Morgan Stanley Suggests Reducing U.S. Auto Exposure Amid Cyclical Peaks - Ford Motor (NYSE:F), General Motors (NYSE:GM)

In a report published earlier today, Morgan Stanley analyst, Adam Jones said, "The very strong underlying North American results reported by both GM

and Ford

last week reinforce our view that now is a great time to reduce exposure to US auto names as we hover at cyclical peaks." Jones noted that with US SAAR reaching 17 million the US auto cycle has moved from a "need to buy" to an "I just want to buy" consumer mindset. Reading the noted you get the idea that Jones is trying to remind investors of the age old of "buy low, sell high". Supporting his view, Jones provided a "few key thoughts" to consider about the sector including.

Clearly pulling forward demand - Jones noted the two most "under reported" and "unsettling" trends include extended loan maturities and inflated residual values. He explained this results in lower monthly payments, which provides the appearance of affordability. Jones commented, "Consumers buy cars like they buy houses - lower payment, bigger car."
Over dependence on China - Jones noted that Jaguar Land Rover (JLR) cut prices in China, which is estimated to be 50 percent of JLR's profit, by as much as 10 percent due to an antitrust campaign. Moreover, he says this was followed by price cut announcements from Audi and that similar cuts from GM and Ford are likely.

Jones concluded by stating that he sees Tesla

TSLA

as the only car manufacturer with meaningful upside and named Magna International Inc.

MGA

as the top pick in the sector.

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