Updated from 11:17 a.m. EST
Auto stocks embraced the industry's latest pow-wow with the new president, but buyer beware.
When the CEOs of Ford (F) - Get Ford Motor Company Report , General Motors (GM) - Get General Motors Company (GM) Report and Fiat Chrysler (FCAU) - Get Fiat Chrysler Automobiles N.V. Report met with President Trump on Tuesday, they had to be thinking in the backs of their minds that Trump's promised very "major" border tax could crush their stock prices.
Why it would happen doesn't take a PhD in mechanical engineering to understand -- a penalizing tax on goods made overseas and brought into the U.S. would arrive at a precarious time for automakers as they are seeing slowing sales of new cars and weaker used car values. A tax could accentuate the bottom-line pressure that is bound to emerge in the auto space over the next year or two stemming from this increasingly turbulent backdrop.
Unsurprisingly, President Trump was first to make news from the gathering. "The U.S. must make a big push to build auto plants," said Trump, adding that he wants to cut taxes and regulations for automakers.
Said Fiat Chrysler CEO Sergio Marchionne in a statement later on, "I appreciate the President's focus on making the U.S. a great place to do business. We look forward to working with President Trump and members of Congress to strengthen American manufacturing."
Ford shares rose 2% to $12.55 on the session and General Motors tacked on 1.3% to $37.13. Fiat Chrysler surged 6.6% to $10.96 amid speculation Trump's desire to ease Obama's emissions goals could benefit Fiat's truck-heavy lineup.
TheStreet takes a look at two of the auto industry's main issues right now (other than the tweet-loving President Trump).
The auto industry has enjoyed a hot streak in the wake of the Great Recession. Flashy cars that could park themselves and connect to smartphones, along with rabid interest in crossover SUVs and pickup trucks, has led new vehicle sales to increase in each of the past seven years. That's the longest period dating back to the Model T, according to Bloomberg data. Share prices of the biggest automakers have responded accordingly: Ford, General Motors and Fiat Chrysler shares have surged 68%, 40% and 152% over the last five years, respectively. Shares of electric vehicle maker Tesla (TSLA) - Get Tesla Inc Report have rocketed about 700%.
But auto industry sales cooled in the second half of 2016 and so far investors in the space seem oblivious on what that means to automakers moving forward. Auto sales in December rose 3% from the prior year to 1.69 million vehicles, according to Autodata. For the fourth quarter, sales were flat, despite a 25% surge in dealer incentives, amid a sustained slump in sales of small and midsize cars.
Sales for last year hit 17.55 million, up a mere 0.4% from a year earlier. This year, forecasts call for auto sales slightly exceeding 17 million.
With auto companies opening up the incentive spigot to drive sales, and consumers not necessarily showing up as fiercely as they have in recent past, inventors could be in for a rude awakening come earnings season this year. The last thing investors in the sector need is the rhetoric on a border tax from President Trump, which will likely help weigh further on market sentiment.
There are a ton of used cars right now on the market due to expiring leases, and that has started to depress prices. The trend stands to intensify this year as Americans will return 3.36 million leased cars and trucks, said J.D. Power, up roughly 9% from 2016. Last year, the number of cars returned popped 33%. Meanwhile, the National Automobile Dealers Association's index of used vehicle prices has fallen in each of the last six months.
This backdrop has serious ramifications for automakers. When auto lenders lease out vehicles, they charge the buyer a monthly payment and make a guess of the car or truck's value when it's brought back for resale. If vehicle prices are falling faster than estimated, losses can mount. In turn, a profit center for the automakers becomes a headwind.
The fallout has already commenced, with Ford recently slashing $300 million from its financial services segment's profit estimate for this year.
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China is the land of Cadillac: Last year, sales of Cadillac vehicles in the U.S. dropped by 3% whereas deliveries in China exploded by 46% to 116,406 units, about 53,000 behind U.S. figures. Now China is poised to become Caddy's biggest market, reportedCarScoops. "We are moving Cadillac from having this very strong U.S.-centric focus to having a global focus. The time will come when we will sell more Cadillacs in China than here," company President Johan de Nysschen was quoted as saying.
So much for Cadillac being as American as apple pie.
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Something to keep an eye on: It's not a trend so far, but declining diesel and gasoline prices could be a canary in the coalmine on the economy if they continue for the rest of January. Diesel prices in the U.S. fell 1.6% last week, marking the second straight weekly drop, according to the Energy Department. The average price of regular gasoline declined even more last week, falling 3.2%.