As Canadians acquired nearly 107,000 new vehicles in February 2012 (up 11% from 2011 levels), and due to massive incentives, the Canadian new vehicle market is up 13% compared with the first two months of 2011. Passenger cars made up 43% of the market, and despite the higher fuel prices, the other 57% of the market was made up of light trucks. These sales dynamic may, potentially, be on the upside of the 1.61 million sales forecast for 2012.

However, two concurrent developments may affect achieving this target: Personal debt and unemployment.

Personal debt: The household debt in Canada declined slightly in the Q4 of 2011 from a record high in Q3: Household credit market debt fell to 150.6% of income from 151.9% in the Q3. This debt reduction dynamic may affect the future Canadian LV sales.

Unemployment: The net job losses in the Feb. 2012 totaled 2,800 compared with the consensus forecast for gains of 14,500. The unemployment dropped to 7.4% from 7.6% (Jan. 2012) as Statscan said 37,900 people stopped looking for work between January and February, the biggest decline since January 2009. The public sector shed 13,400 jobs in the month while private sector payrolls shrank by a milder 1,700 positions. Young people jobless rate hit 14.7 % last month - its highest level since October 2010. The youth participation rate has dropped to a 16-month low and is approaching the 1995 levels. Nationally, 25,000 of the 37,900 who dropped out were younger than 25. Yet, in a recent survey of 1,900 employers by Manpower Canada found that 21% planned to add to their payrolls in Q2, while only 5% planned to cut workers. Most employers (72%) anticipated no change in hiring levels. However, the massive public job (well-paid) cuts in Ontario and federally, is bound to affect the future Canadian LV sales.

Interested to find more? Please write to info@tjaa.ca for your FREE one month copy of TJAA Analytics: Competitive analysis of New Car, Automotive Company, and in-depth analyses of currencies, fuel pricing, International and Canadian economic developments - all influencing to Canadian auto sector, retail in particular.  

Boosted by persistently low interest rates and incentives, Canadian auto sales jump 15% in January. International car sales grew by 29% outpacing the 15% average, cementing the non-domestic Canadian preferences.

The question now is if the upward momentum is going to last. Is this just the expected January effect? Feb./March sales results may be a better indication of things to come.

Watch also the Canadian unemployment: About 35% of Canadians expect unemployment to worsen this year, compared with only 25% a year ago. A minimum job growth of 3% is needed to sustain the current level of LV sales. In 2011 we had only a 1.2% gain. The job creation dynamic is rapidly changing, with 199,000 jobs created in 2011, but almost all came in Q1 and Q2. The economy added just 7,000 new jobs in the last six months of the year and lost 55,000 in the Q4. By Jan. 2012, employment increased by a statistically insignificant 2,300 jobs, pushing unemployment to 7.6%.

Interested to find more? Please write to info@tjaa.ca for your FREE one month copy of TJAA Analytics: Competitive analysis of New Car, Automotive Company, and in-depth analyses of currencies, fuel pricing, International and Canadian economic developments - all influencing to Canadian auto sector, retail in particular.  

THE CANADIAN ECONOMY

As the Canadian economic growth slowed markedly in the second half of 2011, expect the economy in 2012 to remain sluggish with the caveat that things could be worse than expected depending on what happens with the sovereign debt crisis in Europe. According to IMF, Canada is set to grow only a meager 1.9% in 2012.

However, majority of Canadians (about 70%) are saying Canada is in the middle of an economic recession. These staggering results are from a late Dec. 2011 online (2,878 Canadians), survey sponsored by the Economic Club of Canada and conducted by Pollara Strategic Insights. But of course, the economists disagree. The survey, found that the optimism for the Canadian economy has slipped to just 25%, down from 36% in December 2010 and 54% in 2009. The thing is that our (bank) economists are focusing exclusively on the macro data, while most Canadians are focusing on the personal debt dynamics, employment, and daily expenses such as fuels and foods.

DEBT

In mid Dec. 2011, Canadians ratio of debt to personal disposable income, climbed in Q3 to 152.98% from 150.57 Q2 - according to Statistics Canada. Per capita household net worth declined to $180,100 (2.1%) in Q3from $184,700 in Q2. The debt burden of Canadian households has surpassed levels of both the U.S and U.K. However, only 1 in 10 Canadians are in a vulnerable financial position meaning that the cost of servicing their debt consumes more than 40% of their income, which is to be considered some good news. Credit market debt (record 150.8%), is approaching comparable levels to the U.S. just before the housing market crash. Speaking of U.S., consumer debt is about 117% of disposable income, and falling rapidly. U.S. households reduced their debt in the third quarter for the 13th straight period, as the housing market bust continues to reduce demand for mortgages. Compounding debt issues, Canadians have seen their wages stagnate over the past few years. In 2010, after adjusting for inflation, average wages actually fell. In 2011, overall mortgage credit rose to $1-trillion and other consumer debt to $448-billion.

EMPLOYMENT

Overall, the Canadian economy added 199,000 jobs, for a 1.2 per cent gain, in 2011. However, a minimum job growth of 3% is needed to sustain the current level of LV sales. About 35% of Canadians expect employment to worsen this year, compared with only 25% a year ago. Canadian economy full-time work fell by 25,500 in December, but it added 17,500 jobs, but they were mostly part-time jobs. October and November saw a combined loss of 73,000 positions. The job creation dynamic is rapidly changing, with 199,000 jobs created in 2011, but almost all came in Q1 and Q2. The economy added just 7,000 new jobs in the last six months of the year and lost 55,000 in the Q4. The levels of employment and hours worked in December are what they were in July. Civil-service jobs have declined for three months straight. The factory sector alone has lost 50,000 good-paying jobs. According to StatCans, the low-paying services sector of the economy was responsible for almost all the job gains - which explains, at least partially, Canadian's high levels of personal debt.

It's even worse in Quebec, traditionally Canada's second car market, after Ontario: Quebec's jobless rate stands at 8.7%, higher than that of the U.S. Quebec lost 26,000 jobs in December, the third straight month of declines. It is down about 70,000 jobs from October to December, the worst three-month performance since the recession of 1981-1982. The unemployment rate has soared to 8.7% from 7.3% in September, above the national average and the highest in more than two years. Also, the labour costs are too high, with wages of $25 or $30 an hour, because of technology and emerging markets

Overall, the Canadian economy has a growing jobs problem, just as federal and provincial governments brace the public for deep spending cuts in 2012. This news come at a time when Ottawa and the provinces can no longer afford stimulus programs such as the tens of billions they spent to boost employment during the global recession. We expect more of the same in early 2012.

FOOD/FUELS

Foods: Despite the recent slight drop in the global food prices, transportation costs within Canada, and prices of commodities, export restrictions has already ended the cheap food paradigm. Canadians, on average, devote about 10% of their household budgets to food, but the ratio keeps growing. However, about 30-years ago it was about 25%. Lucky? For the 2011, food prices are on track to post their biggest annual gain in 20 years. Restrictions on exports in a range of countries - from Argentina's soybeans to Vietnam's rice and Russia's wheat - are driving world food prices higher, and is also contributing to higher prices in Canada. Don't expect any relief too soon: Milk futures are leading the pack in the commodity arena for 2012. Futures prices for corn, live cattle, feeder cattle, and lean hogs were also set to end 2011 higher. The hedge funds are particularly bullish and the agricultural sector, including corn, wheat and cattle. Also, last year's drought in Texas really took a toll on beef producers, and we could be paying by late spring 2012 the highest prices ever.

Fuels: Economy-sensitive fuels such as heating oil, gasoline and diesel are already higher. With oil hovering to the $100.00 pbb, we shouldn't expect any miracles. In fact, military strikes against Iran may destabilize the entire global oil supply. Additionally, a (very) possible civil war in Libya, corroborated with the increase sectarian violence in post USA-retreat Iraq, could send the oil prices to stratosphere - again.

AUTOS

As you may already know, the Canadian truck sales grew 4.7% last year, while car sales fell by about 1.6%, mostly due to low interest rates, healthy incentives ($7,000 or more) for trucks and relatively affordable fuel prices (for 2011, the price of unladed gasoline was low 120 c/L). Is this trend going to continue? Is the nearly 1.8% growth in Canada's auto sales sustainable? We believe that it's not. At best, we estimate that the sales would be flat, but provisions should be made for a slight dip of about 2 to 3%.

The 2012 Canadian auto sales may align themselves with the recession/riots in Europe, slower growth in emerging markets and an uncertain economic and political/recessional climate in the U.S.  Despite the higher current elevated scrap rate (nearly 44% of passenger cars are over 15 years-old), the lack of supply of newer used cars, and the wear and tear of the existing Canadian fleet, the major global macroeconomic and national developments, will continue to weigh on consumer sentiment. All in all, 2012 is going to be the year of the lease, as ordinal Canadians won't afford purchases, even at 0% interest rate. Expect a lease penetration rate of over 30%, as the Canadian consumer frets about high consumer debt, and losing his/her job. The lease dynamic may be more accentuated in Ontario and Quebec, both provinces with very poor employment perspectives. Canadians are dealing with record high personal debt, a rising unemployment rate and forecasts for slowing economic growth in 2012, so don't expect any miracles for 2012.

Incentives: Despite OEM's best intentions, and recent pricing discipline, incentives will be a major feature in the Canadian marketplace. It's all about market share, but most importantly, about bringing customers in the showroom. We don't predict a full-out incentives war, but when the genie is out of the bottle, you never know...

Overall, the Canadian market is much more stable to the U.S. market. However, the poor employment perspectives, an already huge amount of personal debt (which must be serviced), massive public cuts of employment/benefits for the public sector, may dampen the Canadian LV auto market to achieve its true potential in 2012. Overall, in 2012, the Canadian consumer will be looking for the best values (affordability), but not necessarily for the cheapest deals.

Also, 2012 will be a very difficult year for the upcoming fall negotiations between Detroit 3 and CAW: It's estimated that the wage gap between what Canadian workers in the auto sector earn versus their U.S. counterparts is  the highest its been since 1993. Wages at the Canadian automakers remained steady, but overall labour costs were reduced by cuts to some benefits. Already, Chrysler's CEO, Mr. Marchionne said CAW workers in Brampton and Windsor will have to adjust the cost of building vehicles in Canada which must fall to match labour costs in the United States. He also said that it's difficult for him to explain to American workers why Canadian employees are paid more money. Expect the same contract ‘talk' dynamics from both GM and Ford

CONCLUSIONS

Despite recent strings of good news, the current economics situation could turn on the proverbial dime. Sure, the news that the Canadian banking sector's exposure to the debt problems in Europe are limited, ranging from virtually 0% of the capital in the case of Greece and Portugal, to a ‘high' of 3.4% to Italy's debt, is, well, good news. Also a recent report from the Canadian Federation of Independent Business published the results of its ‘business barometer' of owners' confidence for Dec. 2011 which was 65, up from 63.7 in November. The business barometer index has historically hovered between 65 and 70 when the economy is expanding. Right on the edge, isn't it?

To cool your jets, however, here are just a few of the headwinds Canada may face in 2012: Canada's TSX index has dropped 13% from the first trading day of 2011, and was down 18% from its April 5 peak of 14,270.53. At the time of this writing it is hovering around the 12,170. mark. Europe's recent sovereign downgrades, corroborated with a slowdown in all BRIC countries, may affect Canada's resource sectors. And don't forget that the U.S. may actually tip into a (shallow?) recession: The Weekly Leading Index growth indicator of the Economic Cycle Research Institute (ECRI) posted -8.4 in its latest reading, data through Jan. 6, 2012. The latest public data point is a slightly deeper contraction from last week's -8.2 The index had been hovering in a narrow range between -7.4 to -7.8 for the previous seven weeks but has slipped lower over the past two weeks. (Read the full report here). Remember, about 70% of our exports are destined for U.S. If true, expect another round of layoffs in the already dwindling Canadian job market. Remember, a minimum job growth of 3% is needed to sustain the current level of LV sales, so good luck with that. Therefore, it may be slightly irresponsible to expect an increase in the Canadian car sales in 2012. As always, it's the economy, stupid...

For your complete Canadian forecast, please write to info@tjaa.ca. 

Here we go, again...

As the Q3 ratio of debt to personal disposable income hit a high of nearly 153% (152.98% to be precise) from the150.57% in Q2, it's not that hard to see the Canadian household debt trajectory. 154-55% by the end of 2011 festive season? Your guess is as good as ours!

So far, we Canadians are putting to shame our American cousins, as they managed a paltry 117% of disposable income. Only 117% - what a shame! This unfortunate ‘record' puts as in the position of debt ‘leadership,' at least when compared to U.S. and U.K, traditionally the countries with the most indebted consumers. So far, things are not that great for Canadians: As unemployment rises, expect consumption to shrink. The economy shed workers for the second consecutive month in November, and the unemployment rate is now at 7.4%. Our bank analysts were expecting 20,000 plus job creation, and instead we lost about 18,600 jobs.

Despite the recent automotive retail gains, expect after the New Year those gains to dissolve, and even to go negative. As the Eurozone financial crisis is still largely unresolved, China slowing and the USA barely limping along, the Canadian consumers are incredibly exposed to any mild international/financial shock. Please, keep in your mind that the current ‘prosperity' of the Canadian economy rests, in a very, very large measure, on consumer spending - hence, these elevated debt loads.

For this period, it's all about Europe. If you believe that the new Italian and Greek technocrats now in power may slow the debt crisis, you may be wrong. With the Eurozone government debt sitting at US$12-trillion, there will have to be big cuts in government programs/austerity, increases in taxes (65 billion euros over five years - for France alone). Thus, the car market will be very weak in the European markets. As Europe gets ready for another recession (including Italy, France and Spain), forecasters are scrambling to slash their forecasts for European car sales in 2012. The only bright spot is Germany, where the car market managed a 1.2% growth in October. Mediocre at best, but still it's growth... However, that may change soon, as even mighty Germany may be headed for a ‘mild' recession. So far, Fiat is threatening to leave (nearly bankrupt - 1.8 trillion euros in public debt) Italy, GM may reconsider its European operations, while Peugeot-Citroen is already cutting jobs by the thousands. But, so far, VW, BMW and Daimler are the standout in terms of exceeding expectations - but it can change very soon, especially in the sagging Asian auto markets. As for Canada, the fleets saved last month's sales (2.1% increase). Commercials can replace the debt-laden private consumer only to a point.

Interested to find more? Please write to info@tjaa.ca for your FREE one month copy of TJAA Analytics: Competitive analysis of New Car, Automotive Company, and in-depth analyses of currencies, fuel pricing, International and Canadian economic developments - all influencing to Canadian auto sector, retail in particular.

Utopia economics

As we're edging into the eye of the second financial storm, the sovereign sequel is already on the horizon. We watched this storm build through the years, as debt-induced demand gathered speed - especially in Canada.

Globally, see the rapidly shifting social mood: The N.Y.'s Occupy Wall Street of the Zuccotti Park (ironically, owned by a Canadian real estate company) has spread to 1,500 cities throughout the world. It's only a matter of time that the utopian economics of the last 20 years could collapse totally - despite the current 'sucker' rally.

Just watch the Eurozone, US, and China. With Germany teetering on the edge of recession (only 0.1% GDP growth in Q2), expect maybe a ‘mild' recession in Germany and France (Eurozone largest economies), and a much deeper one for the periphery. However, ‘mild' can have several connotations depending on the scotch-taped European policy. Also watch Greece: The rapidly shifting social mood is gathering speed, and social riots and strikes may become common place. Inevitably, Greece MUST exit the euro, just to save the banks. You know what happens next, don't you...

The US economic troubles are well known: Chronic unemployment, housing, profound wealth inequality (40% of nation's wealth is held by under 1% of the population), and now - Occupy Wall Street. Surprised? As for China, some believe that the hard landing has already begun, due to the huge municipal debt. Even a ‘softy' may have huge implications for the global automotive industries, including Canada's.

Interested to find more? Please write to info@tjaa.ca for your FREE one month copy of TJAA Analytics: Competitive analysis of New Car, Automotive Company, and in-depth analyses of currencies, fuel pricing, International and Canadian economic developments - all influencing to Canadian auto sector, retail in particular.

What you have to watch from this period on, is the overuse of the word ‘unexpectedly.'

For instance: Unexpectedly, Canada may pass thru a ‘technical' recession - with the expected consequences: Less constructions, less spending (Canadians are still using homes as ATMs), less business confidence (jobs?) and perhaps less auto sales as a result.

Unexpectedly, Canada may lose more jobs: Just look at Obama's American Jobs Act, and especially the Buy American clause. The perennial Canadian under-productivity is going to be made worse by the sub-par CAD to USD (CAD, as a petrocurrency is greater influenced by the price of oil). Traditionally, the Canadian employers hired more people instead of investing in technology or machinery. In the U.S. it's quite the opposite:  Manufacturing has made an impressive post-recession recovery, enjoying 26 consecutive months of expansion - mostly due to the fact that manufacturers have invested in productivity-enhancing technologies and machineries. If the Buy American clause gets passed (something that both Democrats and Republicans can agree on - a rare event in Washington), expect another round of layoffs to hit the Canadian workers. Were the 5,000 jobs lost in August a prelude of the things to come? We really hope not...

Good luck with ‘educating' U.S. senators - the job situation in the U.S. is dire, that is utterly useless to even try. However, unexpectedly, a miracle may happen: The Canada-U.S., supply chains are so integrated (especially automotive and oil industries), that it may actually hurt job creation in the U.S.

However, the ‘unexpected' announcement that the Fed, BOJ, BOE, ECB, and the Swiss National Bank opened their vaults for dollar funding for Europe's liquidity constrained banks (Greece, again), may buy us some time, but not much...

For a complete September forecast, and more details about TJAA Analytics Group complete package (Currency, Fuel Prices, Canadian & International Economy analyses, and Corporate and New Car profiles) please write to info@tjaa.ca

So it begins...

From a global macroeconomic perspective, with US default narrowly avoided, everybody thought that the crisis had subsided. Several days later the S&P downgrading of the US debt, ushered in a new phase in the current global economic turmoil. The next few months will show S&P's downgrade to have been too little and too late, rather than too drastic and too soon. Ditto for Europe: The ECB's purchase of Italy's and Spain's bonds, shows that the massive debt crisis is accentuating - in fact, reaching Europe's inner core.

The current ‘Great Reprieve'  - world's governments economic machinations, isn't much different than the financial engineering in the 2002-07 cycle that gave off the appearance of prosperity.

The huge question of the day: Is the ‘Reprieve' over? Perhaps...

This is not a replay of mid-2010. The global economy is slowing down much faster than was the case then and the problems surrounding sovereign government debt are far more acute. The problem that remains is the excessive global debt burdens that were never addressed by the Great Recession. Now the major problems are the European banks and their sovereign debt exposures, especially in core Europe. World's governments debt has brought the world to the edge of a brand new financial crisis: As the fiscal austerity is now the policy watchword in Washington, it is starting to be obvious that the US has hit the wall. Thus, the Fed may be forced at some point into more easing action, there is more reason to be skeptical of any success now than before.

In Canada, Harper's just-elected majority government is cautiously proposing cuts to trim the nation's $564 billion debt, vaguely insisting its budget will be in surplus within the next four years - or about the time of the next scheduled elections. Politics...

From a macroeconomic perspective, the dominant influence for months to come may rest in 'revolution' and 'fear'. This is not just any anxiety - it's the unknown. The kind you feel when you're really staring into an abyss. But it is one thing to see the edge of a cliff, another to go over it.  Will we go over?

As nations and as individuals, we are having sobering experiences - and that's our only chance.

The potentially explosive combination of Eurozone debt contagion, vulnerable banking systems, and European and American political paralysis has made this global economic ‘recovery' unfold like no other in recent memory. Overall, be ready for another short, sharp contraction in late 2011 of about 1%, with a possible rebound in spring 2012.

As the US and Europe are mired in a so-called balance-sheet recession - where the combination of too much debt and too little confidence suppresses demand for a long period of time, in Canada things are vastly different: The Canadian consumer sustained the economy largely by substituting the post-recession income growth with a staggering amount of debt. However, as the Eurozone is falling apart and the US dysfunctional politics crisis worsens, bringing Canada's largest trade partner just a step away from a recession, the question becomes if the Canadian consumer can pick up the slack.

The global political and fiscal events of the next couple of months (starting in September), will categorically answer this very crucial question. The current data is further evidence the slowdown in global growth is both sharp and broad-based, and suggests not just a temporary soft patch, but also a more substantive loss of momentum.

Meanwhile, you should prepare for the worst - just in case. Remember, you always can handle the better.

Holidays!

There you have it...

This is the waiting period before the real circus starts in Sept. - Oct.

The current "extend and pretend" intervention by world governments and central banks to prop up a fundamentally flawed banking system, particularly the vast money printing efforts of the past few years, as a clever trick, that is losing its influence.

This is particularly evident in Europe where, despite the 21-month-old crisis, nothing gets resolved. Ditto for the US: "The political debate about the U.S.' fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled," said S&P on July 14.

The ‘pretend' qualities of the current period, masks the inaction of the last two years, when the recession supposedly ended.

In Canada, consumers replaced income with debt - unwillingly creating an unbelievable vicious circle: spending sustains the economy, but absence of spending, sends the economy to dumpsters, and of course, the consumers with it.

In the US, the opposite happened: TARP, Q1, Q2, and a very possible Q3, is exacerbating the ‘nanny state' syndrome that even the most hard-core Soviets weren't dreaming of. Of course, in the longer term, entitlements are going to bankrupt USA.

The U.S. is facing perhaps its greatest economic struggle - not just since the 1930's, but probably, in its history. Its failure, if it happens, will have great implications for Canada. Its auto production is mostly (83%) destined to the US. Our oil (Canada's single largest source of revenue) is virtually only for the US market. How's this for a holiday reading?

However, for this period, holidays will rein supreme. For the Canadian auto retail sector, incentives may explode in part to compensate for the shrinking appetite for debt. The price of fuels will ‘cooperate' too, unless we have a major weather event in the Gulf of Mexico. The premium segment will boom again, as Canada's income gap widens. In a recent report from Conference Board of Canada  - "How Canada Performs" - income gap between rich and poor in Canada widened in the period from 1993 to 2009. The average income in 1976 was $51,100. By 2009, it had increased by 17% to $59,700, when adjusting for inflation. However, the average income of the richest widened from $92,300 in 1976 to $117,500 in 2009, or about 20%. The study found inequality is rising worldwide, but that two countries most similar with Canada in terms of per capita income (Austria and Denmark) had narrower gaps.

All in all, this period will be relatively calm - for Canada. US may reach a deal on debt, or it may not - but if not, the risk will be enormous for a GOP preparing for the next year's elections. This period's wild card is Europe and its bondholders. Still, don't expect anything super-major until September, when Greece's money to pay its bills will be gone.

But, you never know...

 For more details about TJAA Analytics Group and your complete package (Currency, Fuel Prices, Canadian & International Economy analyses, and Corporate and New Car profiles) please write to info@tjaa.ca    

The extreme volatility of socio-economic global influences will greatly affect Canada's automotive sector this month.

For starters, the diminishing price of fuels may compensate (partially) for the ever-increasing prices of automobiles sold in Canada. As the crucial spring selling season winds down, short-timed profit will be the theme of this month. The strategy may backfire on some retailers while others will gain. Yet, the common denominator for the Canadian automotive consumer is its staggering amount of personal debt (1.5 trillion or $176,461 per household debt), 146.9% in the first quarter of 2011. However, here's the fundamental issue: More than half of indebted Canadians are borrowing just to afford day-to-day living expenses like food, housing and transportation.

Clearly, this trend is not going to last, even as interest rates may not rise until Q2 2012.

Even as federal Finance Minister Jim Flaherty may not foresee a double-dip recession, there is potential for contagion from China (commodities), Europe (finance) and the US (industrial trade and retail). Politically, this is the epitome of double-speak as Flaherty is building in a $1.5-billion per year risk factor in its recently unveiled budget. Will it be enough? Not really as there is talk of cutting $4 billion in spending although nobody knows who will be hit.

Needless to say, another financial crisis is inevitable because the causes of the previous one haven't been resolved: The total value of derivatives in the world exceeds total global GDP by a factor of 10 (Europe's fundamental problem). So, we'll see.

The only good thing happening is that the Canadian economy created 22,300 jobs last month - Canada's unemployment rate unexpectedly fell to 7.4 per cent in May from 7.6 per cent a month earlier as fewer people looked for work. It was expected 20,000 new jobs for the month, and an unchanged unemployment rate. The good news is that employment levels have now grown by 273,000 over the past year. The bad news is that these are highly disposable jobs - all related to the Canada's notoriously low productivity rate (ranking it 18th among 22 OECD countries).

All in all, during this period don't expect major shocks for the Canadian economy - with the exception of a possible financial downdraft originating from Europe. Hence, as trigger points, watch for an implosion of Greece and an aggravation of Ireland's situation.

Therefore, for the Canadian auto sector, expect a ‘reasonable' month for some, worse for others. Once again, the incredible amount of Canadian household debt will, gradually, affect the sector - the retail sector in particular. So, here comes another incentives ‘war' (Chrysler already offers over $9,000 for its Ram). So, be forewarned.

For more details about TJAA Analytics Group and your complete package (Currency, Fuel Prices, Canadian & International Economy analyses, and Corporate and New Car profiles) please write to info@tjaa.ca    

As the geopolitical situation in the Middle East and North Africa is slightly improving and likely to put a floor under oil prices, one major problem is ‘resolved' for the Canadian auto sector. Temporary but nonetheless, welcomed.

However, one should pay attention to the onset of a declining trend in the Global PMIs, which now is a fact. The situation has been expanded considerably by the natural disaster in Japan, and the potential contagion of the debt crisis in the Eurozone. The contraction in Japan has worsened with the PMI falling to 35.0 from 36.1 in March, as the manufacturing (and service sectors) contracted further. For May, a recession is an almost sure thing. Economic activity in the US has slowed significantly with the ISM/GDP composite PMI at 54.6 the lowest since September last year.

Yet, despite the visible slowdown one should remember that a recovery, in the global economy context - is usually lasting about six years. Keep in mind that this global recovery is only two years old. Recoveries typically end when major imbalances in an economy have developed and become unsustainable - such as over-investment, over-consumption or when monetary policy becomes very tight. None of them are true now.

The greater danger today, however, lies within the disposable spending power of cash-strapped shoppers - automotive or not. Canadians are, arguably, are most (household) indebted people living on the planet Earth. Yet if you start to peel the orange, another reality emerges: Canada is just about to become for the 21-century what Switzerland was for the 20th - an incredibly wealthy nation... The reasons are very complex - from plenty of commodities to exceedingly rich emigrants seeking the proximity of the US, but not the US itself, to the lowest white-collar crime prosecution in the world, or some of the world's safest life style and cities - the choice is yours.

As the numbers show that the recent employment is increasing, the number of wealthy Canadians is increasing too (1,745,000 households in Canada who can boast a net worth of $1-million or more).

However, the consumer debt in Canada will most likely put a brake on sales dynamics, compensating for the decline in fuel prices and the delayed spring effect may send more shoppers into the dealerships. So some retailers may have a resonable month, while some won't. And, as usually, anything labeled and marketed as ‘premium' will thrive. Still - with that huge nagging debt, anything is possible...

Therefore for this month, Canada - from an automotive perspective, may be like a temporary island. But not for too long.

For more details about TJAA Analytics Group and your complete package (Currency, Fuel Prices, Canadian & International Economy analyses, and Corporate and New Car profiles) please write to info@tjaa.ca  

Currently, the Canadian auto establishment is vastly underestimating the importance of Japan's fortunes. The focus is on the Middle East and its oil, the downgrade of US debt and the perennial debt crisis of Europe. Yet, Japan's earthquake problems are far from over - with deep implications for the automotive industries across the board.

The thing is, that the March 11 earthquake was only the beginning. The Pacific Plate and the Philippine Sea Plate have slid under the landward plate that includes Japan. It is expected that in the next five years earthquakes will be even more frequent and severe. Five years is a very, very long time in the automotive industries...

As we all know, the impact is quite severe: Toyota has just announced extensions of plant closures - globally - until at least June. Another earthquake - say of magnitude 7 or 8 could throw a huge wrench into the already weakening automotive industries, besieged by the increased price of oil, steel and consumer and sovereign ever-increasing debt.

Let's put it this way - for the next several months, be prepared for some very unusual developments...

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After the February drop in automotive sales, March should consolidate the downward sales trajectory - fueled by much higher price of fuels, food stuffs and a related distinct lack of job growth opportunities

Speaking of jobs, the better-than-expected 69,200 in January was much better than 15,000 consensus, underlining economy's strength. But that was then...

Ironically, the chronically sub-par productivity performance is behind the increasing employment numbers: Productivity of the Canadian manufacturing sector has increased at a paltry 1.0% annualized rate in the decade ending in 2009. For the same decade the productivity in the US grew 5.9%... The thing is that Canadian producers are famous for preferring to hire labour instead of investing in productivity-enhancing new machinery and technologies. But it is good for the labour market, and by extension, to the auto retail sector: One needs a car to go to work, and so it begins an entire demand chain. Conversely, the opposite rule applies.

It would also be wise to remember that the Canadian consumers are still dealing with their mammoth household debt, which, as a portion of disposable income hit a record 148.1% in December, surpassing (faster than anyone thought it possible) the debt ratio seen in the U.S. (147.2%) - for the first time in 12 years. Oil prices will only exacerbate the debt issue. But despite all of this - and perhaps because of it - the automotive Canadian marketplace, thru its currency, demographic and wealth profile, has become perhaps, one of the most profitable-per-unit markets on the planet. Therefore, expect a fierce competition to emerge.

For surviving and even growth-related strategies, please click HERE.

As talking up the upcoming electric mobility was consuming all the oxygen at the latest Detroit Auto Show, one has to wonder why it should be that way. It could be that the auto industry is gearing up for a speculation-induced price of oil at around $100 pbb or even more? Or it could be that this industry badly needs the famous Schumpeter's' ‘Creative' Destruction (paid for by near bankrupt governments and ultimately by you, the taxpayers)? There's no certainty - only educated guesses. However, there wasn't even a peep of info in Detroit that U.S. mostly burns coal and runs nuclear plants to generate electricity - responsible for nearly 70% of the electricity produced in the States. But, as usual, our industry rarely gets involved in such grand issues. Oh, well! The Show must go on, is all they say...

Back to Canada now: It has emerged recently that business confidence is marginally up, although only 14% of business owners say they plan to add staff in the next three months, while another 14% are expecting to cut positions. A zero sum game, if you will.

No wonder that Canadians are worrying: In a recent poll conducted by Pollara for the Economic Club of Canada, only 38% of respondents are seeing our economy improving this year, compared with 54% from December 2009. Top of the major economic concerns of Canadians? 78% cited the cost of living. No wonder: Household debt as a portion of disposable income hit a record 148.1% in December, surpassing (faster than anyone thought it possible) the debt ratio seen in the U.S. (147.2%) - for the first time in 12 years. So any rise in price of energy (gasoline/oil, hydro) or foods, will - conceivably - adversely affect the already worsening Canadian household sheet balance - and of course, we haven't yet mentioned the rising interest rates...

For the ones counting on "being hewers of wood and drawers of water" (the curse of Canada's resource-based economy) for the commodities markets, cold comfort too: The ever expanding Euro Zone crisis (Belgium??), the expected tightening in China, and the ongoing slump in the U.S. economy are just a prelude of things to come. If we pass the March-April (time for your typical irrational ‘exuberance') period relatively unscathed, then we should have a relatively ‘mild' summer ahead. Yet, for this period, the automotive ‘Battle of Canada' will continue unabated: Incentives galore (even for smaller cars) as well as service and parts discounts - anything to help the profit repatriation profile dictated by the unforgiving 30-day sales reports. Oh, well! The Show must go on, is all they say...

For more information regarding the automotive Canadian marketplace, please click HERE.

If in 2010 we witnessed the end of the Great Recession, in 2011 we'll be testing the OFFICIAL beginning of the Great Correction - which literally ends the great credit super-cycle that began more than 50 years ago. Although the risk of another bear market or a Canadian 2011 recession appears low, let's focus on the underlying fundamentals, especially when it comes to the long mega trends.

For the Canadian auto industry, the main themes to watch in 2011 are related to the value of the Canadian dollar, the state of the US economy, a China involuntary slowdown, and of course, the price of oil. Additionally, in 2011 we'll see the first real foray into the consumer auto lending business by Canada's Big 5 banks. However, due to the massive amount of Canadian household debt (expected to surpass U.S. in 2011-12) and increased cost of living (especially energy and foods), the Canadian vehicle sales may actually be lower than in 2010. Therefore, a different type of mentality of selling (fewer) cars to cash/credit strapped, way over-leveraged Canadians may be needed. We're already seeing this: Although the North American auto sales may climb to about 11.8 - 12% by the year's end, Canada may see a mere 2% uptick, if that. As such, the incentives war will continue unabated in 2011 - perhaps moving down from trucks to the car segment.

U.S.-Canadian dollar parity: At the time of this writing, the US dollar buys 0.9896 of its Canadian counterpart. Bar unexpected macro-economic developments, for 2011, expect the Canadian dollar to hover around parity, but it's not expected to reach the $1.10 June 2006 level. From a downside perspective - as a cyclical currency - the Canadian dollar is influenced by commodity pricing, particularly sensitive to concerns China may slow as a result of policy measures aimed at curbing inflation - which is fueling speculation of further tightening. Chinese year-on-year change of M2 money supply hit almost 30% in November 2009. Upside: As the U.S. and Canadian indicators suggest the growth may be picking up, expect the target rate to rise to 1.50% by the spring/middle of next year. Such a move will automatically boost the loonie higher.

U.S.: By far the largest world's economy, the U.S. is still suffering from the damage caused by the credit bubble. Although it's concluded that the stock market action is telling us that the Fed has succeeded - again, it's is likely that the balance sheet recession in the U.S. will be tested again in2011.  If the housing double-dip surprises to the downside, you should not be ‘surprised' to be talking about more consumer credit problems. Additionally, it is entirely possible that a large U.S. state or city cannot come up with the cash to make a bond payment. Such a default would influence the (credit) markets worldwide. Add to that the effect that yield curve manipulation and added money from the Fed, has had on the Leading Economic Indicators (LEI). Without this help, the LEI has been negative - predicting recession - all year. Be forewarned...

Oil: For 2011, don't expect the oil to reach the peak of $147 per barrel seen in July 2008, nor slumped to the low of $40 during the downturn. The average pricing may average in the $70-$90 range - which will translate to about $1.05 -1.10/litre of regular unleaded gas in Canada. If China/India region collapses under inflation pressures, we'll see much lower pricing, even under the $1.00/litre level.

Corporate debt: All eyes should be on GM, VW and Daimler. Volkswagen and Daimler have a massive debt coming due (staring in 2011) with $46.2 billion and $39.9 billion respectively - according to the Moody's Investors Service. As the credit markets are still weak - especially in Europe, expect some turmoil for these two companies.  As GM goes, investors are buying with a huge expectation of a pop in the price because GM should make (maybe?) its way back into the Standard & Poor's 500 index shortly. Membership in Standard & Poor's 500 is important because most mutual and hedge funds buy corporate shares based on it. Also, the large investment banks will do whatever it takes to keep the price above $33 and avoid triggering any computerized sell orders. God forbid a drop under that level, and/or non-admittance in the 500 Index club - the selling stampede may be unprecedented.

Ah, and also don't forget Europe, and its "beyond-believe" financial mess... As we're going into 2011, the thinking is that the boys in the engine room have realized that now it's truly a zero-sum game. In order for me to win, someone else must lose. The question is, who will?

So, here we go again: Canadian dollar parity to the U.S. dollar is just another nail in this country's consumer coffin. The US' gravitational pull over the Canadian economy is starting to be deeply felt, and it gets stronger every day. The most recent GDP figures for July showed that the economy shrank by 0.1 per cent from previous month's reading - the first contraction in almost a year. Also, the Canadian economy lost 6,600 jobs in September while the deep thinking economists had been expecting overall job growth of 10,000. Go figure...

Back to the currency now: Do not expect any relief too soon. The fastest way governments are goosing their growth rate is to devalue currency so they can boost exports - which is behind all the talk about the current currency war. Ironically, all countries want to do the same thing - increase their exports. The specter of the QE2.0 by the US Federal Reserve has been clearly bearish for the dollar - exactly what their exporters needed. Needles to say, the lesson has been very well learned from the new master of the financial universe - China, which, according to some estimates, keeps its currency artificially undervalued by as much as 40%.

As the international policymakers are still attempting to engineer the current business cycle, forget the ‘old normal' - we are definitely in uncharted territory here. Remember, the commodity-related economies, such as Canada's, are seeing their currencies go through the roof affecting all the non-commodity exports.

Here is a question for you: How do you think the Canadian automotive consumer will react to the latest salvo in this currency ‘war?' Would they keep the current modus operandi - ‘buy first, ask questions later' - and go down to the US for another round of shopping spree? Or, as the second most indebted consumers in the world, challenged by jobs perspectives and a rapidly shrinking economy, would they pull back? To find out, please click HERE.

With the summer holidays in the rearview mirror, perhaps now is a good opportunity to take stock of the real economic world. To properly understand why oil prices will fluctuate wildly during the next year or two, one may have to go back to basic economic fundamentals - so, briefly, here we go: Oil and fuels' value derives from its availability. Once you produce it, then you can burn it - it's a cyclical thing. But if you won't burn that much, globally, the price will go down until the stockpile excess is exhausted and the inventory cycle can start anew.

Another thing one must remember is that oil is used directly or indirectly in the production of 95% of all industrial goods. As demand for these goods diminishes, so will the price of oil. Of course, the opposite is also true.

Here are two rapid-developing scenarios: According to Goldman Sachs, oil would see prices around $85 to $95 a barrel due mostly to the increase consumption in the world largest economies - US and China, and IAE agrees. On the other hand, there is consistent research that proves that oil prices may hit $50 a barrel or even less. With new massive oil supplies coming primarily from Central Asia (especially the Caspian Sea basin), Iraq and non-OPEC countries, that may be the new reality indeed.

For the Canadian automotive marketplace - defined by the current aspirational and upscale blatant consumerism, either of these scenarios could have major implications: If oil price surges, the truck/SUV/Crossover market will tank once more, while the car segment will bounce back again. If the oil price drops, the very opposite is true. For how to handle efficiently each of these situations and additional important strategies, please click HERE.

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.