CarMax's Huge Earnings Miss Sends Warning Signal on US Consumer
Comment of the Day

September 29 2022

Commentary by Eoin Treacy

CarMax's Huge Earnings Miss Sends Warning Signal on US Consumer

This article from Bloomberg may be of interest to subscribers. Here is a section:

“CarMax has reminded Wall Street that parts of the economy are already in a recession,” said Ed Moya, senior market analyst at Oanda Corp. The “affordability challenges” highlighted by the company as the main reason for the big miss suggests it is “only going to get worse as Fed tightening starts to impact the economy,” Moya added.


“When you combine these results with the story from yesterday that demand for iPhones is weak, it raises the question about the consumer as we move toward the holiday selling season,” said Matt Maley, chief market strategist at Miller Tabak + Co. “If the consumer is weak, you can take a soft landing off the table.”     


“The story of CarMax’s second-quarter is clear: demand destruction,” said Morgan Stanley analyst Adam Jonas. “High used car prices and rising rates are causing a buyers’ strike.”

Eoin Treacy's view

Let’s not forget it takes between six to nine months for tighter monetary policy to show up in the real economy. The Fed started raising rates in March and added 300 basis points to the base rate since then.

The Biden administration must be unnerved at the prospect of another 75-basis point hike less than a week before the mid-term election. The 2-year is overextended but is reading 4.2% today. That implies continued rate hikes despite the political cost.

Apple is a highly cyclical company. We are two years out from the next demand upswing because so many people bought new phones in the last year. The share remains susceptible to additional downside.

Carmax is likely carrying a great deal of overpriced inventory against a background of falling used vehicle prices. The continues to unwind the pandemic boom and is likely to meet the same fate as over overpriced car site like Carvana

I heard an interesting anecdote last night. A friend of a friend owns two dealerships in Oklahoma. Ford is reducing the number its supports from around 3000 to 2000. They offered to buy him out and asked for a number.

He asked what if he doesn't want to sell? They said he would need to install 1 super fast charger for EVs to take orders, and 2 if he wants to be allowed to hold inventory. Each charger was quoted to cost $600,000.

This article discussing the release of Ford’s new F-250 may also be of interest. The company sells a lot of trucks. Many people in cities buy them with no real need for towing or carrying capabilities. In the countryside towing capacity is a vital necessity. Electric pickups towing a trailer have a range of about 80 miles. There is no way country people are ever going to buy one.
Ford’s virtue signalling on EVs is a recipe for tighter margins. Meanwhile, it makes most of its money from selling gas guzzling pickups and is about to run into a buyer’s strike. The share turned around sharply over the last 10 days and a clear upward dynamic will be required to check supply dominance.

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