Cathie Wood, the founder of ARK Investment Management, expressed skepticism about the auto debt market, explaining how a fall in the residual value of gas-powered autos could lead to serious losses.
What Happened: Wood tweeted in October, “Given the accelerated consumer preference shift toward electric vehicles, used car prices and the residual value of all gas-powered autos are likely to plummet, causing serious losses in the $1 trillion auto debt market."
See Also: How To Invest In Tesla Stock
Given the current global macroeconomic environment and volatility, auto company stocks have registered negative returns in line with the general market.
Ford Motor Company F and General Motors Company GM shares have lost over 40% since the beginning of the year.
Interestingly, Elon Musk replied to Wood’s tweet, indicating he fully agrees with the notion. Musk's Tesla Inc TSLA is the top holding in ARK’s flagship ARK Innovation ETF ARKK.
Drop in Index: Wood cited the Manheim Used Vehicle Value Index, which showed wholesale used-vehicle prices fell 3% in September compared to August. The index declined to 204.5 and is now down 0.1% from a year ago, according to a company statement.
The report further explained the average daily sales conversion rate decreased slightly to 49.2%, below normal for the time of year.
“For example, the sales conversion rate averaged 52.1% in September 2019. The lower conversion rate indicated that the month saw buyers with more bargaining power for the time of year,” it said.
It also pointed out that only three of eight major market segments saw an annual increase in seasonally adjusted prices in September.
“Compact cars had the largest increase, at 5.9%, followed by vans and pickups, both of which increased by 0.8%. The remaining five segments’ prices were well below the industry, with mid-size cars only minimally lower,” it said.
Gasoline Demand: Wood has been vocal about how gasoline demand has taken a hit despite a higher number of cars on the road.
“Demand destruction. Gasoline demand in the US has dropped below the level hit during the depths of the coronavirus in 2020 to levels last seen 25 years ago in 1997, even though the number of cars on the road — most of them gas-powered — is much higher than it was 25 years ago,” she tweeted on Sept. 20.
This story was originally published on Oct. 10, 2022.
Photo courtesy: Ark Investment Management
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