or near record highs and the Big 3 up to their old tricks of channel-stuffing (as we have vociferously exposed), it seems time has run out for the US manufacturing renaissance. The 'if we build cars, they will come and buy them' mentality has hit a literal wall as not only are dealers bloated with stock, the buyers have dried up. As the following chart shows, the average number of days it takes to sell a car in the US has surged recently after 9 months of improvement. This is the worst (slowest) pace of sales since August 2009. Not what the 'recovery' faithful wanted to hear...
While loathed to admit it, US auto makers have done it again. As we have vociferously explained month after month (and has been vocally denied until now by the car makers themselves), much of the recovery in auto sales has been a massive channel-stuffing make-work program (mal-investment once again triggered by 'false' signals created by Fed intervention). Now, as the WSJ reports, Detroit's big 3 are trying to sweeten discounts to clear a massive inventory of unsold vehicles from dealer lots (desparate not to start a profit-killing price war). "We believe we can sell our way out," said GM, but as Morgan Stanley warns, "the best of the U.S. auto replacement cycle is over." Good luck...
What better way to assure your company has an earnings bomb? Have Jim Cramer tout it before earnings of course. Sure enough from January 28: "GM sales are going to be superb", and "Europe's coming back." Fast forward to today when GM reports Q4 revenues of $40.5 billion which missed expectations of $40.9 billion, and EPS of $0.67 vs the $0.87 expected. Additionally, GM's global market share just dropped to 11.4% - matching the lowest in the past year. So much for the superb sales. As for Europe? Well, as the chart below shows, Europe just posted its weakest quarter in the past year. And don't count on much growth either: CapEx was down to $7.5 billion in 2013, from $8.1 billion in 2012, even as the company's total free cash flow declined from $4.3 billion last year to just $3.7 billion.
We touched upon the disappointing GM car sales number reported earlier, which were promptly blamed on snow in the winter in some part of the country, which supposedly also meant that California's ravenous car buyers didn't purchase vehicles due to drought or something. Either way, one thing is clear: there was a big drop in auto demand which was to be expected from an overextended consumer whose plight we have been following for years. However, where GM did surprise, is that despite its apparent realization of climatic conditions, the company decided to plough through with abnormal production levels and flooded its dealer network with inventory. So much inventory, in fact, that in January, GM's channel stuffing pipeline rose by another 42K cars (a quarter of total sales in January), increasing the stock of cars parked at dealer lots and collecting dust to 780K from 748K in December, the second highest ever!
On the surface, the January Philly Fed was a beat, printing at 9.4 on expectations of a 8.7 number and up from a downward revised 6.4. However, the internals were hardly as pretty with the most notable, New Orders, plunging from 12.9 to 5.1, the lowest print since May 2013, and also the biggest three month drop since August 2011. Additionally, while unfilled orders posted a modest increase from -6.6 to -1.0, Inventories were crushed sliding from 16.0 to -19.6, on what one can assume were wholesale liquidations, and judging by the retailers abysmal numbers, at hardly profitable levels. Furthermore, the optimism of the diffusion index respondents seems to be waning as the 6 Months forecast slide from 44.8 to 34.4 after hitting a recent near all time high of just shy of 60. Also bad news for margins, as Prices Paid increased by 2.3 points to 18.7, while Prices Received decline from 10.8 to 5.1 - a delta, in the wrong direction, of 13.6. The only good news in the report was the increase in number of employees from 4.4 to 10.0, however offset by the average employee workweek which dropped from 4.8 to -5.3. So more workers, doing less: so much for wage inflation pressures.
Moments ago, GM, now fully non-government backstopped (and perhaps because of), reported adjusted US vehicle sales of 230,157, a decline of 6.3% from the 245,733 cars delivered a year earlier, on expectations of a 1.5% increase in sales. As Kurt McNeil, VP of US sales, announced "“December started a little slow but sales were stronger later in the month, especially in the week between Christmas and New Year’s. We didn’t make any big changes to our ‘go-to-market’ strategy during the month, which is to offer competitive incentives and market aggressively, and we are carrying good momentum heading into January." GM also was quick to put blame on wintry weather in December - fear not though, they won't be the last. It was unclear just how substantial GM's incentives were in a month in which below margin inventory liquidation was the name of the game for all retailers: we expect to learn soon. But perhaps the most interest datapoint in today's release, and one which may explain why GM's sales missed, was that the car's near record channel stuffing, which as we reported last month had soared in the past three months at a record pace, and was just shy of its all time high, saw a modest decline from 780K to 748K. Still, the latter number was still the highest ever December GM dealer inventory for the month of December in the restructured company's history.
We can only imagine the upward revisions to 'current' GDP that will occur due to the largest mal-investment-driven wholesale inventory build in over 2 years. The 1.4% MoM gain is over 4x the expectation and biggest beat since Q4 2011, when - just as now - a mid-year plunge was met by a rabid over-stocking only to see the crumble back into mid 2012. As we noted previously, 56% of economic "growth" this year was inventory accumulation (cough auto channel stuffing cough) and this print merely confirms "hollow growth" continues. The problem with inventory hoarding, however, is that at some point it will have to be "unhoarded." Which is why expect many downward revisions to 'future' GDP as this inventory overhang has to be destocked.
Jobs Added By Industry: Education, Transportation And Retail Winners; Information And Finance LosersSubmitted by Tyler Durden on 12/06/2013 10:26 -0400
Curious where the November jobs gains and losses were, broken down by industry? The chart below should explain it all.
Confused why the various US manufacturing indices have been on a tear in the past few months? Perhaps the fact that GM dealer lots are so full of cars they just couldn't wait for even more deliveries has something to do with it. Which is also why in addition to reporting sales numbers for November that were largely in line with expectations, amounting to 212,060 (even if total Chevy Volts sold YTD of 20.7K were -0.6% less than in the same period in 2012), or 13.7% more than last year (estimated called for 13.% increase), of which a whopping 51,705 was in the form of "channel stuffed" units to be parked on dealer lots. In fact, as the chart below shows, in the past three months, GM channel stuffing has exploded and soared by 150K units (the most ever for a 3 month period) from 628.6K to 779.5K. This represents the second highest amount of channel stuffing and is lower only compared to the 788.2K units "stuffed" exactly one year ago.
While the abundance of commercials for cars across all media this time of year is nothing new, the manufacturers (and even more so the dealers) are likely getting more desperate. As Bloomberg reports, inventory climbed to almost 3.4 million cars and light trucks entering November - at 76 days of supply, that was the highest for the month since 2005. This should come as no surprise as we previously noted GM's post-crisis highs in channel stuffing as hope remains high that the recent slowdown in sales does not continue. The question, of course, is, "will manufacturers be responsible and curb production to keep inventory in check, or are some going to resort to old, bad habits and churn it out and then throw incentives on them." We suspect we know the margin-crushing answer.
While the Census Bureau disclosed that headline Durable Goods declined in October by 2.0% (and much more on an unadjusted basis), this was in line with expectations, and was driven by an unexpected -15.9% collapse in new aircraft orders, driven by Boeing which had a 60% drop in orders, down from 127 to only 79 for the month. However, the big surprise was in the ex-transport durable goods number, which declined by -0.1%, crushing expectations of a 0.5% increase and down from last month's revised +0.2%. In other words, the modest rebound in orders in late summer now appears to have been purely a function of channel stuffing, which now has to work its way through the system, as manufacturing with unfilled orders dropped by a whopping -3.1%.
One thing that was not mentioned in the otherwise blemish-free GM sales report, is that the biggest reason for the surge in GM "deliveries" was because the car company once again resorted to that old faithful gimmick: dealer channel stuffing. At 728K units in dealer inventory at month end, or 87 days supply, this was the highest number since March 2013, but more troublingly, the monthly rate of increase was the highest since GM's emergency as a "new" company from bankruptcy.