On You Tube there are many things to see, sometimes a conference video will come up and perhaps there is an idea. If you are similar to most people, when attending a conference you are looking for 3 ideas, but it might take a number of sessions to hear one. One conference took place in Vancouver and its primary interest was on gold and silver. However there was a speaker Michael Alkin who helps run a hedge fund called the Tullamore Fund. Mr. Alkin was speaking about things that could go wrong in the marketplace.

On Wall Street, things can really look good, until they do not.

History does not often repeat itself, but it does rhyme or similar patterns happen.

The industry Mr. Alkin focused on was the Auto Industry.

While the economy has changed from when what is good for GM is good for the economy; the US Auto industry represents 5% of the US workforce, 3% of the GDP and half the companies on the Dow Jones make money in the sector.

The average price of a vehicle has increased since 2009 from $27,000 to $36,000 which has meant profit margins have increased and that is a good thing.

Mr. Alkin asks for a $36,000 vehicle people need financing, how do they finance?

For the past few years, the market has benefited from a limited supply of trade ins which meant the trade in vehicle had increased in value. As consumers were trying to ensure they have a good vehicle (sometimes better than they can actually afford) they looked at the monthly payment. If you have a high trade in value, the monthly payment is less and leasing can look very appealing, depending on how much you drive (watch those miles on the contract or you will pay extra). ‘

If you look forward, you will see many vehicles will come off lease, the lease will expire and the consumer either buys the vehicle or takes out a new lease on a new vehicle. What is good for one, is not good for millions, millions of leased vehicles will come on to the market and thanks to supply and demand – the value of the leased car will fall. The next lease, the person has to finance more of their new vehicle.

At present, about 23 million consumers who pay monthly car payments have credit scores less than 640 or are known as subprime. The vehicle financing companies are beginning to tighten up the requirements to get a new loan.

Is trouble ahead or will consumers buy a vehicle they can actually afford rather than meet the monthly payment extended over 7 years? Will they be paying for more than one car when they renew (as many tend to). Ask people about their car payments.

Linking to dividend paying stocks, the auto sector continues to be a great importance to the economy and we would all love that everyone could afford the vehicle of their choice. In reality, many can not, but they need a vehicle because of the way our cities are built. Life is more difficult if you live in the suburbs without a vehicle, not impossible but difficult. It is good to hear about possible headwinds because you can do your research or understand how the industry makes money and is it sustainable?

There are more questions than answers, till the next time – to raising questions.