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I recently read a piece in one of the CFA Institute publications about the dangers of “conviction” levels.  Warren Buffet talked abut the need to constantly challenge one’s own convictions and outlooks as an excellent measure to keep thinking fresh, timely and accurate.  It was with this in mind that I recently stumbled across an amusing pair of headlines in the May 11th issue of Automotive News.

Let me first say that the auto sector fascinates me for three reasons.  First, it is extremely important to the US economy.  One statistic everyone has heard is that roughly 1 million people (read as consumers) depend on GM’s post retirement health benefits.  Second, it is a huge consumer of resources.  Approximately 30% of steel consumption goes to the auto sector.  The plastics sector depends quite heavily on automotive as well.  Finally, it is a microcosm of many problems facing the US – healthcare, retirement benefits, environment, reliance on  fossil fuels, new fuel technology and demographics.

So I opened up the May 11th issue of Automotive News and found this curious headline: “Chrysler shoppers shrug of Chapter 11”. The article goes on to say that Kelley Blue Book’s survey of consumers showed that people care little if at all about the bankruptcy.  Sure, cars were junk before, they’re junk now.  But another survey by ntoed that the percentage of respondents who said they would consider a Chrysler for their next purchase increased 30% in the 7 days after bankruptcy was declared. 

Now, I was convinced, along with many others, that once an OEM filed, buyers would flee out of concerns that the warranties would become worthless.  We were in good company, in conclusion, if not in reasoning.  In a sidebar to that same Automotive News article was the following headline “Residuals tumble after Chapter 11 filing.” Apparentlythe Automotive Lease Guide slashed residuals on Chrysler products after the Chapter 11 filing.  Now that makes sense.  And this fits my previous conviction. 

The bit about consumer acceptance really shook my conviction, however, so I paid close attention to the Chrysler Financial lenders call.  One bit of info that came out was that auction sales in May decreased (i.e. more fleet and lessor purchasers) and prices at auction actually rose.  Apparently, Chrysler cars and minvans became more valuable and desirable after bankruptcy.  These result more reflect the Kelley Blue Book and findings in the main article than the sidebar leasing information.

One big take away for me was that conviction levels must always be tested and tempered.  Even an obvious outcome may not be so obvious, so we as analysts must be careful and humble in taking a view on anything.  This sounds obvious, but I know I often claim a high level of confidence in an outcome.  Quite possible that confidence could be greatly shaken.

But that’s just one credit analyst’s opinion.


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