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Thursday, August 26, 2010 - 00:00

Some of you may be tired of what you perceive to be our bountiful optimism over the fundamentals of the aftermarket and even our positive inclination on so many of the publicly traded equities in the space.

While it may appear that we are “perma-bulls,” we would disagree and rather posit that the results of this space and continued favorable secular trends simply warrant a more constructive outlook. The two questions we continue to receive from investors are: 1) can secular trends for this group still provide a tailwind into 2011; and 2) have they “missed the trade?”

In our opinion, there are three main factors underlying the current strength of the aftermarket — elevated unemployment levels, depressed new vehicle sales and increasing failure rates of critical parts as vehicles age. While these three drivers are clearly interdependent, we think the combination of these factors should continue to support above-average growth rates for this industry well into 2011 and beyond.

During the “golden 90s,” the U.S. economy created an average of 175,000 jobs each month. While not economists, we are fairly comfortable in saying that job creation of this magnitude in the current economic morass is highly unlikely – and actual results over recent months have been even more gloomy.

The civilian non-institutional population of the U.S. has tended to increase by about 200,000 each month. And while the labor force participation rate can be a bit volatile — particularly when the prevailing perception is that work is hard to come by — by simply applying a long-term average of about two-thirds of the population one can quickly see why concerns are mounting about the likelihood of material declines in the unemployment rate even under the scenario of moderate economic recovery.

Given the strong inverse correlation between unemployment and new vehicle sales, the fact that lower new vehicle sales will spell an increasing average age of the fleet, which in turn will yield higher aggregate replacement rates for critical parts… well, I think you see the point.

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