Unexpectedly... Here is the word that you'll hear a lot in the next little (long?) while. As nowadays there are too many ticks and not enough dogs, let's have a quick look at the ‘unexpected':

Unexpectedly, Canadian job creation could find its reverse gear: According to Statcan, 139,000 full-time jobs were lost during July - while 129,700 part-time (lower-paid) positions were created. The unemployment rate rose to 8% from 7.9% in the previous month. In the U.S., non-farm payrolls fell by 131,000 in July - more than twice economists' projections. Also the U.S. Labor Department also revised its June data downward to 221,000 job losses, from the previously reported 125,000 loss. Back to Canada - and despite a gradual industry recovery, by the end of April, almost 10,000 auto jobs disappeared in the last year alone. According to CAW, 30% membership in the parts sector remains on layoff and there are no signs of recall at most operations. As the North American economies are slowing down and possibly grinding to a halt, expect the trend to continue.

Unexpectedly, Canadian borrowing slows down, considerably: As interest rates creep up (BoC has raised its rate for the second time in the past two months), the rate of increase has slowed drastically for virtually all forms of borrowing. In this context, it's important to remember that less borrowing means less consumer spending (essential to economic growth). According to TNS, the overall consumer confidence index dropped 4.5 points in July from 98.9 the previous month. The index - a measure of how consumers see the economy, declined for the fourth straight month. Also, the buy index (timing making major purchases), dropped 9.3 points to 87.7 -the lowest point since January 2009. Remember January 2009?

Unexpectedly, electricity goes up, wiping out manufacturing advantage: According to the Association of Major Power Consumers of Ontario (AMPCO), Hydro One has asked for a boost (rate increases) of 15.7% in 2011 and 9.6% in 2012 - a mind boggling 25.3% in less than two years. Why? Among other things, to earn profits for their shareholders (pension funds, mostly). It is important to remember that the Canadian manufacturing industries paid throughout the 90's about one-third less for power than U.S. The difference narrowed after 2001, and it was completely eliminated by 2005. You do the math for what's next...

Unexpectedly, Europe comes back into the news: According to a new report by Standard & Poor's, European banks have amassed 30 trillion euros in liabilities. Broken down, liabilities are 23 trillion euros for the eurozone and about 8 trillion euros for only Sweden, UK, and Denmark. About 1 trillion of debt in the Eurozone and UK will come due in less than two years, mostly within the next year. Defaults, anyone?

Unexpectedly, China may slow down: In 2009 China - the new master of the automotive universe - became the largest car market in the world. While most auto companies are busy expanding in China (especially GM - thanks to American and Canadian taxpayers), the clouds of a major slowdown are gathering. As the impact of government incentives faded (according to the China Association of Automobile Manufacturers), new car sales declined 11.9% in July (from June). Aside of a large wave of strikes in auto parts factories by workers seeking better pay - which will raise the cost for labor anywhere between 4% to 12%, watch also the rising raw material costs (which account for 50-60% of total parts cost). Additionally, watch also the broad economy as the purchasing manager index (PMI) data released by HSBC China declined to 49.4, the first time below 50 in 16 months (a figure below 50 reflects a contraction). However, the most important thing to watch is the political infighting at the highest level of leadership. Highly unusual, media reports of such infighting reflects the power struggle within the Party, just ahead of the 18th Congress of the Chinese Communist Party in 2012 - which will ‘elect' Politburo and State Council's new members. The new money elite against the ideologists - this is exactly the way that Eastern-European communist bloc collapsed. That should be interesting, to say the least...

So, how are you going to deal with the ‘unexpected'? You can act or you can react, the choice is yours. One way has results, the other consequences. For surviving strategies, please click HERE.

The biggest news for this period - the 93,200 jobs last month - should count as a huge confidence buster. The news alone - much acclaimed in the consumer media - will reinforce masses belief that the good times are back. Coupled with the current incentives war, July should be if not a banner month in term of auto sales, at least a very good one indeed.

A careful reading of data, however, suggests that the euphoria may be only temporary:

The June employment gains, were largely in the services sector and support services category (G8/G20 events) - a much more volatile sector than say, manufacturing, which actually shed 10,200 positions. The number of self-employed workers also increased, by 25,600. Debt holds the key: Almost unnoticed in the consumer media, here's a comment from Michael Gregory, an analyst at BMO Capital Markets (via MarketWatch): "The big difference, frankly, is credit creation. A lot of spending is credit based and here there's a healthy banking system and households willing and able to borrow more." It goes without saying, the next months could be a different story, so take advantage of the current headlines - while you still can.

However, things could change, rapidly: The almost-certain rising BOC interest rate could pose serious problems to the consumer. Coupled with HST in ON and BC (together, these provinces are responsible for half of Canada's economy), the rate hike and the new tax will aversely affect the public's buying power, debt load, and in some instances, credit availability. As we all know, bubbles don't last forever - especially the credit ones...

At the international level, watch GM and Japan:

First, Japan: One should be wondering whether this weekend's election - which saw the near collapse of the country's leading party - will finally trigger  Japan's debt problems to come finally to international fore. In essence, the election was a reprimand of ruling party's efforts to cut debt by raising taxes. Would this trigger an imminent Japanese debt crisis and a corresponding collapse of the yen?

GM: Finally, some very serious positive news about GM. After a thorough analysis of operations, current direction suggests that lessons were, finally, learned. GM's recent decision against creating its own finance unit or buying back its former lending arm - GMAC LLC, is a major step in the right direction. Unlike Ford - which is choosing to go on the bank route (at least in Canada), GM will let the credit and lending business be where it really belongs - to the banks. According to the latest analysts' evaluations, GM's worth may be in the $47-70B US dollars range  - a far cry from Ford's already declining stock market valuation of $36B (interest payments alone cost Ford $542 million in the first quarter). Government's debts aside, GM owes just $15.4B to its creditors and has about $30B in cash. Unlike the situation in the developed markets, GM is also in a very strong position in developing countries, which can assure a steady growth and sales perspective. While GM's European operations is still a major concern, the general direction has improved considerably since last year's bankruptcy.

 For growth strategies, and to take advantage of the Canadian deflating bubble and the newest automotive and economic international developments, please click HERE.

AUSTERITY?

"The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, assistance to foreign lands should be curtailed lest Rome become bankrupt, the mobs should be forced to work and not depend on government for subsistence". Cicero - 55 BC

Attributed to Marcus Tullius Cicero, this quote is like it was written for today's economic mayhem. Although some doubt its authenticity, one must remember that it was Cicero that introduced Romans to the Greek philosophy and way of life - so he must have known something. 2065 years later, nothing changed...

For the Canadian automotive industry all seems to progress rather well, but under the veneer of uneasy calmness, trouble is brewing. For this period, lets have a quick look at the major domestic and international developments that could affect our industry:

Domestic

 - As the Canadian economy expanded by a stronger-than-expected 6.1% in the first quarter, we should remember that growth was massively boosted by a hot housing market and unstoppable consumer spending. As the "Pay Me Later" economy keeps expanding, Canadians' personal saving rate dipped to 2.8% from 4.6% in the fourth quarter. Would there be any doubt that economic growth is coming at the expense of rising personal debt?

 - Watch carefully the very public battle brewing between auto parts giant Magna International, the Canadian Pension Plan Investment Board, the Ontario Teachers' Pension Plan and other investment firms. This is a sign of what's yet to come - pensioners' versus companies' money. Frank Stronach will probably get his $863-million (U.S.), but the lines in the sand are already drawn.

 - A quick look at May's sales results reveals that momentum is already loosing steam. Compared to the weakest May (2009) sales in several years, Canadians purchased only about 1,000 new vehicles last month, not the kind of news one expects to hear for one of the key selling months of the year.

 - According to a notice published in Canada Gazette, Ford Motor Co. plans to apply for a license to operate a bank in Canada - Ford Credit Bank, based in Oakville, ON. Ford, a BANK? Lessons not learned...

International

 - Europe is already in full austerity mode. We're not talking just PIIGS, but core Europe - France, Germany, UK. Next, involuntary austerity programs for the US and by default, for Canada - or at least some new form of fiscal restrain. Renewed stimulus? Forget it.

 - Watch the fallout from the two industries that have failed our society - the investment banking and the oil industries. As we're entering the Mark II phase of the financial crisis, act one of another oil shock could be just in the offing.  Welcome to what Michael Klare, professor at Hampshire College, calls the era of "extreme energy."

 - The current Chinese wage inflation is not affecting only Honda and Toyota's cost assumptions that drove its offshoring model, but is also affecting the massive ‘Wal-Mart' economy that N. America is so relying upon. More bad news for the Canadian consumers...

The world's economy is at a major crossroads - public (and consumer) debt has an eventual mathematical limit: insolvency. Some European countries are at the end of their fiscal ropes - and Greece is already sinking. Spain and Hungary probably will be next. Then maybe Japan. As deflationary pressures are increasing - ageing populations and decreased demand, the stage is set for a major showdown. Panic and knee-jerkism aside, this means at least stagnation for some years, but it could be much worse. To learn how to navigate your business thru the upcoming economic upheaval, please click HERE.

SO IT BEGINS...

Let's make it short: The Age of Austerity - that we've tried to avoid since October 2008 - has arrived. Just ask Europe, post-$1 trillion bailout.

As a new bête noire is emerging - sovereign defaults, monster bailout schemes are nothing but postponing the reckoning day. The next leg of The Great Correction could be coming either from China, Japan or California. It's just a matter of (short) time and another black swan event: Another flash-crash, another BP-like or Icelandic volcano disasters, or even a small rate increase? Your pick - anyway, we've reached a point at which even a relatively minor disturbance can bring everything crashing down.

Is interesting to note here that Toyota is already making exit plans out of Japan, before the yen becomes nothing more than toilet paper: In the next five years, the automaker will move 20% of its production out of Japan into the emerging markets. As the world's second largest economy is about to enter a real bond crisis, don't be surprised to see that percentage growing higher, faster.

To keep things in perspective, U.S. has its largest budget deficit in history for the month of April, $82.69B. It was supposed to be only about $30B (last April it was $20.9B). US income was down 8% y/y, while spending was up 14% y/y.  According to California's Schwarzenegger press secretary Aaron McLear, "...you can expect generally no taxes and terrible cuts, absolutely terrible cuts..." You know what's next, don't you?

The thing is that - from a macroeconomic perspective, we, collectively, have collapsed under the ingenuity of greed and all-out-of-control economics of retirement entitlements. Confusion and fear are contagious - remember that.

As for the Canadian market place, clearly, the consumers have taken over the asylum. It's now official: According to Certified General Accountants Association of Canada, Canadians have the most indebted households in ALL 20 OECD countries, in the tune of $1.41 T - about $41,740 for every man, woman or child. Take the children, the very poor, the very rich, and some older retirees out of the picture, and a new reality emerges. For the Canadian automotive market, here's some news for you, via the same source: At the end of 2009, borrowing to buy cars had reached the 75¢/$1 level - up from only 39¢ in mid-2008. If you think this is sustainable, you're in need of serious medical attention - now...

I just whish to remind you that last year we have already discussed Charles Mackay's masterpiece - Extraordinary Popular Delusions and the Madness of Crowds. First published in 1841 - it seems like it was written yesterday. As history repeats itself, watch for investors in all things automotive to crawl back to the fetal position. INVOLUNTARY demand destruction is about to begin. As they say, the squeaking wheel doesn't always get the grease.  Sometimes it gets replaced.

To get ready for the new, Canadian-style age of austerity, please click HERE.

Where The Wild Things Are

A thorough analysis of the influence of international macroeconomics on the Canadian automotive markets suggests that we may be heading for what we call a ‘summer pirouette'. Without doubt, the latest data suggests inventory restocking has begun - which, in turn, strokes a new capital expenditure cycle and, hopefully, employment and consumption. Yet, despite signs of Canadian economic inter-sectors fusion - growth in resources, manufacturing and financial sectors - we may instead experience an international-induced economic fission.

Here are only a few of the ‘wild things' to watch for:

Stock Market: With nearly 85% of the increase in corporate earnings firmly linked to the (US) financial sector, the market has clearly broken away from fundamentals. Additionally, the risk premium for default risk has considerably diminished to the pre-crisis levels. Red flags abound - Caution!

Auto Sales: The sales results have now been so thoroughly gamed (incentives) that any attempt to analyze them is useless. People love a great deal and when the same people become indifferent or ignorant about the marketplace fundamentals, there's trouble ahead. Just look at Toyota's incredible mixture of possible criminal charges (fraud?), lawsuits and rising sales. How about Hyundai? Facing a won to an 18-month high, is the company going to abandon its vaunted marketing programs? Or Ford? The news that UAW is selling all of its 362 million warrants for Ford Motor Co. stock ($1.3-billion @ $14.54) is raising a lot of red flags. Are the proverbial rats leaving the $32-billion debt-laden ship before the last voyage? As the international overcapacity pressures continue to build up, how long is the Canadian incentives war going to last? Hint: A long while...

Oil: As we're heading for the magic US$90-100 pbb, the world's US$2.5-trillion/year oil market is going, once again, to influence any plausible scenario to a sustainable recovery. Watch also diminishing refineries utilization ratios (increased profits) and rising fuel taxes (latest in UK and Quebec). Additional upward pressure may come from institutional investors who turned to the commodity as an alternative to assets and the (temporary) weak dollar.  Ah, and the predicted ‘above-average' hurricane season - starting June 1^st...

Canadian Consumer Debt: Debt is replacing income as a major driver of consumer purchases - and that's a fact. According to the latest data,Canada is virtually the only country in the world where consumers have taken on even more debt during this recession - in the tune of 7% (U.S. household debt shrank 1.7% for the same period). The debt-to-income ratio, as a result, hit a record 147% in December '09. Here's a question for you: Have we already passed the critical 150% threshold in a mass hyperbolic discounting phenomenon?

Soverign Debt: Forget Greece and even Spain. Forget the whole Club Med, too - Europe's big Bubba is UK. Poorly understood by most, UK's debt dynamics are not for the faint of heart. UK government debt will rise from the current 77% of GDP and approach 100% within a couple of years. Both Fitch and S&P have a ‘negative' outlook on Britain's economy with possible downgrade just after the May 6^th election. Aftershocks? As for the US, despite accelerated growth, the build-up in government spending and borrowing is truly of the shock-and-awe variety by now. In addition to the $787 billion economic stimulus package and the purchase of $1.7 trillion of mortgage securities, agency debt and US Treasuries, the health-care legislation costing $900 billion is worsening an already-bleak budget gone completely parabolic. As for entitlements, just look at California - US' Greece - where pension costs alone rose 2,000% from 1999 to 2009. For the period pensions liabilities alone are well above the half trillion dollars (Stanford report).

See all of the above only as a few of many signposts - and this is not yet touching the sensitive issues of trade, currencies and carry trade, subsidized consumption, subsidies, etc. So, we are heading toward a day of reckoning - an economic Stalingrad?  We doubt it, for now - but as they say, the stars are starting to align for something fairly big to happen. If so, please click HERE for more information and related strategies.

Party on! 

The major theme for this period is debt - public debt that is. It may not provoke an instant indigestion, but nevertheless, it should, because it's signaling a major change trigger in the mega trend. Before you reach for that digestive biscuit, however, rest assured that for the next month or so, things should still be under control. Then, the party could  really be over.

For starters, let's have a quick look at the latest developments, as most metrics indicate a now-generalized character of the disruption to global public finances:

In the US - still Canada's largest trading partner (73% of exports at the end of ‘09), public debt is truly out of control: They raked in almost $221-billion of debt in only a month, marking February's deficit as the largest monthly deficit in the history of US. Yet, if markets conclude that Euro Zone members are adopting stronger macroeconomic policies, expect Euro to jump, exacerbating even more US public debt issues. And that's discounting much-speculated California default surprise - it's unlikely, but definitely not impossible, as over there, the troops (unions) are leading the generals.

Out of N. America, the same story from Italy to Dubai or Vietnam - local governments are in foaming fits, swimming in red ink and asymmetric information on their deficit financing mechanisms. Meanwhile, UK is facing a very uncertain election and sovereign debt downgrade, while its Financial Services Authority is planning stricter stress tests on banks to prepare them to withstand a double-dip recession. Already.

France's pensions system reform has stalled, while it, the system, is already digesting more than 10% of the GDP.  Oh, well, says President Nicolas Sarkozy, here's another extra 800M euros in subsidized loans for farmers, bringing the total to 1.8B euros for the sector since October. France's debt is projected to jump to 83.2%of GDP (a 20% increase) in just two years. B stands for billions, you know...

Meanwhile, Greece riots over the fact that Germany refuses to pay for their fat pensions and benefits. The average pension in Greece is about 93.5% of previous income, and public employees make up more than half of the Greek workforce. Those heartless Germans...

To keep things in perspective, nearly 45% of global GDP is based in the OECD economies and, virtually all are facing massive fiscal deficits.

And how about the Canadians, eh? Well, everybody is borrowing like there is no tomorrow: We're in the middle of the largest federal investment in infrastructure in more than 60 years, making the debt at the federal level grow over the $100B mark for this and next year. Add to it another estimated (CIBC report), combined provincial deficit of $70B. However, while there may be undeniable short-term gains (Party on!), the non-corporate spending ends up creating mostly high-wage union jobs and out-of-control economics of retirement entitlements - at taxpayer's expense. Here's the best example: British Columbia plan's to borrow a record $9B, is exclusively dedicated to financing capital projects in health, energy and education.

Ditto for the Canadian cities: The City of Toronto is issuing 30-years bonds worth about $700M. That's the first time since the mid ‘80s. Montreal is also considering borrowing a half-billion dollars for its subway projects. Never mind the cities in the rest of the country.

Needless to say, the current borrowing orgy will start to hit home, soon. In fact, Quebec's sales tax will increase by 1% to 8.5% in 2011 and it may soon increase that by another 1%. That's not funny if you're a dealer...

For now, here's what you should prepare for:

Parity with US dollar: Aside global demand for Canadian commodities and increased demand for dollars to feed foreign acquisitions of Canadian companies, fears of sovereign defaults, almost certainly will drive investors into the relative Canadian stability. From this month on, get used to our loonie trading for over 98 cents US. You do remember how it felt last time when the loonie traded above parity, don't you?

Yuan's appreciation: Here's a new one: Most currency strategists agree that China may allow its yuan to appreciate. Faced with unprecedented inflation pressures (‘hot investment' money: Feb. M2 in China is growing 25.5% y/y. The US is at 2%), China's economy is caught between a rock and a hard place: Raise interest rates or allow the yuan to appreciate. For now, a hike in interest rates is out of the question as it would destabilize the still-stimulus-depending massive economy. An elevated yuan value would have an immediate deflationary effect but without curtailing critical domestic demand. Yet, for Canada's automotive sector, a stronger yuan will almost certainly cut into the already thin profitability profile of many companies. Since virtually everybody buys/sells Chinese-made components, the impact could be quite powerful.  However, for the next month or so, expect baby steps only, while the real jumps may take place sometimes after the mid-year.

But for this period, party on! As net result of this borrowing orgy, the Canadian consumer confidence is up, job perspectives are up, stock market is up again and interest rates are still down. And, most importantly, spring is at the door!!  So don't worry, for now, and keep unwrapping those governments' presents.

Yet, as we're going around in ever shrinking circles, the time for talking is done. Another major Black Swan financial event is not in the offing anymore and it could happen any time now. If interested in surviving in the after-party environment, CLIK HERE for details and related strategies. If not, keep reading these mollycoddling standard analyses from your bank.

Complexity Theory

As March approaches, we'll be watching the proverbial camel's legs begin to buckle under the weight of an ever-increasing quantity of straw - make that debt, to be more precise.

Welcome the strange world of complexity theory and the more complex world of socio-technical systems. There is an old - and unfortunately largely ignored - technical adage that says that technology always brings with it a retrograde step in corporate organizational design. Just ask Toyota about it...

Automotive complexity

For the automotive world, complexity theory represents, literally, the interaction between corporate complex infrastructures and human behaviour. For instance take Toyota's reliance on complex, JIT-driven and super-efficient supplier network: What started with strictly technical issues - sticky accelerators and floor mats, Prius' brakes and cruise controls, Corolla's electric steering, Tacoma's rusty frames and drive-shafts, etc., quickly evolved into a socio-technical system crisis.

In this context, complexity theory emphasizes the significance of corporation / supplier relationship, feedback and the degree of connectedness between all and each component as they evolve. So far, Toyota is facing 44 class-action lawsuits in the US alone. As a result, Moody's is citing these litigation risks and said that it might downgrade Toyota's credit ratings. Promptly, the company has erased $30 billion from its stock, with more to go, as the ongoing US investigation into the rollover cover-up issues is still unresolved. Accordingly, expect a drop in R&D funding, more incentives, out-of-court legal settlements, a serious drop in the resale value of Toyota automobiles and trucks - which ultimately will diminish both consumer and investor's interest in company's products. Last April we've told you to cut your automotive Japanese exposure. As 2010 progresses, you'll remember that advice.

Financial complexity

At the macro-economic level, the much talked-about Greek fiscal crisis is just a symptom of worldwide credit problems that was signaled by the emergence of complex subprime loans. Some argue that Greece is only 2.7% of European GDP. But remember, Bear Stearns held less than 2% of US banking assets, and you know what happened. Don't be fooled, Greece is to sovereign debt what subprime was to US private debt.  And now, both Dubai and UK's debt are back in the news. The inflection point for the Eurozone is April and May, as Greece must raise E30bn in debt by mid-year.  Watch this situation very, very carefully.

Canadian complexity

Assembly: Within Canadian auto manufacturing context, all eyes should be on Chrysler and Toyota. Chrysler's Great Master Puppeteer  - a.k.a. Sergio Marchionne - is definitely marching East (China and Russia - $3.3 billion JV) and South (Mexico and South America - $US 550-million) while giving us, the gullible Canadians, some vague promises about an Alfa-Romeo pipedream for Brampton. So much for our taxpayer-supported Chrysler bailout... As for Toyota, a production re-alignment is not out of the question, with possible negative repercussions for both Woodstock and Cambridge.

Financials: At an automotive North-American macro-trends level, here's another worrisome development to watch: In the US, it appears that Citigroup have begun talks with hedge funds and private equity firms on selling at least $3 billion in car loans. The bank says that it is trying to reduce its balance sheet of troubled assets.  Compounding the issue, in late January, the Business Development Bank of Canada has quietly bought about $1.3-billion in auto-loan receivables-backed notes from GMAC Canada, GM Canada's main lender. Car loans - Troubled assets?? In Canada? Does BDS knows something that you should also know??

Retail: For this period, at the retail level, expect the Toyota-led incentives war to escalate as we're entering in the crucial March - September selling period. Additionally, watch the housing mortgage developing drama (bubble?) to spillover into the Canadian automotive retail market - with all its predictable effects. Perhaps this is why Moody's warned last month that if current trends continue (expanding consumer debt levels), Canada could be in a worse position than the United States within a very short few years.

Conclusion

After the government spending orgy of 2009, we're seeing a short cyclical, inventory-driven economic recovery, but remember, in all its complexity, this decline is secular not cyclical. Unfortunately, the first easy option of a system (personal, corporate or governmental) is to try to restore its fit with the external complexity by increasing internal complexity. Needless to say, still driven by the narrow-minded 30-day sales reports, the Canadian automotive sector is the perennial prime example of this paradigm.

As a mega-trend, the result, unequivocally, is even more socialized debt - with the all-predictable consequences, or enough fiscal austerity to relieve the debt pressure, which in turn could lead to severe recession. The history is repeating itself all over again, and either way now may be the time to dust off those old Das Kapital manuscripts of Marx. Just in case...

The not-so-distant future belongs to a much, much simpler, more elastic automotive socio-technical systems. To find out how to get there, please click HERE.

SPIN!!

There is a really great French expression "tout s'arrange, mais mal" – which it means, "everything will work out, but badly."
So, everything will work out, right? As the crisis enters a new phase, this period and perhaps until the end of August, will be the time when SPIN will dominate the headlines - in its full splendor.

As we said last month, after a silly December, in January, the feathers are already really flying so let’s see what’s going on:

On the macro-economics front, here is a ‘surprise’ December loss of jobs, for the US, Eurozone, and of course, Canada. Surprise? Really?
In the US the real underemployment rate is now close to 25% (no honey, it’s not 10%), similar numbers for Europe, while for Canada only God – and Mark Carney - knows the truth…

As the Eurozone keeps struggling with rising unemployment, Greece debt problems are getting out of control, South of Italy riots, Spain is nearing financial insolvency, while UK – Europe’s former financial stalwart, is now facing, seriously, a sovereign debt downgrade. Island? – Forget it (repaying its debts, that is).

In the Americas, to US’ well-known problems we’re now also adding shocking rumors of a potential government stock market manipulation in the tune of $580 billion, a new bond debacle in Argentina – only eight years from its massive default - and Venezuela’s devaluation of the bolivar. At home, Canadians are facing another prorogued parliament until March (smart Mr. Harper, eh?) guess for what: To consult with Canadians, and businesses as it moves into the "next phase" of its economic action plan. Consult??

And for Asia, watch Naoto Kan – Japan’s brand-spanking new finance minister. Despite later retractions, he quickly earned the nickname of ‘Kamikaze’ Kan as he urged a weak yen – currency devaluation?? Also, China hikes its interest (albeit symbolically) rate to cool-off its twice already stimulated economy.

And we’re not even in the middle of January yet…

Close to home on the Canadian automotive front, the dealers’ feathers are really flying, particularly for the 860 new car dealers in Quebec, where the new Quebec Environmental Quality Act is about to be implemented mid-January. Also, watch the action in Oshawa where GM is steadfast denying Steve Rodgers' (APMA’s new president) report that it plans to cut production to below 400,000 units – down from earlier projections of 500,000.

Which bring us to the theme du-jour – SPIN.

For an industry well known for its inability to recognize cyclical turning points in the context of secular ones, Detroit Auto Show and later in February the Canadian Auto Show will showcase once more an industry incapable of halting a past that has already begun.

As corporate and macro-economic politics are increasingly clashing with consumers’ real fiscal position, watch for an unbelievable barrage of spin from these shows to flood our industry: PR exhibitionists, data manipulation, environmental exaggerations and greenwashing, futile technologies, and of course – a whole array of experts’ analyses and reports, all cleverly designed to get consumers’ confidence up again.

However, at some point this year the market will correct: increased urbanization and total cost of ownership, youth switching from cars to social media, fuel prices, crushing debt loads – just to name a few. But don't worry - for the next couple of months, we’ll still be just kicking the can down the road.

Speaking of the all-important consumer confidence, by March be ready for a very unpleasant experience, because the post-2009 consumer has very little patience, a loooot of debt and a very, very big imagination.

Don’t succumb to spin and smiling sloganeers, and, bear in mind that life is short, opportunity really scarce, so don’t waste time fighting battles already lost. The wise people move on.

For supporting data, strategic directions and a no-nonsense analysis of the Canadian automotive industry, please click HERE.

 

December, as we all already know, is a really silly season, but watch the feathers really start flying from January onwards. After a spectacular year and one of the greatest rallies in the history of the equity markets, 2010 is the year when stimulus and its corresponding asset bubbles are coming to an end. As the new-year draws closer, we, collectively, move into the phase that is suggestive of a change in the mega trends.

From an economic and automotive standpoint, here are some of the major change triggers for the upcoming year.

ECONOMIC FUNDAMENTALS

Until the end of Q2 2010 we’ll still see a semi-robust economic growth, accommodative stimulus policy, banks funding government deficits, low inflation and a still-climbing stock market. However, most institutional investors already have their finger on the trigger.

End of year: In the US, the Fed may have to catch its lenders by surprise, thus we could see a shock devaluation as our neighbor will try to inflate its way out of debt. There are growing signs of reluctance on the part of foreign banks to buy American debt, and watch Japan – as it may be forced to sell treasuries in order to meet their own exploding budget needs. If so, expect a snowball effect of incalculable consequences.

Debt dynamics:  Governments (bond) funding crisis - a very real possibility in the Eurozone in particular - metastases the financial system once more, most likely in H2 of 2010. Stock markets could be reeling again. A potential double-dip trigger.

Dollar carry-trade: Despite a brief passing of the crown to a deflationist Japan, the US economic fundamentals are a veritable magnet for institutional speculators. The possibility of a 2010 US dollar collapse in a disorderly fashion is remote, but not impossible.

Interest Rates: US - sometime in late 2010 or early/mid 2011. Canada – H2, but possibly earlier in Q1, as BOC may have no choice but to pop the explosive housing bubble, setting the stage for deflation – low to negative growth with, for a reasonable period, both falling consumer and asset prices.

Unemployment: For the developed world, as the inventory rebuild is yet to occur, the real sustainable industries - manufacturing, trades, transportation and construction are still hemorrhaging jobs, and will still do so for the foreseeable future, albeit at much lower rates. H1 will be crucial – at least for North America.

AUTOMOTIVE – INTERNATIONAL TRENDS

Consolidation: For starters, the automotive community is starting to agree that this ‘recovery’ is not built on a solid foundation but, nevertheless, is showing signs of elevated tactical flexibility to make it work. Hence, the remaining players now have a bigger oligopoly than before. Winners: VW and Fiat Groups, India’s Tata Motors and the Chinese (state) manufacturers.

Oil goes down (until H2): International Energy Agency (IEA) said in its last monthly report that crude demand will reach 86.3 million barrels a day in 2010, up 1.7 per cent from 2009. The markets disagree – and as is starting to trade on fundamentals, oil could be below $60 by the middle of the year. That’s bad news for hybrids and small cars, but great for the ‘classic’ business model. Enjoy while it lasts.

Product: Affordability is the key to people’s wallets. Gasoline engines will still dominate the Earth until the recharge-related issues will clear for the new crop of EVs. It will be ‘mission impossible’ as private equity and voracious pension funds are salivating over this utility perspective. Forget (near-bankrupt) governments.

China: Watch the sales growth to slow down after the imposition of sales tax on cars with engines of 1.6 liters or smaller to 7.5% (currently at 5%). More to come - after the second quarter. Watch carefully the related international implications.

Japan: Not exactly an implosion in 2010, but clearly their heydays are behind us: Mitsubishi is pinning its hopes on (debt-laden) PSA Peugeot Citroen, Suzuki switches sides and gets tied-up to VW, Toyota is struggling to maintain its reputation, Honda is surviving (still relatively well) on their non-automotive branches and the developing markets, Nissan is OK-ish for now (thanks to Renault’s subsidies), Mazda gets slowly dumped by Ford (only 11% equity left), and so it goes. The only ongoing success story: Subaru. Small is beautiful.

Germany: ‘Objects in the mirror are closer than they actually appear’: See Eurozone’s socio-economic problems and one quickly realizes that the auto manufacturing exodus from Germany has only begun – BMW’s X3 sport utility vehicle and Daimler’s C-Class are representative of forex dilemmas of 2010: US dollar exchange rate of $1.70 to the euro is quite realistic – and it speaks volumes. Next stop – China, India and South America. Forget Russia – for now.

US: Obituaries for Chrysler are definitely premature, but GM’s – despite better product – are not: Despite consumer media’s loud trumpets and asymmetric ‘information’, the massive corporate ‘cultural’ change is definitely a monumental challenge for company’s lifers and time is running short indeed. Additionally, Opel/Saab/Saturn/Hummer dramas are still to be played out yet. As for Ford, it will issue up to $1 billion in new stock – just in time for the partial re-run of the financial crisis in the H2. Later, at the end of 2010, the stage is set for the new General Ford Motors - circa 2011-2012.

AUTOMOTIVE - CANADA

As the Canadian consumer/taxpayer keeps willingly ignoring the now deeply embedded macroeconomic shifts, the two major headwinds for our industry – bar a major Black Swan event - are strictly people-related:

Labour: After more than a decade of separation, the Canadian Auto Workers says it will re-affiliate with the Ontario Federation of Labour, setting the stage for a frightening scenario – huge unions with huge voting power against private business (and taxpayers) in Canada’s automotive hotbed. Deadline: The first quarter of next year.

Consumer: The second one is an equally frightening scenario: The now legendary irresponsibility of the Canadian consumer is sending real chilling frissons to the financial industry’s spine and this time is deadly serious: According to BOC, household debt has become the single biggest risk to the stability of Canada’s much lauded financial system. Culprits: After mortgages, auto purchases were amongst the leading causes to the rise of debt-to-income ratio to a historic high of 145% (for every $100 of disposable income, Canadians owe now a staggering $145 in debt – and that’s the average!). So be warned…

CONCLUSION
 
As we look ahead, all you see is too much consumption and too little investment, too many imports, too few exports, too many entitlements and too much capital market speculation.

Don’t be fooled - beyond the stimulus money – with few exceptions – the global economy is in fact still shrinking.
It's not consistency that counts now – but strategic elasticity.

For your complete TJAA MERCURY 2010 Automotive Special Report, please click HERE.
 

For the next period is all about the economics of debt.

As we’re entering this era of deeply embedded macroeconomic shifts, the economic decision-making is quickly shifting to basic binary - yes/no:
Is Toyota the world’s largest auto manufacturer? No.
Is VW-Porsche taking the top spot? Yes. (VW???)
Penske – Saturn?  No.
GM decision to keep Opel ? Yes.
Canada produces more cars than it sells here? No.
The common characteristic to these seismic automotive events (just the tip of the iceberg) is the speed of transformation: Previously, GM held the crown for 80 years. Toyota just one year – but it may take it back, eventually. Both Penske/Saturn and GM/Magna deals looked like sure done deals until the unexpected no decisions. As for the Canadian auto production/sales ratio, for the first time since the early ’60’s, we’re solidly on track to blow it: 179 % in the ’90’s, 151% since 2000, 127% last year, and this year (to September) 1.013 million vehicles were made in Canada while we sold 1.125 million.
Considering October’s auto sales last month, there are no signs of stopping the train. Or maybe there is, and here’s what to watch for this next period until the end of the year:

Economic ‘Re-coupling’
At a macroeconomic level, the economic ‘indicators’ seems to be violently decoupling from the real economy: stock markets are booming everywhere, corporate earnings are apparently rising, despite fiat money inflation is nowhere in sight, credit is back (sort of), and some countries’ GDP is bouncing back into black.
On the other hand, watch for the ‘bathtub recovery’ - a long flat bottom with lots of consumers permanently under water - for the real economy. Mass ‘re-coupling’ has become inevitable, despite promises of more stimulus and maintenance of low interest rates. Change triggers / Black Swans: Japan’s credit downgrading, US dollar, disclosure of data related to real oil reserves – and a consequential price spike.

Canada’s Fool Paradise
Canada’s economy is in a particularly tough situation: Despite appearances, the US economy is still sinking - the unemployment rate soared to a 26-year high of 10.2%, while – keeping with our auto theme - nearly half of the much-publicized GDP growth (3.5%) came from the ‘cash-for-clunkers’ scheme. According to the Bureau of Economic Analysis (BEA), motor vehicle output spiked a seasonally-adjusted 157.6% quarter on quarter. This item alone added 1.66% to the US GDP!! You know the rest – out-of-control debt, rampant market speculation and the housing foreclosures time-bomb.

But the real enemy of the Canadian economic recovery is our own Canadian consumer.

Canadians’ irresponsibility towards debt – both at personal and government levels, is truly breathtaking. In Ontario alone – which is facing a deficit projection of a whopping $25-billion - the officials are now so worried that starting in September 2011, students in Grades 4 to 12 will have to learn financial management skills, something that their parents are sorely missing. At the national level, household credit as a share of GDP - currently at 90% - and the household debt-to-GDP ratio - at a another whopping 140%, are still going up even despite the recession. So far, the total household debt rose by another $44-billion during the first six months of this year.
The problem is so acute, that the Bank of Canada will be paying special attention to household debt, as it will include a special analysis of it when it releases its biannual review of the financial system in December. We’ll keep you posted.

Considering these circumstances, the incredible speed of change and the new binary yes/no business paradigm, the burning question is if the autos buying binge will continue.

Willingly or not, as the government-nanny system is grinding to a screeching halt, what the ‘re-coupling’ - coming in the next few months - will mean for your Canadian automotive business?

To find out, click HERE.

For the next several months is all about the US dollar and deflation high-wire artistry.
Period.
Meanwhile, the Canadian consumer thinks that if he can just keep his eyes closed he will get to the other side. Yet, underneath him or her is this vast debt abyss that is actually growing bigger: According to StatsCan, household debt is now 140 % of income, up from 131 % in 2008 - the opposite credit direction than in the United States, where the ratio has fallen for the last two quarters.
Granted, this is aggregate debt, but still, overall household debt increased by 3.4 % while headline personal disposable income declined by 0.2 %. You do the math…
Canadian recovery?? If you talk jobs, remember that the September’s ‘good news story’ was centered on the 36,000 positions added by the public sector, while – much less publicized in the consumer media - the private sector actually shed 17,100 jobs. Your dollars at work, or so it seems.

Globally, as we’re heading into the traditionally slower winter season, pay attention (discussed here since May) to the current US dollar devaluation further fueled by the soon-to-be-approved second US stimulus, and conversely, the strengthening of the Canadian dollar, Japanese yen and South-Korean won. Expect that the Asian automobile companies would be the likely candidates for the first phase of this second leg of the correction.
Canadian automotive businesses should also be wary of another (longer term) US-Canadian dollar parity – expected within the next several months.

However, as we’re going forward, the main danger for the incipient, tax-payer-supported recovery is deflation. Japan and Eurozone aside, so far, the Canadian deflation is heavily concentrated around the steep drop in energy prices. Yet, this trend could jump very soon into asset mainstream, especially as workers’ real income declines. In most of the G7 countries, the underlying growth rate of productivity is about 2%. Yet, if the average rate of pay increase falls below the 2% threshold - downward pressure on real pay - the conditions will be in place for sustained Japanese-style deflation. So far Canada has experienced its straight third month of ‘negative inflation’ (a made-in-Canada consumer-soothing linguistic aberration). September is expected to be the fourth month, and it might be well after 2011 before core inflation returns to the 2% level preferred by the Bank of Canada.

As a sideshows watch Magna’s Opel dream facing a rude awakening in Europe, the end of Chrysler’s Roman holidays (due early November), and of course, the Ford Canada - CAW ongoing wrestling match, back in the ring on Oct. 26. Positives: To the consumers’ benefit, until the end of the year, watch the Germans eating Japanese’s lunch – big time.
Bonus: Could we see Magna splitting into two entirely separate entities?
For more details, please click HERE.

September Vaudeville

Here we go, again…
Welcome to the Great Correction –Part II and its opening act, The September Vaudeville. Widely popular in Canada and US in the very early part of the 20th century, the vaudevilles were a sort of variety entertainment made up of unique, but unrelated theatrical acts, all stitched together on a common bill.  Just like today’s automotive world, sans the humor.

If anything, the September Automotive Vaudeville is ushering in a new era of unprecedented economic ‘decupling’ – supply from demand, perceived from intrinsic value, and most importantly, consumption fundamentals from induced (stimulated) consumption. Globally, the main headline acts are:
More taxpayer-supported stimulus schemes, the head-scratching support of too-big-to-fail failed companies, unions vote-buying political shenanigans, the return of ‘casino capitalism’, and the most dangerous of all - product and social engineering gone amok via the green/environment/fuel efficiency high-wire artistry.
The seeds of the future automotive mayhems are being sown right now.

However, it should not come as a surprise that the seeds of the second leg of the Great Correction - unlike the first one that started so violently exactly one year ago - will take some time to germinate. But don’t expect the fabled green shoots this time around.
So, what should you be looking for this month?  Here are the three global flashing points of some importance to Canadians:

Currencies: For starters, please note that the US dollar’s perceived decay is directly related to the current deflationary pressures. This could have serious negative implications for the Japanese and Europe’s automakers selling in North America, as well as for the Canadian assembly lines. But it will bode very well for GM, Ford and ‘Frysler’ alliance.

Production: On the positive side, globally, the remaining auto parts suppliers should breathe a bit easier, helped by improved pricing (thinner competition - about 43 parts makers bit the dust already), various stimulus programs and production rebound for the replacement of the depleted inventories. Still with the production, the much talked about China Syndrome – China gobbling up western car companies may prove just hype, but massive resources hoarding and technology (and engineering brain-power) acquisitions is definitely not.

M&A: As Magna/Opel difficult saga showed us, the headline M&A activity will be over until mid 2010. However, expect a significant increase in global cooperation – inter-brand shared platforms and power-trains in particular. On the labour front, if history and behaviour economics are to be taken seriously, the fight over Opel will be nothing but the beginning of more labour turbulence – especially for exceptionally volatile Germany.

As for Canadian automotive business, the September Vaudeville will feature the following acts:

The Time Machine – Pull Forward Sales: With the government firmly out of the picture, the corporate version of cash-for-clunkers will turn the screw on the consumer again – and expect most players to have some sort of similar program in place by the end of the month. The seriousness of this new salvo of the current price war will become more evident for the next couple of months (usually Canadian peak car buying season).

‘Frysler’– The Resurrection: The best thing that happened to Chrysler is that Fiat missed on Opel. Watch this unlikely alliance to take off, surprising many. The only obstacle: A stratospheric loonie.

The Disappearing Dealership: 46 Saturn and Saab dealerships will close by the end of the year. Guess who’s next?

The Amazing Shrinking Profits: Just ask Honda (down 21.8% in August) and Toyota (down 24.2 %). Several months ago we told you to cut your Japanese exposure. Expect the fall to continue even though the luxury segment (a true Canadian anomaly) may ease the pain a bit. Culprits: Pricey brand inertia, currency speculation, stronger competition and lower gas prices. What’s gonna give?

The Amazing Shrinking Profits – Second Act: Ford versus CAW. Who’s gonna give in?

The Incredible Elastic Money: Finally, the smaller Canadian parts manufacturers got their up-to-$5M bridge loans from the BDC. Watch for the terms and conditions of these loans, as the program will evolve during its one-year life.

As a time line, watch carefully the latter part of the month, as well-established business structures will get the first taste of what October and November are going to be like: Do not underestimate Canadian consumer’s heard mentality, understand what’s behind the narrow-minded 30-day sales reports, and avoid ignorant people when in large groups.
Bottom line for September and beginning of October: Be elastic, entertain all alternatives and avoid buying debt. Any debt.

For the realists and the ones with lower blood pressure, the COMPLETE SEPTEMBER ANALYSIS, is available HERE.
 

With all the talk of a 'Cash for Clunkers' program coming (hopefully) to Canada silently taking up all the oxygen, the August and September period is shaping up to be a quite memorable period for the Canadian automotive marketplace.
Additionally, as we discussed in July, at macro levels market’s fundamentals are changing rapidly, especially for the auto titans of Japan and Germany: VW and Daimler downgraded, Opel is (still) in limbo, while Porsche finally surrenders to crushing debt. The Japanese: Toyota is seriously fretting about Hyundai while is acknowledging that N. America is no longer its top priority. Honda’s bright hope - Insight hybrid fails to ignite sales, Mitsubishi is contemplating an ‘exit strategy’ from the US, while Subaru keeps ‘realigning’ prices… As for the former US Big Three, we all know the story by now.

Yet, according to the hype and spin, the industry is poised again for growth. In some respects, globally, this is true, and N. American inventories are also quite depleted – especially for GM and Chrysler. And south of the border, the success of the now famous Cash for Clunkers program is leaving auto executives salivating – big time.
However, as the Chicago school of behavioral economics will tell you, this period is nothing but the eye of the hurricane. Already we’re hearing talk of a 'bathtub' recovery - a long flat bottom with lots of consumers permanently under water. If the Canadian July’s job numbers are any indication, we’re in for a very bumpy ride in H2.  And, despite the recent ‘asymmetric’ employment information, expect the same for the US.

For the current episode, at macro level, stay tuned to the following developments:

 - To dealers’ delight, there is a good chance that a watered-down (less money) Canadian version of ‘Cash for Clunkers’ program/legislation could pass thru soon - arguably, the Greater Fool theory at its best. If so, the pull-forward sales will easily transform into a consumer stampede – see what’s happening in the US: Desperation + Greed + Your-tax-money = Unreal Auto Sales (a.k.a. ‘recovery’).

  - Expect Magna’s Opel adventure to get pushed well into September. Related to this development, watch carefully German politics, looser money markets, Russian financial roulette and the consolidation of the auto parts sector. Add to this a new executive board at GM and increasingly militant German unions and we’ll have quite a story unfolding. Did anyone say RHJ International?

  - Looking to make some good money in the auto sector? Despite ‘recovery’, forget oil (for now) and follow the scent of cellulosic ethanol and lithium’s trail after Bolivia’s salty flats.

As we predicted last October, the global financial correction is about to enter in its final phase, as a lot of financial ‘toxicity’ has been already replaced by real money. Yours.
As for the automotive world, this is it, the eerie calm and the uneasy sunshine of the eye of the hurricane.
Getting ready for the next chapter?  Please click HERE for more details.
 

If anything, July 2009 will be remembered as one of the very last months when we’ll enjoy some relative calm in the Canadian automotive marketplace. As soon as August comes around, the what-would-have-been-a-normal summer lull will give space to unusual developments – watch the automotive markets and players in Germany and particularly from Japan for clues.

As discussed last month, at macro level, the financial tectonic plates are once again on a collision course, and as such, the corporate and consumer debt story is going to replace the overdone ‘green shots’ narrative.

Within Canada, in July, all eyes will be on consumer credit, Magna’s Opel adventure and the developing story around GM’s bankruptcy. However, Canadian consumer’s debt troubling (and fast-developing) dynamics will be the most influential ‘don’t-talk-about-it-in public’ socio-economic item.

Without doubt, June’s Canadian sales numbers continued to show us that financing issues (particularly availability of credit - especially in the critical luxury lease segment) are quickly replacing the traditional ‘product-is-king’ blueprint.
If anything, the process will pick up even more speed in July and August, to become an entirely ‘affordability’ issue by September. A W recession for 2010?

Here are this month’s pointers:

 - Despite the approval of GM’s speedy bankruptcy process, expect creditor and credit related issues to stall progress for the 'New GM', as memory of its staggering $172.81 billion of debt cannot be easily swept under the carpet. Social engineering will continue, on both sides of the US – Canada border.

 - Pay special attention to the stock and government bond markets macro developments and their subsequent influences over the credit market, particularly in the short-term loan segment. Deflationary/stagflation pressures will continue in lockstep with grossly inflated money supply. (Globally, it has doubled over the past year). Consequently, if last month’s US unemployment numbers (- 467,000) are an indication, there’s major trouble ahead. Watch Canadian unemployment numbers and long-term bond rates creeping up – a sure sign for an economic train wreck.

- The  ‘normalization’ of the N. American new car sales segment will be short-lived, as is fueled by a combination of irrational incentives, re-appearance of (government’s) ‘cheap money’ in the credit market, and a false consumer confidence based on incessant ‘green shots’ media coverage. Like in Europe, the ‘cash-for-clunkers’ scheme in the US may push July’s tally even higher than June’s but don’t count on it too much (it kicks in at the end of the month) – thrift is here to stay.

And lastly, the auto parts sector is continuing its freefall – and from August on it will only accelerate. As US nixed an $8-billion federal loan guarantee for the sector (Ottawa in tow), by the end of 2009, only half of the current will survive in North America. There’s no coming back from this major consolidation process.

Once again, enjoy July – it’s not going to last. August’s developments will set the tone for a very complicated autumn of 2009.

Remember that…

For details and subscription please click HERE.
 

June/July: It should be all about subtle business undercurrents this period, until the end of it. But it’s not.
June may still end as it has started, with another automotive bang. Chrysler? GM? Magna?

As the global financial tectonic plates are still on a collision course, the long-term outlook for the entire industry remains grim. To paraphrase an overused term, there is little question that 2008 will be remembered – for a long time – as the year of ‘peak car’. What’s next is already happening under your eyes – providing you may want to open them.

As we discussed last month – in TJAA Mercury’s NO RULES, the ground is now shifting, dangerously. So welcome to the next phase of this incredible Russian Roulette game of socializing corporate debt – the SILENCE PERIOD.

What’s really important now, for all of us, it’s not what is said. But what is not. And most importantly, perhaps, why.

As GM and Chrysler’s fate showed us, the historic and unparalleled corporate and personal debt socializing movement, politically, has reached the point of no return - and the month of June will mark, neatly, the exact half way between the End of the Correction – Phase I and the Beginning of the Rest of the Correction – Phase II. The difference is that in September-October, we’ll be already on the edge of a pretty big hole.

From a Canadian, and broadly from a North American automotive perspective, we’re also entering a new phase – focused much more on Social Engineering rather than (Real) Product Development. Protecting long-term automotive elite’s entitlements and short-term political interests will trump finding real solutions to the crisis, as our automotive pains will start metastasizing the society at large.

Protecting these interests requires silence and silencing - so steel yourself.

Hence, from now onward, it is IMPERATIVE for every Canadian automotive business that it should create its own version of the Chief Risk Officer position.
 
As we’re looking for answers in June and July, here are the questions that might be lying in wait:

  - As the Japanese manufacturers continue to slide, the question has become “globally, have we reached the ‘peak car’ plateau last year?” If so, what’s next for Canada?

  - It is becoming painfully apparent that the Chrysler/Opel/Fiat/Magna question is evolving: Does Fiat have ANY money at all – and what it may mean for Chrysler Canada? Or Magna?

  - Saturn: A quiet chuckle of schadenfreude for GM? Or an immense opportunity?

  - Shock and Awe: As the various Governments’ automotive dominoes in our interconnected US-Canada chain begin to fail, are they serving as vectors for the deeper failure in the North American auto metamarket?

There is little doubt that our industry is now preparing to go from the sublime to the ridiculous, so it is vital to entertain all alternatives: Learn to read between the lines, interpret dissonant notes, put your ear to the ground and listen carefully - so you can protect your business and yourself.

You can start right now, HERE. Otherwise, you may be silenced.

 

Special Report

As we discussed last month, the ‘intermezzo’ period continues and we may actually see some of the now famous ‘green shoots’ surviving even thru the summer.
The return of the Chia Pet?
However, for several months we’re warning you about the precipitous decay of the Anglo-Saxon capitalistic business model. As the automotive business – Canada's included - is turning the page on the free markets model and socializing corporate and consumer’s private debt becomes rampant and out of control, the question now is, what’s next?

That’s really very difficult to predict as most businesses in this industry are still vastly reactive, rather than proactive – something that Canadians are most famous for. But, beyond our usual 30-day attention span, we still can observe the trends, draw the necessary conclusions and protect our investments - and ourselves.

As the decay accelerates – see its latest celebrity victim, Chrysler - here are the three most significant pointers to watch during this feverish May-June period:

 - ‘Sales-inducing Cultural Revolution’ - Governments' not-so-invisible hand is jawboning the business in ways that even the Soviets would not have believed it. Some will lose, and some will win – for now anyway. Corporate propaganda, politicized ‘information’, marketplace manipulation and financial sugar highs are replacing the fundamentals of capitalistic Darwinism - and real progress. Expect the unexpected from your Government's new and improved politburo. CYA principle rules the day. As they say, be (very) aware of stupid people when in large groups.

 - Asian Grand Reversal – As the Japanese are slowly but surely turning on the oxygen tanks for mere survival, the Chinese are staking the (immediate?) future of the business. Globally. Seriously. They have to…

- The American Automotive Vivisection (Chrysler, GM and by the beginning of 2010, Ford) will continue: As incredible as it may sound right now, the current ‘international’ realignment of the N. American automotive industrial complex, is actually paving the way for the emerging of One General Ford Motors (or whatever) by the end 2010. Incredible? Until recently, so it was GM contemplating bankruptcy, the first American black president, Marchionne’s new Roman (automotive) Empire or the disintegration of the pension system. Just wait for 2010…

HERE is our May-June Special Issue of TJAA Mercury  - NO MORE RULES.
Are you ready?
 

Beyond the hype and spin of everything that can be exaggerated, April and the beginning of May could be easily characterized as a period of relative calm before the tumult that will mark the later part of this year.

During this period there are three significant pointers to watch:

At local (Canadian) level, the ‘pull forward’ sales momentum will only increase – the seed of devastating consequences for the later part of the year.

At a metamarket level, as Detroit’s vivisection/psychosomatic experiment continues to pull all industry’s, public's, and politicians’ attention, a far more potent turbulence point is quietly developing – see the first rigor mortis signs for the Japanese former untouchables.

And finally - according to G-20’s undercurrents - a gradual but irreversible shift from the Anglo-Saxon capital management system has clearly begun, bringing forward untold opportunities – or disappointments - for the Canadian automotive establishment(s).

As such, our developing opinion is that the current optimism is, to some degree, designed for public consumption only. Canadian automotive businesses should use this short ‘intermezzo’ period for redesigning and redeveloping all vital strategies and business alternatives, and most importantly - learn to say no to all that defies clarity in their business plans.

The ability to shift in unison with rapid macro-economic developments will be the key of surviving the now-approaching ‘when-you-got-a-hammer-all-looks-like-a-nail’ era.

For details, click HERE.
 

Ides of March – End of Correction (Phase I) and the Art of Price War

Here are two major developments to watch for during the March/April 2009 period:

Way back during the glorious days of the Roman Empire, the Ides of March (the 15th day of the month) was a festive day dedicated to the celebration of war  - and its god Mars. Last year, we celebrated to beginning of a new war - a global financial one: Remember the fall Bear Stearns, which on March 16, 2008 was officially pushed into JP Morgan Chase’s fold? By all accounts, it was the beginning of the end of the debt-based economies, as we knew them.

Our 2009 mid-March variation keeps up with the same beginning-of-an-end theme, but what we’re talking here is about ‘celebrating’ the beginning of a new war – the Canadian Automotive Price War.
The first salvo of this ‘war’ was bravely fired by Chrysler Canada, which quickly positioned the company as the “No.1 Selling Car Company in Canada” during a dismal February.
For an industry famous for sacrificing long-term returns for short-term profits, the new developments should not come as a surprise but what’s behind it, it is.

Secondly, as March and April progresses, the current soliloquist acts that the Canadian (financial) politicos are optimistically performing for our rather dubious public consumption, may (and that’s a big ‘may’) in fact gain some traction, as a modicum of hope may start to permeate the markets.
May it be that the End of the Correction is in sight? Maybe, but the somber long faces will give us only this spring and the perhaps summer to get ready for the Greater Correction – Phase II, sometime in the fall.

For the complete March/April analysis and details including our March Canadian Sales Forecast please click HERE.

The economic maelstrom raging outside our cozy Canadian house of cards has finally knocked down the front door. January’s auto sales results and unemployment figures are just a few indicators of things to come.

As we forecasted last month - unfortunately correctly, the Canadian auto sales hit the wall at 76,875  - the lower end of our January prediction of 76,000-79,000 units. The consumer confidence indicator imputed in our calculations proved to be too high, even for our modest expectations. For February we actually lowered our forecast, but we’re maintaining the overall sales outlook for the year.

The big stories to watch for the next couple of months are rooted in a vastly underperforming 2009 Canadian Stimulus/Budget and our own local Darwinian financial ecology: Shirtless Joe and Vanity Jane are finally getting ‘it’ – they’re swimming in too much debt.
The kicker of the month, however, is related to ‘bird watching’: The probability of witnessing an automotive Canadian and/or a global Black Swan event is increasing - really fast.

For the complete February analysis and details including our Canadian sales forecast plese click HERE

As the Canadians’ natural inclination toward self-absorption is profoundly shaken by the current socioeconomic anxiety, a unique and paradoxal automotive consumer bipolar response is emerging.

On one hand - after years of consistent denial - we’re now dealing with a terrified consumer buried in debt and sweating bullets for the future of his/her weekly paycheque. Here we’re witnessing the emergence of a new look-out-for-yourself-at-any-price ethos – the new savers, conservers, re-users and the self-sufficient, DIY crowds.

On the other hand, we’re also looking at the perennial narcissists, must-have pathologic cases as well as at the classic power-shoppers: All still ready, as always, to get their hands back in the magic cookie jar. Sure, as this industry’s corporations and OEMs are licking their wounds (mortal in some cases) after years of short-sighted financial irresponsibility – obscene incentives, subsidized leases, no-money-down financing schemes and similar aberrations – that jar is most definitively empty. Yet, here's the other jar - unsurprising surprise – the government’s much awaited stimulus.

As the various dominoes in this incredibly interconnected automotive chain began to fail sometime back in 2008, the all-important consumer confidence also began to fail in a tight lockstep.
The question is, what’s next?

TJAA Analytics Group’s all new Canadian Automotive Consumer Confidence 'Fear Factor' Study – March /April 2009, details all major influences that are expected to shape consumers’ attitude towards our industry: Employment prospects, financial propaganda, the recency effect, Canada’s international diasporas, the ‘emotional purchase’ boomerang and of course, the much anticipated stimulus programs.

To read the abstract for the Fear Factor Study – March / April 2009, please click HERE.