Will auto prices ever go down?

Stocks got battered yesterday after bond yields leapt to new heights. The latest JOLTS report suggests that jobs are still aplenty for those that want them, much to the dismay of the Fed… and the markets.

Spiraling. Ok, so, today, I was all set to write about the recent spike in the VIX index and remind you of how the math behind it can give us a clue about what to expect in daily swings from the S&P500. I was also going to talk about how the VIX futures can show us if things may get more or less volatile in the coming months. I was, but something else popped up that I want to share with you. So, the conclusion to the above two points +/- 1.23% per day (it’s just math) and more volatile as next month’s and December’s contracts are trading higher than this month’s. But, of course, that can all change . Now on to today’s main topic.

There is a little-known economic concept called the wage-price-spiral. What made me think of it. Well, as I do EVERY DAY SO YOU DON’T HAVE TO, I start my morning when even the owls are tired and read all the headlines of the major global press outlets. This morning the theme of labor strikes seemed to dominate the press. It looks like a broad strike involving healthcare workers is on the brink of erupting. This is just the latest in a series of similar strikes. If you followed me on a walk through NYC, you too would have seen the many healthcare workers striking in the past year in front of some of the many fine NYC hospitals. That caught my attention. Then I landed on an article about the current state of the negotiations between major automakers and the auto workers’ unions, and numbers that have been proposed to the workers, were at first glance… um, glancing. We are talking about major double-digit concessions made by the companies. So, I paused and thought about it for a few minutes. Have you noticed how frequent strikes have become? Of course, you have. Why is this?

Well, in the case of autos, if you haven’t walked into any auto showroom recently and been outright shocked at the sticker prices, you have surely read my many daily notes about inflation in which I HAVE HIGHLIGHTED AUTO PRICE. Regardless of which way you found out, surely you know. [cue paper shuffling in the background sound effects] Ah, here is the chart I was looking for. Have a look and then read on.

This is a chart of Ford Motor Co’s gross profits going back to 2007. You can see a recovery in the wake of The Great Recession followed by a pretty clear declining trend of gross profitability even prior to the pandemic. In 2021 and 2022, it is clear that profitability has returned and, in fact exceeded 2017, 2018, and 2019’s showings. The two shaded bars all the way on the right are analysts’ estimates for 2023 and 2024 in which the trend of increasing profits continues. In percentages (gross margin), that went from +7.56% in 2019 to just above +14% expected for this year. That is almost a doubling of gross margin! How can that happen? More unit sales will increase sales, but HIGHER STICKER PRICES and unchanged direct costs to produce like labor and raw materials is the only way to increase gross margin. This puts laborers, on whose backs those find autos are produced, in a strong bargaining position for raises. If you throw in a tight general labor market with unemployment expected to be at 3.7% and yesterday’s JOLTS showing 9.61 million unfilled job openings, you get prime conditions for strikes. Add in high inflation where auto workers are likely struggling with their budgets, and the environment goes from prime to explosive.

Now back to economics and the wage-price-spiral. The specific headline that caught my eye this morning was that Ford had offered workers a +20% pay hike. That seems fair, wouldn’t you say? Now, hopefully the strike can end, and we can get back to business, right? Of course, I couldn’t just be satisfied with that. I thought to myself, “self, what if you were the CFO of Ford and suddenly your direct labor costs just went up by some +20%?” Well, panic would instantly set in. Who would want to be the CFO of a company that has recently experienced unprecedented gains in gross margins only to have to report that those gains have now vanished? How can Ford avoid all the pain that will come with such an announcement? There is one sure way that comes to mind. RAISE PRICES! That, my friends, is the wage-price-spiral. Workers demand higher wages in an inflationary environment and employers are forced to pay those higher wages, only to cover the margin declines with higher prices yet. There is only one way to stop that spiral, and I don’t have time to get into it this morning, but don’t worry, the Fed is on the case .

WHAT IS GOING ON IN THE PREMARKET

Ford Motor Co. (F) is slightly higher in the premarket on news that the company sweetened its wage offer to the striking UAW. This has investors hoping that strikes will end soon. Ford will announce earnings later this month. Dividend yield: 4.97%. Potential average analyst target upside: +26.4%.

Intel Corp (INTC) shares are higher by +2.05% in the premarket after the chipmaker announced plans to spin off its Programmable Chips Group and sell shares to the public. The company is set to announce its Q3 earnings on 10/23. Dividend yield: 1.4%. Potential average analyst target upside: +3.7%.

YESTERDAY’S MARKETS

NEXT UP

• ADP Employment Change (Sept) may show an increase of +150k jobs, lower than August’s +177k additions.
• Factory Orders (August) is expected to have grown by +0.3% after declining by -2.1% in the prior month.
• ISM Services Index (September) may have slipped to 53.5 from 54.5.
• Fed speakers today: Goolsbee and Bowman.