Authored by Daniel Ruiz via Blinders Off blog,
Until this point, a lot of what I've shared with you is theoretically based on my knowledge and experience of used vehicle values and how I believe they affect new vehicle sales velocity. Today, I am going to share some some hard data that I've been researching with a great deal of effort.
I genuinely believe that used vehicle values have a very significant effect on new vehicle sales velocity. I have explained it on Twitter and on a previous blog post through the concept of trade cycles. Because of this, I am certain that used vehicle values can be used as a leading indicator for inventory management at the manufacturing level, at the retail dealer level and certainly as an investment tool. However, I humbly hold that current used vehicle value indexes sources are not good enough.
There is a very specific group of vehicles that can be monitored in order to better project results. The Manheim and NADA index both have too much noise in the data. For example, the Manheim Index has no model year restrictions and includes new vehicle price inflation in the calculations. NADA goes up to 8 model years. Both average the data over multiple months and include vehicles which, in my opinion, have little to no impact on new vehicle sales velocity. Therefore, I have decided to make my own index.
For now, I'm going to use Ford as an example please ignore the red residual line until later.
I have said numerous times that passenger vehicles are at a different points in the value cycle than trucks and SUVs.
This is common knowledge at this point, and most have placed their faith on trucks and SUVs. This includes manufacturers shifting production and rental car companies changing their fleet mix to the better performing SUV and truck sector. Most analyst are looking at fuel prices to mark the top of the SUV and truck market. Here's what they've missed:
Here's WHY this matters:
Now back to residuals. What I want to drive home, in simple terms, is that assuming no change in demand, supply precedes price changes. When used vehicle values underperform residual values, the return rate of leases goes up. The opposite is also true. Less vehicles returned means less auction volume supporting higher prices. More vehicles returned means more auction volume supporting lower prices. Look at the charts again and note the acceleration of used vehicle value declines when used vehicle values fall below residual values. So where do we stand today? You tell me if this looks supportive of higher used vehicle values:
You might wonder what will stabilize used vehicle values going forward. Consider this, a used vehicle is nothing more than a new vehicle transaction that drove off the dealer's lot.
The answer, years of declining new vehicle sales and we are just getting started.
If you feel that my insight might be a useful part of your investment decisions in the automotive sector, I offer phone consultations as well as in-person presentations through GLG.