In The Headlines
Is the U.S. Auto Industry Headed for a Slump?
It is a good time to be a car buyer. Dealers are offering the biggest discounts since the Great Recession, and a combination of historically low gas prices and improvements in fuel efficiency mean consumers can upgrade from cars to SUVs without spending a huge chunk of their paycheck at gas stations each month. But the story is entirely different for U.S. carmakers and dealers. Although the auto industry has enjoyed record sales recently, there are early signs that the party could soon be over. And that could spell trouble for the new administration’s economic agenda. Although it has celebrated automakers General Motors, Fiat Chrysler, Ford, and Toyota for announcing new jobs at U.S. factories, these manufacturers could soon be caught in a bit of a contradiction, with weaker earnings ahead leading to furloughs or even job cuts if they are forced to cut production.
Broadly speaking, autos make up about 3% of the country’s gross domestic product (GDP), but account for a slightly larger share of inflation metrics like the Consumer Price Index and the Federal Reserve’s preferred measure of prices, known as personal consumption expenditures. This may sound small, but it is enough for a steep decline in the auto sector to shave a few tenths from both GDP and the inflation metrics, limiting the economy’s ability to achieve rapid economic growth and hampering the Federal Reserve’s target for 2% inflation.
Here is how some industry analysts say it could play out. We are at peak auto sales: The auto industry has enjoyed a boom over the last few years. Vehicle sales hit records in 2015 and 2016, as more jobs, rising wages, low interest rates and historically low gasoline prices encouraged consumers to replace older vehicles and upgrade from cars to SUVs. Meanwhile, a recovery in the housing market boosted sales of pickup trucks. But now industry experts say they have reached the peak and there is nowhere to go but down. Speaking recently at a forum ahead of the New York International Auto Show, a Toyota executive admitted as much, forecasting U.S. sales for the entire industry will decline to between 17 million and 17.2 million units in 2017, down from a record high of 17.5 million the year before. Bob Carter, president of Toyota’s U.S. sales unit, called the industry “over the top” and noted that Toyota’s discounts are “higher than we’ve ever experienced.”
Toyota certainly is not alone. Dealers are offering consumers the biggest discounts since the Great Recession to move new cars off the lots. These discounts averaged about $3,900 per vehicle in the first three months of 2017, or about 10.5% of the average manufacturer’s suggested retail price (MSRP) for a new vehicle, notes J.D. Power forecaster Thomas King. “The industry is using tactics to maintain their sales pace, which is creating challenges,” he told Fortune. “There’s a risk of a hangover to come.” There is a glut of both new and used cars. Part of the reason why dealers are offering such deep discounts is because they are producing more cars than there is demand. After record sales for two years running, there is less appetite from consumers to replace older vehicles. In addition, dealers selling new cars are facing increased competition from used vehicles. During a weak job market in the recession, drivers held on to their cars for longer than usual, meaning that there were fewer used vehicles on the market and prices climbed to record highs. But now those used vehicles are coming back on the market, driving the prices down.
Dealers selling new cars have to compete with some pretty amazing deals on gently used vehicles. “If you were shopping for a vehicle, and you happen to look at the used vehicle lot, you’re going to see a much bigger selection of nice used vehicles,” King said. What is more, this slump in used vehicle prices hurts consumers who want to trade in their older models. As used vehicles depreciate faster, car buyers will find they have less equity than they may have expected when turning in an older vehicle.
Longer loans, the Fed’s rate hikes and rising delinquencies will all squeeze automakers’ profit margins. In the first quarter, more than a third of new auto loans were dated 72 months or longer. Consumers are locking in these six-year loans to get lower monthly payments, and as a result are choosing to buy more expensive vehicles with more features. A lot can change in the economy, not to mention an individual’s personal finances over a period of six years or more, and it could be argued that many buyers are spending more than they can afford. These longer loan durations are increasing the risk of defaults, and already the Federal Reserve Bank of New York data show new delinquencies are back at their highest levels since 2008. Higher delinquencies can foreshadow losses for carmakers and financiers, who have recently made 0% financing a widespread phenomenon. Delinquencies and interest rate hikes from the Federal Reserve will further squeeze automakers’ profit margins, limiting their ability to keep offering deep discounts to customers.
Finally, automakers and dealers are left with just two choices: Either cut production or introduce even steeper discounts to keep selling record numbers of vehicles. Over the short-term, this mix of strategies could keep auto sales stable around their latest record highs, but not without posing long term consequences on the industry. “The pieces of the puzzle are coming together to point to weakness ahead for the auto sector, but there is the lingering question of how quickly the story will evolve,” Bank of America Merrill Lynch economists Michelle Meyer and Alexander Lin wrote in a recent note to clients, aptly titled: “Are we heading into a car crash?” The answer? Not yet, but stay tuned. “So far, the slowdown in the pace of auto sales is manageable for the economy,” they concluded.
Citations
1. http://for.tn/2pjgipy – Fortune
2. http://on.freep.com/2p3HZpD – Detroit Free Press
H&M Builds its Business with a Stable of Niche Brands
At the H&M store on Boulevard Haussmann in Paris, teens comb through racks packed with velour tank tops as tourists load up on cheap jeans to a soundtrack of bouncy pop music. While the bustle and bargains appeal to those buyers, people like Pierrick Beringer, a 35 year old hairstylist, says he prefers quality to quantity, are and more likely to turn the corner to a store called COS, where the pace is far calmer. “I like the shape,” he says. “And it’s less well-known, so you don’t see it everywhere.”
For H&M, that is not a problem, because both establishments are creations of Hennes & Mauritz AB. Faced with falling profit amid competition from rivals such as Zara and Primark Stores Ltd., as well as online players like Amazon.com Inc., the Swedish retailing juggernaut is beefing up its portfolio of niche brands. H&M is betting outlets such as COS can help expand its appeal beyond budget-conscious young shoppers. The plan is to add 80 stores from the company’s half-dozen smaller brands this year, vs. 350 more H&M outlets. That includes a new concept called Arket, a higher-end shop with clothing, home goods, and a cafe serving Scandinavian-inspired dishes. The first Arket store—the name means “sheet of paper” in Swedish, a reference to starting with a blank slate—is scheduled to open this fall on London’s Regent Street, followed by branches in Brussels, Copenhagen, and Munich. “This isn’t like anything else we have,” says H&M Chief Executive Officer Karl-Johan Persson. “It’s a completely different expression.”
The push beyond the flagship brand comes as H&M’s margins have been narrowing. Goods from Asian suppliers, priced in the strengthening U.S. dollar, have become more expensive, pushing net profit down to 9.5% of sales today, vs. almost 26% in 2007. And with increasing competition, H&M has had to resort to deeper discounts to clear its shelves. The company’s shares in March fell to their lowest level in four years after H&M reported inventory levels were up 30% year-on-year. “When you’ve got a very mature brand, you reach a point where it becomes challenging to keep up growth,” says Maureen Hinton, an analyst at GlobalData Plc in London. “You’ve got to find new markets and new customers.”
That has spurred the multibrand effort, which largely emulates a strategy the world’s No. 1 fashion retailer, Inditex SA, has pursued since 1991. The Spanish company owns Zara and seven other brands including the Italian-themed Massimo Dutti, teen-focused Bershka, and Oysho lingerie stores. While Zara continues to account for two-thirds of Inditex revenue, it comprises just one-third of the company’s 7,300 stores. H&M, by contrast, only started diversifying in 2007, when it created COS—or Collection of Style. It added three more youth-oriented concepts in 2008 with the purchase of a Scandinavian retail group, and then introduced the premium women’s wear line & Other Stories in 2013. Those brands today make up less than 10% of the company’s almost 4,400 stores. While H&M does not break out its revenue, Bryan, Garnier & Co. analyst Cédric Rossi says sales from the smaller brands account for about 5% of the total.
The new concepts are not a bad idea, Rossi says, but it is more important to fix the flagship brand. He says Zara is more fashion-focused, and with factories in or near Europe, Inditex can respond faster to runway trends than H&M, which ships most of its goods from Asia. “What’s absolutely necessary is to return to growth in existing locations at H&M,” Rossi says. “Without this, the business isn’t sustainable.”
H&M says it is working to reduce lead times so fresh products get to stores more quickly. And it says it is automating warehouses and improving data collection so shortages and overruns can be addressed more quickly—reducing the need for margin-busting markdowns. “We haven’t been as precise, exact, and flexible as we could have been” in logistics, says CEO Persson. “We see big improvement potential.”
Longer-term, though, it is smart to also find a broader customer base, says Anne Critchlow, an analyst at Société Générale SA in London. With COS, & Other Stories, and now Arket, the company can target different niches at the top end—where customers have more resources and prices are higher, she says. Dresses at COS start at $59, compared with $11 at H&M, while the cheapest jeans at COS are $74, vs. $22 at H&M. “Young value fashion has become extremely crowded,” Critchlow says. “Lifestyle retailers have less competition.”
Citations
1. https://bloom.bg/2nR8iv1 – Bloomberg
2. http://bit.ly/1XCXSOR – Investopedia
The Good News Is . . .
• Consumer prices fell in March by the largest amount in more than two years, pushed lower by another sharp decline in the price of gasoline and other energy products. The Labor Department reported the U.S. Consumer Price Index dropped 0.3% in March following a small 0.1% rise in February. It was the first monthly decline in 13 months and the biggest drop since prices fell 0.6% in January 2015. In addition to a big 6.2% fall in gasoline prices, the cost of cellphone plans, new and used cars and clothing were all lower last month. Core inflation, which excludes volatile food and energy, dropped 0.1% last month. Over the past 12 months, inflation is up a moderate 2.4% while core prices have risen 2%.
• Infosys Ltd., a global leader in technology services and consulting, reported earnings of $0.94 per share, an increase of 4.3% over year-earlier earnings of $0.90 per share. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $10.2 billion, an increase of 7.4%. Management attributed the results to solid growth in its cloud computing and data analytics business segments.
• Two American trucking companies, Knight Transportation and Swift Transportation Company, said on Monday that they would combine in an all-stock deal as they seek scale amid pricing pressure in the trucking sector. Knight and Swift will operate under a single holding company but they will maintain distinct brands and operations. The combined firm, to be known as Knight-Swift Transportation Holdings, would have $5 billion in annual revenue. The new company would be based in Phoenix and operate about 23,000 trucks and have 28,000 employees. Under the terms of the transaction, Swift investors would receive 0.72 shares in the combined company for each share of Swift they hold. Knight investors would receive one share in the combined company for each Knight share they own.
Citations
1. http://bit.ly/2jKLr2f – Bureau of Labor Statistics
2. http://cnb.cx/2lwnm3s – CNBC
3. http://infy.com/2ofJ9cL – Infosys Ltd.
4. http://nyti.ms/2ozoHqs – NY Times Deal
Planning Tips
Questions to Ask Before Cancelling Your Life Insurance Policy
If you are in or near retirement and all your debts are paid, you may be wondering whether you really need your life insurance policy anymore. The decision to cancel or terminate a life insurance policy once you are in or near retirement requires careful consideration. You may not need your life insurance policy anymore, but before you decide that for yourself, make sure you are asking the right questions to yourself and loved ones and have done a thorough review of your retirement and have looked at the what-if scenarios. Planning for the unexpected is the first thing you need to do when planning for retirement, and often a life insurance policy will help with those unexpected events. Once you terminate your policy, it could be too late to go back and get another policy, or a lot more expensive. Below are some questions you should ask before deciding to cancel or terminate a life insurance policy when you are near or in retirement. Be sure to consult your financial advisor to determine the best strategy for your situation.
If you pass away will your spouse be covered with enough assets and income? – When it comes to retirement, you need to understand what the income looks likes for the surviving spouse. We know that when one spouse passes away, we will automatically lose the smaller of the two Social Security checks that are coming in. Don’t forget to look at your pension or annuity income if you have it. As a Baby Boomer in retirement, you may tend to forget about how you set your pension or annuity income up. Will it pay out 0%, 50%, 75% or 100% to the surviving spouse? If you have laid out your income plan in retirement, you and your spouse will be able to determine whether or not the surviving spouse can live on the income that is left over and whatever assets that are left over as well. If the surviving spouse has enough assets as well as enough income, then there is a possibility you may not need life insurance any more.
Do you want to leave a legacy behind? – There are some Baby Boomers that want to leave as much to their children or grandchildren as possible. Some want to make sure something is left to loved ones or even charity as a possibility. If this is the case, you may want to keep your policy intact. You do have to decide for yourself whether or not the money you are using to pay for the policy is sacrificing something else for you in retirement and what that might be. Generally, if you are just barely making ends meet or are not able to have a small amount of savings each month, holding on to the life insurance policy may not be a good idea because you may end up just giving up on it in the future anyway if you have to look for cost savings in the future.
Do you have estate tax issues? – Estate taxes are different for each state, but not federally. For example, if you live in Minnesota, you can exempt up to $1.8 million for 2017 and $2 million for 2018. In the state of Florida, there are not any state estate taxes. Check your local state estate taxes to find out how you may be affected. If you are above what the state will exempt, it may be wise to hold on to the life insurance policy to help pay for taxes. Federally, you can exempt up to $5.49 million in 2018. Life insurance will go to your beneficiary’s income tax free, but keep in mind that it is not estate tax free.
Have you thought about long-term care and how to pay for it? – A lot of life insurance policies have accelerated benefits so you can use the funds if you are terminally ill or even for long-term care (LTC) uses. Look at your policy to determine what you might have available. Run through a what-if scenario if you go in to a long-term care facility and what effect that might have on your assets and income for the surviving spouse. Depending on how long you end up in a LTC facility may also require you to spend down your assets. One way to avoid losing all your assets due to spend down is to change the ownership of your policy to an irrevocable trust where the proceeds are protected. There is a look back period so make sure to meet with an estate attorney to make sure it is set up correctly.
Do you have assets left for burial expenses? – Even when you are no longer here, planning and paying for a funeral can be a burden on your loved ones. That is why it can be good to have some assets or life insurance set aside to help cover those expenses. A lot people today are paying upfront for the burial expenses and have everything already picked out. If you have enough assets or have already planned everything then you may not need the policy.
Citations
1. http://bit.ly/2pjiNbv – Zacks.com
2. http://bit.ly/2pj8eVI – Protective.com
3. http://bit.ly/2ozqkEF – Investopedia
4. http://bit.ly/2p3GfMY – Bankrate.com
5. http://usat.ly/2nNwHpl – USA Today
