 Good day fellow investors. Let's discuss a little bit the automotive industry. There is something very important that I want to share with you here because one thing is the development. This is the outlook. This is the future electric vehicles and everything. Really a beautiful beautiful future ahead but between the future and now there is still a big big ocean of debt and I want to quickly discuss and touch on something very important when it comes to investing. Sector fundamentals. It's not only about the stock. It's crucial to understand the sector fundamentals, the situation where those companies work in and how that situation can change. Many look at the fundamentals of a company to see how great those are and think it will be a great investment. However, things are not that easy. If you look at Ford, we look at the fundamentals price earnings ratio of 10 dividend yield of 6.7%. You should think okay the dividend yield is free. Four times what the SAP 500 offers. Cars are expected to do well in the future. Economic growth, development, more sales, more cars shift to electric vehicles so everything should be very positive. However, the fundamentals of the industry are a bit different. Those are not that great and that's why Ford is trading at the dividend yield of 6.75%. Recent articles in the Wall Street Journal discussed debt and car purchases and I really want to give this micro perspective and later close with the macro perspective on the industry and then again on micro on Daimler and how things actually work. The seven-year auto loan America's middle class can't afford its cars. Automakers are lending more and more money for longer periods in order to facilitate the sales of those cars and if we look at household debt and the composition of it of course mortgage has picked up as home prices picked up but if we look at the growth of student loans and car loans then we see that there is something important going on. Car loans are getting bigger and bigger in perspective of what's going on. Car loans are much shorter than mortgages and therefore also put pressure on consumers. Longer loans make for lower monthly payments but this also means that the time when you renew to buy a new car will be further in the future so also car makers are sacrificing future sales to sell more cars now because they cannot sell less cars and we'll see later how that is detrimental immediately immediately to the company. Also something very important the negative equity trade-in due to longer loans is growing very very fast so share of trade-in with negative equity is already above 40% when it was below 20% in 2009 so car makers are happy to trade-in for new cars just sell they just worry about selling cars and not about the long-term sustainability of what they are doing. There is again a bond boom so cars are being sold the financial arms of those companies or other banks take those loans repackage them and then sell them to the market for Wall Street investors repackaging loans bonds etc something very very familiar to what was going on in 2007-08 with mortgage loans now it goes on with car loans which really destabilizes the long-term fundamentals of the system further if you look at car dealerships when they sell a car they should make a profit on the car but no they are making more and more profits on the financing and insurance part of the car and we recently bought a second-hand car and the guy said I would prefer you to buy a car on financing on the zero Renault financing program zero interest rate then you buying it with cash as we did it was not a big deal so we've just paid cash not to think about and to leave room in our salaries for perhaps a mortgage loan down the road but he would have preferred a financing and insurance sale so that he makes even more money in the deal further compared to 2008-09 there are more and more sub-prime loans that the delinquency rates are growing even if the unemployment rate is at record lows if that unemployment rates change the delinquency rates on cars will also change and we lead to a lot a lot of trouble for the industry here just an example Mr. Jones's loan for this car that makes a quarter of his salary has been bundled up with other 7 000 loans for the Honda 2017 Accords and sold for 1.25 billion further so this is what's going on however the market is very very fragile and I don't see growth coming further because the pressure on the consumer is already very very high so this is the environment but let's look deeper let me show you the balance sheet of Mercedes if you look at the balance sheet the equity attributable to shareholders of Daimler is 60 billion euros total equity and liabilities are 294 billion euros this means that there is liabilities of 244 billion euros against 60 billion of equity that is huge and most of that liabilities and assets come from financial services where the company finances car purchases because that's how they facilitate cars and you look at that oh I pay just I don't know 200 300 per month and I can drive a new Mercedes but over the long term that's not sustainable and this is the real danger when it comes to investing in such a sector if we look at the financial performance in the second quarter of 2019 just a small increase in gross profit in gross costs in the cost of making those cars has led to a big shift in profitability for Mercedes the revenue was up 5% but EBIT earnings before interest this there is no interest so we will see later has shifted from positive to negative very quickly so everything is good things are still good in Europe but Daimler has seen free cash flow negative and earnings negative just on small small percentages changes and there there are always other issues when it comes to automotive companies diesel, Takata airbags issues etc recalls and those are always there and will always be there even with companies like Mercedes so their financial performance as said very negative and this is when everything in the environment is still great so the fundamentals of the sector show how fragile things are and that's why you have such a nice dividend yield I don't know from where will growth come will there be enough sales to cover those financially engineered systems and then also something very important if we look at the bonds of Daimler look at the coupons at which they issue at which they borrow money 0 0.2 0.2 and the yield on those bonds when it's traded is usually 0% so Daimler can get access to free money that is equal so already now you are buying a bailed out company because if you can get free money for me that's a government bailout so the ECB is bailing out Daimler because if those rates would be 2% and people would have to buy cars at 4 or 5% then the sales would crash down the company would be bankrupt as you say Kecks so this is it auto industry bailed out in 2009 Daimler is already being bailed out so these are the sector fundamentals are telling me okay it's unreal it's financially engineered and it's already bailed out it's not a healthy long-term sustainable environment where I would like to put my money into so this is my message I've looked at the car industry for the past years analyzed companies I even used Daimler as an example in my book saying how the value should be around 40 long-term value but given the financials perhaps that should be amended when I wrote my book the price was 70 so it is getting riskier and riskier thank you for watching looking forward to your comments don't forget to subscribe and I'll see you in the next video