August was another good month for U.S. auto sales. Last month, light vehicle sales rose to an annualized pace of 17.8 million units, the highest reading since July 2005.

Even more impressive than the strong unit numbers was the type of autos that were driven off the lot by U.S. consumers. According to reports from General Motors Company(NYSE:GM), Fiat Chrysler Automobiles NV (NYSE:FCAU) and Ford Motor Company (NYSE:F), it appears that consumers were more interested in SUV and luxury models which carry higher profit margins for the Auto makers.

Ford Motors enjoyed a 5.6% increase in August sales, led by the company’s “workhorse” F-150 pickup series. This is the company’s most profitable line of autos, so it is encouraging to see this model driving sales higher.

Fiat Chrysler reported a 1.7% increase in August sales. The company sold 201,762 vehicles during the month with particular strength in high-margin Jeep and Ram truck models.

General Motors actually reported a slight decline in August units. But even this contraction was largely bullish as the company has decided to scale down its less profitable fleet vehicles and focus on higher-margin brands.

Even non-US car companies reported strong sales for the month with Audi accelerating its U.S. sales to nearly 10% growth.

Low Oil, Strong Employment Boosting Business

The strength in U.S. auto sales is likely the outcome of two major trends working in favor of U.S. consumers.

First, lower oil prices have helped to push gasoline prices lower. With less money spent on fuel costs, consumers have more money to spend on discretionary items (such as a car payment). Also, lower gas prices help more families justify larger units such as the SUV’s which are so profitable for auto-makers since it now costs less to drive these vehicles.

We should note that for much of the summer, it was refiners, not consumers, who were profiting from low oil prices. Strong demand for gasoline kept prices from falling nearly as much as oil prices had declined. But today, it appears that gasoline prices are now catching up to the decline in oil prices.

A strengthening labor market in the U.S. is also helping to boost consumer confidence. Last week, the commerce department reported that consumer spending for the month of July rose 0.3%, while incomes rose an average of 0.4% for the month.

This data continues what has been a very steady (albeit less than stellar) recovery in the U.S. labor market.

Another item that may be helping to drive consumer confidence is the strong recovery in the housing market. U.S. home prices have been moving steadily higher with rental rates also increasing and vacancy rates moving steadily lower. For stable households who own homes, an increase in values can help to drive optimism, which in turn can affect high-end car sales.

China’s Weakness Priced In

While strong U.S. sales were a welcome data point for car manufacturers, investors appear much more focused on what is happening in China right now. A slowdown in manufacturing and a surprise yuan devaluation has led to a sharp stock market selloff.

In July, Chinese vehicle sales declined by 6.6 percent in July, which followed a 3.3 percent decline in June. Since China is now the world’s largest car market, these declines have naturally spooked investors.

But at this point, the weakening data from China has been fully accounted for by analysts and investors. Shares of U.S. car manufacturers appear to be pricing in a “worst-case scenario” for China, while largely ignoring the robust strength in the U.S.

With both General Motors and Ford shares trading at a large discount to prices at the beginning of the year, and both companies paying a dividend yield above 4%, we’re interested in setting up bullish income positions that will pay us well while holding these shares and will also lead to profits as investors start to see the potential for U.S. markets offsetting Chinese risk.

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