Despite record incentive spending, constantly loosening lending standards and endless cheer leading from the "Big 3" U.S.-based auto OEMs, senior executives from Toyota and Nissan are convinced that the U.S. auto market has peaked. According to comments made to Bloomberg, Toyota co-CEO Hiroto Saikawa said "it’s a peak and we don’t see a potential for further growth...incentives are rapidly growing in the industry, and we are paying close attention to it.”



“The market turned out to be somewhat weaker,” Takahiko Ijichi, a Toyota executive vice president, told reporters Tuesday after the carmaker reported a 43 percent plunge in quarterly operating profit. The North American market “really requires very careful managing going forward,” he said. The more dour outlook is significant not only for Toyota and Nissan but for Japan’s economy. For the nation’s automakers, North America remains the biggest export destination, with more than 1.3 million passenger cars shipped during the first nine months of the year. That was double the number of vehicles exported to Europe and fourtimes the number sent to the rest of Asia, including China, which has seen a tax cut-induced buying spurt. The peak also has arrived at an inopportune time because the stronger yen continues to drag on earnings. While Toyota City, Japan-based Toyota raised its profit forecast for the fiscal year after the yen rallied less than expected, it’s still projecting operating profit to slump by 40 percent to 1.7 trillion yen ($16.3 billion) for the year ending in March. Nissan, meanwhile, said operating profit fell 19 percent last quarter, driven primarily by the impact of a stronger yen. For the year ending in March, operating income probably will drop by 10 percent to 710 billion yen, according to the Yokohama, Japan-based company.

Of course, this startling dose of honesty shouldn't be a huge surprise to our readers. As we noted last week, October's auto sales implied a total SAAR of 18.0mm for the U.S. market. To put that into perspective, that implies a total rolling stock equal to more than 1 car per driving-age adult in the U.S.

Meanwhile, the inventory/sales ratio for the industry continues to hover near multi-year highs outside of the anomalies around the "great recession."

As Toyota and Nissan noted, the peak has largely been driven by rapidly rising incentive spending though auto makers are likely reaching the peak of how much they can incentivize additional purchases.

Automakers spent an average of $3,262 per vehicle on marketing promotions this year through October, up 13 percent from a year earlier, according to Autodata Corp. Both Toyota and Nissan are increasing incentives at a slower pace than the industry average, with the researcher estimates Nissan’s spending at $3,607 per vehicle and Toyota’s at $2,270 per vehicle. Toyota has been using “appropriate levels” of incentives to buoy sales of its mainstay passenger models, the Camry sedan and Corolla compact, Ijichi said Tuesday. Nissan said incentive spending reduced operating profit in the U.S. by 40.5 billion yen, raising concerns for Takaki Nakanishi, an analyst with Jefferies Group LLC. “We cannot underestimate risk in this market,” Nakanishi, who has a hold rating on Nissan shares, wrote in a report Monday. The drag on operating profit from incentives, after a 36.9 billion yen reduction in the first quarter, “reconfirmed that Nissan has reached a peak in U.S. profitability,” he said.

Meanwhile, as we noted below, used car pricing and rising delinquencies on auto securitizations seems to confirm fears that the U.S. auto market is rolling over.

For those who missed it, below is what we wrote on the topic previously:

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It will come as no surprise to our readers that sales of automobiles in the U.S. have bubbled over in recent years and stood at a SAAR of 17.7mm units at the end of September. To put that number in context, an assumed 15-year useful life for vehicles would imply that's more than 1 car for every driving age person in the United States. Obviously that's likely not sustainable which is probably why Ford executives admitted on a recent conference call that U.S. auto sales have reached a "plateau."

As we've argued in the past, the main reason auto sales have bubbled over is due to the continuous degradation of lending standards over the past 6 years fueled by the Wall Street securitization machine. Of course, the problem with "rigging" new car sales in this way is that eventually all of those vehicles come back to flood the used car market with excessive supply resulting in lower used car prices and higher securitization losses...and that's when the whole ponzi starts to unravel. Which, as the Wall Street Journal points out, is exactly what is starting to happen right now.

Several large companies have warned that prices of used vehicles are likely to weaken, potentially leading to higher losses on loans on which cars are the collateral. That, combined with looser terms for loans and the growth of loans going to subprime borrowers, is sounding a warning for the long credit boom that has spurred auto sales. Auto-loan balances topped $1 trillion for the first time ever this year. Actual default rates remain low, but losses are starting to tick up, leading some big lenders to scale back. That has the credit underpinnings of the auto boom looking shakier. “Losses are going to go higher—there’s no question about that,” said Hylton Heard, senior director at Fitch Ratings. Earlier this year, J.P. Morgan chief James Dimon warned about a weakening auto market and the potential for used-car prices to drop. Indeed, prices of used cars that are up to eight years old are down 3.6% in 2016 through September versus the same period a year earlier, according to the NADA Used Car Guide, a division of J.D. Power. “It is the first time since 2008 that prices have fallen by any material amount,” said Larry Dixon, director of market intelligence at the NADA Used Car Guide. The firm is projecting prices will finish the year down by an average of 4% compared with 2015.

While data from Manheim suggests that overall nominal used car prices have not yet collapsed, they have certainly stalled in recent months...

...while used car pricing as a percentage of new car pricing has been on the decline.

As we recently pointed out, rising delinquencies are already apparent in GM's subprime securitizations where 31-60 day delinquencies have been on the rise since 2012 and now stand at over 8% of outstanding loans.

Meanwhile, the year-over-year change in 61+ day delinquencies for GM securitizations have been growing at double-digit rates for several months now.

Finally, just like in 2008, wall street is starting to bet against the bubble they created as S&P warns that downgrades of certain subprime securitizations are imminent in the face of mounting delinquencies and write-offs.

"The auto industry has also become intensely competitive, which has led to price competition, loosening of credit standards, and higher charge-offs," S&P said. U.S. car sales have been growing for six years, but the growth rate is showing signs of slowing after a record 2015. The ratings firm said it may have to downgrade some subprime auto loan securities that have high-yield grades because of the increased delinquencies and loan losses, a statement it first made last month. Some investors believe that subprime auto loans will continue to deteriorate, and have looked for ways to bet against them. After the financial crisis, mortgage lenders have been required by law to verify that applicants can repay their debt, but car lenders do not have that obligation. In the 12 months ended in June, only 5.2 percent of car loan applications were rejected, down from 11.1 percent in the 12 months ended in October 2015, according to research from the Federal Reserve Bank of New York. Lenders are making longer-term loans than before, and used car prices have fallen, which also could hurt loan recoveries, S&P said on Tuesday.

With used car prices coming under pressure just as delinquencies and charge-offs start to mount, it's just a matter of time before the subprime auto bubble bursts. Just another sign of the Obama "economic recovery."