Last updated Monday, October 2, 2006

Things have not changed much since our last market conditions report in mid-August. The European luxury segment of the market has continued to decline substantially, pick-ups and SUVs have suffered modest erosion as have domestic cars and many mid-size foreign and domestic competitors in that highly saturated market segment. About the only group that has held its own are the smaller examples of all the segments - SUVs, pick-ups, and cars – 4-cylinders in particular and especially around the $8,000-$12,000 price range.

As we enter October we think that the softening of the market that we normally see this time of year is forthcoming. Certainly convertibles and sport-coupes have already experienced significant declines and will probably continue to do so for the next month or so. The higher priced European models have been particularly hard hit. Among those are the new-body (’03 and newer) SLs, BMW 3-series (especially the M-3s), Boxsters and 911s. Audi TTs and A-4s, and Jaguar XKs. Corvettes, Volvo C-70s, Saab 9-3s are experiencing similar declines. The rest of the convertible/sport-coupe segment is declining, but not as rapidly.

As we have been saying for months, the European high-end market in general has been experiencing unusually harsh treatment. Mercedes products have been hardest hit. There are simply too many of them for the market to absorb and their depreciation has been about twice what has been normal. Certainly BMW, Jaguar, Lexus, and Audi have all suffered, but not to the degree of Mercedes. Whoever has an over-supply of inventory coming into the marketplace from that segment will probably have rough going for the next couple of months.

Larger SUVs and other such gas guzzlers have already taken significant hits and with the price of fuel moderating we expect that they will recede gently, if at all. A common perception is that we are really coming into the season for those vehicles, but we have noticed over the past few years that unless there is a shortage of supply those vehicles do not follow any seasonal pattern and often decline in line with the rest of the market during the late fall/early winter market. We don’t foresee a shortage of those vehicles this year.

Having said that, there continues to be a shortage of most types of vehicles this year and because of that there is a good chance that the market will not erode as dramatically as it often does over the next few months. Many segments have already lost a great deal of value and have become relative bargains. But there is still very little demand in many segments and for that reason the market is and has been highly unpredictable. It will probably remain that way for the rest of the year.

Dan Galves