BSE Insights – Ready for the Market Swing?

BSE Insights – Ready for the Market Swing?

The Market Tight Rope

Arjun Kumar
Director of Business Development
September 27, 2021
How are you responding the the
current Market? Answer Here

A monthly brief addressing critical topics facing our industry and guidance on how to navigate them.

 

The Market Tight Rope – The second article of a 3 part series

News, Noise, New Cars?

The last few months have been filled with news updates regarding the status of our industry and often conflicting news at that. One week we read that manufacturers are hopeful about production, then next, we receive information of plants shutting down. The week after, we see reports that the semiconductor shortage is nearly over. It’s NOISE.

The reality here is that the gurus don’t know, the stock market doesn’t know, and the retail customer certainly doesn’t know. We know what we have in front of us: our people, inventory, and numbers. However, we can’t take our eyes off that end goal; in focusing on the tangible, be prepared for the eventuality of new inventory and normalization of the pre-owned market. The decisions we make today have to consider that inventory levels return to normal.

How are You Responding To The Current Market?

Preowned Market Values:

Editor’s note: This is an ongoing and evolving situation so as we were about to publish this article new data from both Manheim and the Federal Reserve became available which caused us to re-approach the newsletter.

Preowned inventory has been a hot button issue this year, so much so, that we witnessed Fed Chairman Jerome Powell talking about used cars in front of a House Subcommittee. Unlike those of us in the industry, much of the country sat stunned upon hearing that used car value was a driving factor in the consumer pricing (Inflation) data. The reason is easy to see in the Manheim chart- we saw a commodity go truly parabolic. What is fascinating here is that concern only trickled down to the equity markets after the top had been found.

As the discussion of inflation and interest tapering go on, the preowned
segment will be a key factor in decisions on the nation’s ongoing monetary policy. As we know, it’s a constantly shifting target – we only need to look at the charts for August and September wholesale data to see how quickly the situation can change.

August data showed used car prices settling back down from Manheim
wholesale data (chart above), and there was a reasonable expectation of the values slowly easing back to pre-2020 levels. The key here was having definitive timelines on new production; had the information on new production been on track for year-end, the rate of decline in the wholesale market would have remained steady. As we can see from the mid-September Manheim data (chart below), there is little confidence in having full production by year-end as such the Market is
responding in kind.

That said, however, there are two situations to be wary of going forward:

1. If more detailed information comes out regarding further delays on
new production, we could see the prices move sideways or even up a
little bit, depending on the severity.
2. This is a lesson we can take from the stock market – a correction period that often accompanies a parabolic move of a commodity. The critical pivot points to watch will be the December 2019 and the Feb/March-2020 data points. A break below those levels would be consistent with a sentiment-driven over-correction that is ready for a bounce.

This week we are turning to you to find out how you are approaching the current market conditions:

This week’s question:

This time each year we adjust appraisal values and auction evaluations to
accommodate the advance of model and calendar years. The challenge we face this year is that an over aggressive approach may leave us with inventory values far exceeding the adjusted market when production of new car inventory normalizes. Conversely, if we become too conservative in our acquisition of preowned inventory before new car production has been resolved, we’ll have created a shortage of pre-owned inventory in addition to our shortage of new car inventory.

Please share your strategies going into this inventory cycle to balance
the risk versus reward tight rope we’re about to walk.

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