CORONAVIRUS AND THE FERRARI MARKET

Jim Weed

Volume 45 Issue 08

Apr 11, 2020

  The coronavirus is affecting life and economies around the world so I thought I would explore some thoughts on market impact. There is no doubt we are living in extraordinary times. There are remarkable measures being taken by governments and countries to combat this global scourge.

    The coronavirus is affecting life and economies around the world so I thought I would explore some thoughts on market impact. There is no doubt we are living in extraordinary times. There are remarkable measures being taken by governments and countries to combat this global scourge.

    Questions arise about whether the cure is worse than the disease. At the risk of creating some debate I feel it is necessary to put our present situation into context.

    Without placing blame as to where the virus started or whether steps could have been taken early to prevent the spread, it matters not at this point.  This virus, or the next one, or the one after that, still boils down to the human race had no immunity, or defense, to fight off the effects.

    Without antibodies the world population is vulnerable to getting this nasty form of sickness and it will not get better until a large portion of the global population has either gotten the virus or received a yet-to-be-developed vaccine.

    The easy transmission from human to human has allowed large portions of the population to infect each other and with market globalization people and goods move freely across borders to spread the virus to many countries.

    The virus is particularly nasty causing a high death rate in older and health-compromised people. The warnings have implored anyone over 60 years be extra vigilant. I suspect the majority of Ferrari owners fall into this category.

    The other parameter is the health-compromised. That could include just about everyone living because diabetes, high blood pressure, asthma, and obesity have been moving targets. The standards for each of these conditions have changed many times, what was acceptable then is now high-risk today.

    Researchers and doctors have been predicting another pandemic like the 1918 Spanish Flu for 100 years. The accepted response is to quarantine. Nobody thought it would be possible to quarantine the entire world, but that is effectively what has happened.

        Italy gets hit hard by the virus

    One of the difficulties in treating the infected is the need for intensive health care. Many patients require help from a breathing machine; the notorious ventilator. The health care system is not capable of attending to the wide-spread volume of casualties. Facilities get overwhelmed and the sick are not able to receive treatment.

    The cure is to stop the spread and that requires mass quarantine. Large portions of Italy locked down their population and required non-essential industries to shutter their doors, economically shutting down the country.

    Ferrari is a non-essential manufacturer. As a responsible employer they have stopped production and most of their suppliers have also stopped production. Automobiles, even Ferraris, are not made completely within the factory walls. Components come from outside suppliers. Things like headlights and taillights to hardware are all made by someone else. When one company shuts down the others often do the same.

    In this case manufacturing in all of Italy has slowed or stopped. This will take a toll on sales. Ferrari stands to lose at least two months and possibly more in lost production. Will this bode well for future collectible Ferraris when production totals will be much lower than previous and future years?

    Will we look back upon any 2020 model as a special year when limited numbers were made? If production is able to be started by the middle of April, even if at a slower pace, will it be possible to satisfy the existing orders already in the pipeline?

    Production could also be delayed until much later. What happens if Italy prevents the return until May or even June?

    Most manufacturers roll out new models in September. While Ferrari has not always followed the American way of new car roll out before the end of the year, they have typically followed that example.

    Will Ferrari just finish the cars already in production and begin the retooling process for next year’s models? I remember the 1983 Corvette had production problems and there were no 1983s made. The 1984 Corvette was first sold to the public in March of 1983 as a 1984 model.  Will Ferrari abandon the 2020 cars and move into the 2021 models?

    Collectors are always looking for something special and owning one of the “Coronavirus” cars could be considered special. Rarity has its rewards and I predict in the future to own one of the post-quarantine 2020 build date Ferraris will be desired. Much like a 1988 ½ 328 GTS is today.

        Global Shutdown

    While Italy has been shut down the rest of the world has followed suit. As the virus moved through the population, countries have limited movement within their borders and also restricted movement across the borders.

    Some countries have instituted strict non-movement or shelter-in-place orders while others have just “highly recommended” shelter-in-place orders. Either way, businesses have had to severely limit sales or have had to close completely.

    Here in America many cities have experienced varying forms of lockdown and our economy is suffering. It would appear the hospitality industry is the one hit the hardest but try to find a dry cleaner or get a haircut, and it becomes apparent that many small businesses have been directly affected.

    Many large retail stores have changed their format to limit the number of customers at one time or have had to adjust hours to allow a higher level of cleaning during the off-hours.

    U.S. unemployment instantly spiked to unprecedented levels. While the government is stepping in to help, it will never be able to cover all expenses or losses to all of the people and businesses.

    Which brings me to “where do we go from here?”

    I can speculate that most Ferrari owners will not miss a meal if the paycheck were to stop for a few weeks. I can also say that most Ferrari owners will not lose their house and be relegated to living in the Ferrari. (The thought of that kinda makes owning a 2+2 a good back-up plan).

    Most Ferrari owners will be affected in some way. Revenues are going to be down. That may mean no bonus. Cash flow is going to be down. Mitigation expenses are going to go up. Generally the cost of business is going to increase and that will put a bite on net income.

    Oh, I haven’t even mentioned the stock market disaster. The economy had been on a good three-year upward trend. Stocks were good and the market was flirting with new highs. Who would have thought a number like 30,000 would have been possible three years ago?

    Overnight the market lost, and lost big. Instantly all the gains had disappeared and we are back to 2017 numbers. I suspect most Ferrari owners are invested in the stock market; I know my 401 will reflect the downturn.

        Past Market Forces

    Through this doom and gloom is there anything we can be thankful for? I believe it is possible to review some of the past market forces for answers.

    One of the first Ferrari market corrections was in 1989. The possibility of Enzo Ferrari’s passing brought a lot of speculator buying into the market. Prices rose nearly overnight until the bubble burst. A scenario very similar to the housing crash of 2007.

    Borrowed money purchased many a Ferrari and when the music stopped Ferraris flooded the market causing a glut of cars and few buyers. Prices fell hard.

    I believe the housing crash of 2007 helped create the steady rise of Ferrari prices that continued until 2014. While it took another couple of years to be able to pinpoint the exact pinnacle, by 2016 the market was recognizing the decline.

    I believe the poor economy coupled with the poor housing market in 2007 helped to drive money into tangible objects like Ferraris. At least it could be seen and held and at the least enjoyable to drive and show.

    These Ferraris were purchased with excess cash. While not initially appreciating, as time went on the investment became better and better. The point is most were purchased outright without highly leveraged loans outstanding against a depreciating asset.

    As Ferrari owners began to recognize in 2016 the market had shifted there was not panic selling. A slow decline in values is always unfortunate but without flooding the market with too many cars there has been a nearly normal exchange of cars between owners.

    The laws of supply and demand still apply to Ferraris.

        Where Do We Go From Here?

    Clearly many will be hurt by the global pandemic. Business shutdowns are never good. While many things look bleak for now I believe what we will really experience will be a pause.

    It is difficult to imagine almost everything on hold but that is what is happening. There is much to be said about everybody being in the same boat. There is not one sector, except, maybe healthcare that is going gang-busters. Even then, I believe in the end, they will not have made as much from the increased effort.

    So, what we really have is going to be a two-month, maybe three-month, pause of the economy. When, not if, things can be loosened, up the economy is going to pick up where it left off. Restaurants may be the one sector that is hurt the most, but people gotta eat. New restaurants will replace the old.

    As for other businesses, the key will be turned in the door, the lights turned back on and the pent-up demand will carry forward.

    The stock market has seen the possibility of 30,000. I don’t think it will hold back once commerce is allowed to continue. But what about the Ferrari market?

    I have already gotten calls and new subscribers looking for advice on whether Ferraris prices are going to go down further. Bargain hunters are out there but is the market going to continue its slow decline as it has through the last five years? Or are we looking toward a new drop in value?

    That depends upon the owner of every Ferrari. How desperately will cash be needed? If your business took a hit it might be better to cash out to make a payroll payment, or rent. If one owner needs to sell, the market will be able to absorb the sale.

    If a mass of owners need to do the same, a glut in the market will guarantee a further drop in value. If owners have carefully planned for catastrophes and there is no desperation in selling, the market may continue the normal flow of Ferraris from owner to owner.

        Supply and Demand, Demand and Supply

    Now, could this virus episode actually bode well for the Ferrari market in general? Sure it could. Businesses open back up and pent-up demand create the booming economy we know is possible. Everybody is making money again. Where could you put some of that excess cash when Ferraris are experiencing the aforementioned five-year downward trend?

    If there are enough buyers to pick up the available inventory of used and collectable Ferraris, prices should stabilize or even increase. The demand will slightly be more than the supply.

    On the other hand if owners have taken a beating between the shutdown and the market, the decision to convert a Ferrari into cash might be stronger than the ability to hold on until better days. If more cars come to market than can be readily sold, the supply will be greater than the demand.

    There are already new potential buyers hoping to find bargains with the expectation that desperate owners are willing to let go of decent Ferraris. So which direction is the market going?

    It’s too early to tell. The crystal ball always gets a little fuzzy when attempting to predict the future but you can bet as I follow the trends I will be able to report on what has happened.

    Now, my advice is… prices are reasonable today, we have seen the market go up and come back down. This down cycle will change and if it continues to go down, well, how much worse could it get?

    If you don’t already own a good driver you should look for one in the Ferrari Market Letter. There are many enjoyable models to choose from.

    Gas is less than $2.00 a gallon and every Ferrari is fun to drive. That is a good combination; go find a Ferrari that you would like to drive, fill the tank, enjoy the reduced traffic on your favorite roads and keep practicing social distancing.

    Why not? Ferraris are meant to be driven!