MORGAN STANLEY: We Could See The 'Largest Decline In Used Car Prices In History'

Morgan Stanely analyst Adam Jonas is out with a note about August U.S. new car sales, and he's concerned.

The gist is that he thinks incentives and generous financing terms are pulling forward consumer demand from the future. That's how we blew away expectations for the annual sales pace in August: 17.5 million versus 16.5 million.

That is an eye-popping number, especially when you consider that an annual sales pace of 17 million was the historic high point for the U.S. market, more than a decade ago. But then again, using incentives and financing to pull demand forward is nothing new in the car business. Although some justified red flags have been raised about subprime auto loans and leasing terms, particularly when the financing stretches beyond the usual maximum of five years.

But Jonas also serves up this insight: "We believe investors who are increasingly aware of today's sales tactics will find it difficult to justify paying up for earnings beats stemming in large part from future borrowing of demand, precipitating what we fear could be the largest decline in used car prices in history."

It sounds like Jonas is worried that longer financing terms will leave buyers with weaker residual values on their vehicles than expected. This would create an interesting reversal in the used-car market. When the U.S. sales pace fell to 10 million after the financial crisis, prices spiked in the used-car market. Not enough new cars had been built to satisfy demand - and demand was elevated because consumers couldn't afford a new car.

The used-car market has now returned to normal, but if I read his concerns correctly, Jonas thinks that abundant supply and lower residual values could conspire to undermine used-car values.

That would be a new kind of abnormal for the market.

Overall, assessing the U.S. auto market is rather tricky at the moment. The average age of a car in the total U.S. fleet is still 11 years, and that's clearly driving sales to a degree, as consumers unload their rickety old rides. But automakers also see a terrific window of opportunity to sell a lot of cars into this surging demand, thereby increasing market share (if they have the right products, such as compact SUVs).

Profits are also in the picture, as carmakers whose bread and butter is trucks and large SUVs strive to sell as many of these very profitable vehicles as possible.

A jump from a 16.5-million annual sales pace to 17.5 million is something that's likely to give industry observers pause. And it makes sense to zero in on potential financing shenanigans to explain it. But then again, it's also useful to remember that automakers don't just sell cars - they sell car loans. And right now it looks as if both sides of their business are booming.