Another Sign of Trouble for the Auto Industry

We recently reported that problems started emerging in the car loan sector:

Will Subprime Car Loan be the Next Big Short?
Credit Markets are Signaling Trouble

This week, Rebecca Ungarino of CNBC pointed out that the problem is not only in the loan defaults, but also in the decline of used-car prices:

Used-car prices are sliding, and some warn that this trend could have sharply negative effects on both relevant stocks and on the economy as a whole.
“This is a credit bubble in autos that is very reminiscent of the subprime mortgage crisis,” Larry McDonald, head of global macro strategy at ACG Analytics, said Friday in an interview on CNBC’s

And the decline in the used-car prices is already reflected in the credit default swaps of auto rental companies

Avis stock price. Source: Finviz.com

Bets on the failure of Hertz and Avis to repay their bonds, as measured by five-year credit default swaps, are on the rise as used-car prices fall and auto loan delinquencies edge higher. Elsewhere in the industry, automakers General Motors and Fiat Chrysler this month reported March sales figures that missed expectations; Read more

However, some experts argued that the market capitalization of the auto industry is too small to have a significant impact on the economy. We will see what happens next. In the meantime, and as always, risk management is key.