Articles

Michael Sheehan's Ferraris-online.com Article

Ferrari’s Cycle of Booms and Busts

The best Ferraris have certainly been a better investment than a strip mall in Florida, Nevada or Arizona

As appeared in:

Sports Car Market—September 2011 issue

Sheehan Speaks

by Michael Sheehan

1973 Ferrari 365 GTS/4 Daytona
1973 Ferrari 365 GTS/4 Daytona

Since 2008, the world’s economic markets have been, at best, volatile, but how does that relate to the Ferrari market of today—and tomorrow? As aspiring Ferrari-socio-economists, we always look at the past to know the future, so let’s start with the first fuel crisis of October 1973. As a gallon of gas went from 33 cents to $1 a gallon, exotic cars went from being desirable to dumb. Near-new Daytonas, Dinos and Miuras cluttered Southern California used car lots with Daytonas priced at $15k and Dinos at half that.

Ferraris boom, bust—and boom again

All cycles end. Consumers painfully accepted $1-per-gallon gas, and from 1975 to 1979, America’s economy and real estate markets boomed and inflation soared. The Ferrari market had its first boom. In only five years, from 1975 to 1979, the $15k Daytona became a $75k Daytona, a 400% run-up over five years. In August, 1979, party-crasher Paul Volker became the Fed Chairman. Volker cranked interest rates to 21%, which killed inflation, the economy, the real estate market and the Ferrari market. By 1984, Daytonas were back to $50k.

As interest rates dropped in the early 1980s, the money markets stabilized, liquidity returned, the economy again took off in 1985, and Baby Boomers began celebrating their big “Four-O” with a buying binge. When the Japanese came to the party in 1986, Ferrari prices spiraled onward and upward. By the end of 1989, a nice Daytona had reached $500,000, a 900% run-up over five years!

But the 1985–89 boom was built on voodoo economics. The Bank of Japan’s interest rates were at a (then) ridiculously low 2% to 3% and massive liquidity flooded the Japanese market. The Japanese banks were offering an unbelievable 100%-plus financing against the appraised value of real estate! As the yen doubled from about 300 to the dollar in 1985 to about 150 to the dollar by 1989, anything outside Japan was half-price.

Back in the United States, on what is now known as Black Monday, October 19, 1987, the Dow Jones Industrial Average started down and by the end of October had lost almost 23% of its value, following the lead of Hong Kong, which fell 45%, Australia fell 41%, the U.K. fell 26%, and Canada fell 22%

While most would guess the Ferrari market would be hard hit by the dip in the Dow, investors pulled money from the stock market into collectibles, such as art, real estate and autos, so the Ferrari market kept on climbing through 1988 to the end of 1989.

Japan defies financial gravity

As other stock markets headed down during the late 1980s, the Japanese Nikkei index kept climbing through 1988 and 1989, reaching a peak of 38,915.87 on December 29, 1989. While Americans and Europeans had started to pull back from the Ferrari market, the Japanese were very aggressive buyers, and they kept redefining the market upwards. The crash of the Nikkei index in December of 1989, coupled with the following implosion of the Japanese real estate market, brought everything to a screeching halt. By 1994, our benchmark $500,000 Daytona was now a $125k car!

By 1995 the Ferrari market had begun a slow but steady climb, but stopped again in 2000, when the Dot Com Bubble burst and NASDAQ markets imploded. The market got another blow from the September 11, 2001, terrorist attacks. Despite that, the financial markets slowly gained strength through the early 2000s, and by late 2007-2008, our benchmark Daytona had crossed well over the $300k barrier.

The latest bust and boom

The you-know-what again hit the fan in 2007, with the crash of the sub-prime market, and the economy hit the proverbial wall in 2008 with the demise of Lehman Brothers and the freezing of the financial markets. The world entered the worst financial downturn since the Great Depression started in 1929. If one had to sell, our benchmark Daytona was a low $200k car.

Recovery began in late 2009, and in August 2010, the Monterey auctions paid proof to a market revival with a whopping $172m in sales, up by $52m from 2009. These impressive results were reinforced at Scottsdale this past January with a very impressive $159m in sales

The boom was back, and as of this writing, excellent Daytonas are now back over the $300k mark. I predict that the Monterey auctions will be a booming success and the market momentum will carry the boom into next year’s Scottsdale auctions. Beyond that, my crystal ball goes frustratingly murky.

Looking at the much bigger picture of collector cars as a part of the overall economy, these strong sale numbers defy the general overall economic climate. Hopefully, Ferraris are early-market indicators signaling an economic recovery is coming. Or is there a move of capital to collectibles against possible coming inflation?

What most would agree on is that there is no lack of bucks or buyers in the collector car market today, and the greatest upward movement is in the top end. We see aging Baby Boomers looking at their last chance to buy and enjoy top-notch cars.

As was obvious at Monterey in 2010, a lot of buyers just don’t worry about the relationship between the financial markets and the collector car market. I’ve long opined that $1m car buyers have a net worth of more than $10m, and $5m car buyers are worth far more than $100m. With that level of wealth, Ferraris are merely another line item on a financial statement. You don’t see bidders on vintage Ferraris waving books of foodstamps in the air in the auction arenas.

High-end boom and bottom-end mud

Another factor to consider when analyzing the Ferrari value game is that there are multiple market segments in the Ferrari world. The deep-pocket players are shifting some of their assets into high quality collectibles, such as the best-of-the-best Enzo-era Ferraris, which are steadily moving up.

1999 Ferrari F50
1999 Ferrari F50

The middle market—the $500k to $1m Enzo-era cars and the 288s, F40s, F50s and Enzos—are strong with modest upside. Enzo-era cars under $500k are doing fine.

The market bottom, which is flat to down, includes the lower-tier Ferraris, such as 308s, 328s and Fiat-era Ferraris. These cars go to players with fewer assets who are also focused on preserving their limited cash. As for the Montezemolo-era cars, their value will only go down— especially when routine, required maintenance, like belt changes, can easily cost $8k on a $40k 348 or a $50k 355. A rising market does not lift all Ferraris.

However, as demonstrated by the Monterey results of 2010, the car market has again got that loving feeling. Collector cars are concrete assets that can be easily transported and instantly converted into other currencies— and should beat the specter of looming inflation or the possibility of further deflation. Today’s buyers are not hesitant to step up to buy the right car and while they are not as liquid as stocks or bonds, the right car has far greater bragging rights.

The developing world enters the party

While the Japanese have long since left the Ferrari party, a whole new group of buyers from Russia, Eastern Europe—and much of Asia and the Middle East—are becoming Ferrari market-makers. These new players will buy more cars as the planet’s supply of multi-millionaires and billionaires grows.

The cutoff for the Ferrari class at Pebble Beach has long been 1972, and with good reason. The Ferraris of the early Enzo era set the standard for both race and GT cars. That means the most exclusive—and the most-collectible, best-appreciating Ferraris have always been, and will always be, the early Enzo-era cars. They have certainly been a better investment in your garage than a stack of Lehman Brothers stock certificates or a strip mall in Florida, Nevada or Arizona.

It’s a simple equation: more wealth is chasing a fixed number of Enzo-era cars. However, let me end on a cautionary note. Despite all of the good things I’ve noted above, our subject Daytona, currently at $300,000, has yet to reach the $500,000 of its 1989 heyday. Which means some Ferraris are a better investment today than they were 22 years ago.