Channel Stuffing

One of the hallmarks of the ongoing European economic depression has been the complete implosion in the continent's automotive sales (here and here) and as Reuters summarized last week, there is little hope of a rebound for a long, long time. Curiously, where Europe has seen complete devastation, the US has been surprisingly resilient, and even when factoring in for such traditional gimmicks as channel stuffing, performed most notoriously by GM, which in March had the second highest amount of cars parked on dealer lots in its post-bankruptcy history, car sales have been rather brisk which in turn has allowed the US to report manufacturing numbers which, until the recent PMI and ISM data, were better than expected. One does, wonder, however, how much of a factor for this has been the forward demand-pull impact of Hurricane Sandy in late 2012, when as a result of tens of thousands of cars being totaled in tri-state area flooding, consumers scrambled to car lots to buy new autos. Well, we may have found the reason for the recent disappointing performance in both the Chicago PMI and the Manufacturing ISM - the positive effect from Sandy is finally fading, as today's domestic car sales show, which posted a surprising decline in March, especially in non-Trucks which dipped to the lowest since October 2013, and the first miss in total light vehicle sales SAAR since October.

It was only two weeks ago that Fed governor Jerremy Stein delivered a speech titled "Overheating in Credit Markets" in which he observed the obvious and warned that a new credit bubble was forming (not to mention housing, tech, student loan, GM channel stuffing and much more). And it was only yesterday that we learned that Bernanke, after a 6 year hiatus, just had his latest "everything is contained" moment.  And just as when Maria Bartiromo asked him in July 2005 "what is the worst case scenario if prices come down substantially", so now his response, as then, is "I guess I don't buy your premise, it's a pretty unlikely possibility. We have never had a decline of house prices on nationwide basis." Of course, three years later the Fed had to do everything it legally could, and also much more, to prevent the modern financial system from terminally imploding.

So much for the latest "recovery." While everyone continued to forget that in the New Normal markets do not reflect the underlying economy in the least, and that the all time highs in the Russell 2000 should indicate that the US economy has never been better, things in reality took a deep dive for the worse, at least according to the Empire State Fed, the Philly Fed, and now the Richmond Fed, all of which missed expectations by a huge margin, and are now deep in contraction territory. Moments ago, the Richmond Fed reported that the Manufacturing Index imploded from a 9 in November, 5 in December and missed expectations of a 5 print at -12: this was the biggest miss to expectations since September 2009.

A few days after divesting its stake in the firm that started it all, AIG, and at a profit at that (ignoring that the risk has merely been onboarded by the Fed whose DV01 is now $2+ billion as a result), the US Treasury continues to divest of all its bailout stake, this time proceeding to GM, where the channel stuffing firm just announced it would buyback 200MM shares from the US government at a price of $27.50. More importantly, the "Treasury said it intends to sell its other remaining 300.1 million shares through various means in an orderly fashion within the next 12-15 months, subject to market conditions. Treasury intends to begin its disposition of those 300.1 million common shares as soon as January 2013 pursuant to a pre-arranged written trading plan. The manner, amount, and timing of the sales under the plan are dependent upon a number of factors." Assuming a price in the $27.50 range, this implies a nearly 50% loss on the government's breakeven price of $54. So much for the "profit" spin. One hopes all those Union votes were well worth the now booked $40+ billion cost to all taxpayers.

If yesterday's better than expected initial claims numbers were bad for the market (as they implied the approach of the Fed's QEnd), today's CPI should dissolve some fears of an imminent, and very unrealistic, end to easing. Because as the Fed explained, employment is only one component of the QEnd calculus, inflation is another. And with November CPI dropping 0.3% sequentially (up 1.8% Y/Y), on expectations of a -0.2% M/M, and +1.9 Y/Y, also the biggest sequential decline since 2008, there is not much to worry about on the inflation front... as long as one doesn't count other inflation "expressions" such as modern art, insurance costs, student tuition, or even the S&P and other credit funded items into account. Core CPI also missed the expected rise of 0.2%, growing at 0.1%. Biggest components of the price drop were energy prices, declining (-4.1%) from October, Apparel (-0.6%) and Used cars and trucks (-0.5%) - thank you GM channel stuffing. Alternatively, prices rose for food at home (+0.3%), Electricity (+0.7%) and food away from home (+0.3%). We may need some more QE4EVA+1^{^?} soon if this continues.

The economic data dump trifecta has been released, with updates on claims, retail sales and PPI. The end result was a nearly even beat/miss split.

Yet another story we have been following for nearly two years (and here) has finally migrated over to the Mainstream Media as attempts to hush it down before it become painfully obvious and problematic, have failed miserably. The WSJ writes that "Detroit auto makers are piling up big stocks of passenger cars at dealers despite brisk new-vehicle sales in the U.S.—a problem that executives vowed to avoid since their painful downturn three years ago."

Those who have been reading our 2+ year series tracking the ridiculous "bottom-left to top-right" trend in GM dealer inventory channel stuffing, know all there is to know about the modern day equivalent of AOL (in which the purchases of modern equivalents of "dial up connections" are funded by loans from the US government itself), in both (non government backstopped) business continuity terms as well as in channel stuffing notoriety. Which is why we will present the November update of total dealer "inventory" (which rose to a record for the fresh-start company 788,194, or a record 99K increase in two months) a without commentary, except to say: WTF!?