A Warning From the 'Godfather' of Subprime Auto Loans

New lows for crude oil... OPEC is running out of options... Hertz and Avis are plunging... Porter's auto prediction is already playing out... A warning from the 'godfather' of subprime auto loans... Good news for Europe... The 'stealth bull market' continues... Steve Sjuggerud's highest-conviction idea today...

Crude oil plunged to a new five-month low last Thursday...

West Texas Intermediate ("WTI") crude – the U.S. benchmark for prices – closed below $46 a barrel for the first time since late November.

Crude prices rebounded today on news that OPEC is planning to extend its production cuts when it meets on May 25. As Saudi Arabia's energy minister Khalid al-Falih said during his speech at the Asia Oil and Gas Conference in Kuala Lumpur this morning...

Based on the consultations I have had with participating members I am rather confident the agreement will be extended into the second half of the year and possibly beyond.

The producer coalition is determined to do whatever it takes to achieve our target of bringing stock levels back to the five-year average.

As always, we take comments from OPEC members with a huge grain of salt...

But even if the group can extend these cuts, it may not be enough.

Despite meeting its pledge to cut production by 1.2 million barrels per day ("bpd"), OPEC has failed to keep prices elevated. In fact, oil has now given up all of its gains since the deal was announced in November. Meanwhile, global stockpiles remain at or near an all-time record, while U.S. shale-oil production has surged back to two-year highs.

Worse, if the extension fails to boost prices, OPEC may be unable to do much else. As Bloomberg reported late last week...

OPEC has limited room for maneuver when it meets on May 25 in Vienna to discuss the deal, and is almost certain to persevere because the alternatives look even worse. If it were to deepen the cutbacks, even more shale supplies might come along to fill the gap, according to UBS Group AG. Abandoning the policy and restoring output would inflict the economic pain of crude below $40, Citigroup Inc. predicts.

"The risk of a higher cut is that it could trigger too strong an increase in prices and support U.S. shale," said Giovanni Staunovo, an analyst at UBS in Zurich. "If they change strategy, Saudi Arabia would lose face. You can't say you want lower inventories, and after a few months give up."

We also note that despite this morning's announcement, crude's "bounce" was rather weak...

Prices rallied less than 1% before reversing lower again in afternoon trading.

Oil also remains well below its 200-day moving average ("DMA"), a level many traders use to differentiate bullish and bearish trends. As you can see in the following chart, this is the first time crude has broken decisively below this level since the market bottomed in 2016...

Meanwhile, speculators are beginning to unwind their record bullish bets...

The U.S. government's latest Commitments of Traders ("COT") report shows net bullish bets on crude have fallen from an all-time record near 600,000 back in March to just 373,000 today.

Yet, as you can see in the following chart, this is still well above the levels that have marked significant bottoms in the past...

In sum, we believe the longer-term risk in crude oil remains to the downside. Prices are unlikely to move much higher even if OPEC extends its cuts later this month. And should they fail, prices could quickly move back below $40 or even $30 per barrel.

However, we also note that crude has become particularly oversold on a short-term basis. Don't be surprised if prices move higher to test the breakdown at the 200-day moving average before heading lower again.

Last week, rental-car company Avis Budget (CAR) reported first-quarter earnings...

The Stansberry's Investment Advisory short recommendation said its losses more than doubled year over year to $107 million, or $1.25 per share, compared with a loss of $0.53 per share in the first quarter last year. Revenues fell to $1.839 billion from $1.881 billion last year.

The company blamed higher fleet costs and falling used-car prices for the larger-than-expected losses.

This should sound familiar to regular Digest readers. And there's likely much more pain ahead. As Porter explained in the November 8 Digest...

Most investors don't realize that the entire car-rental business is basically a giant leveraged bet on the value of used cars... Since 2010, Avis and Hertz have spent more than $110 billion on new-car purchases. Meanwhile, their used-car sales generated $85 billion. That's a net cash shortfall of $25 billion...

As long as the amount of money and credit being pumped into the auto industry is growing, car-rental companies can grow their fleets and keep buying new cars. But the moment the credit spigot gets turned off, they have a big problem. In the first place, when lenders start repossessing cars, used-car prices collapse...

These companies are at the mercy of used-car prices. The only significant asset on their balance sheets are used cars. Together, Hertz and Avis own $26 billion worth of used cars (62% of their assets). If used-car prices fall, say just 15% on average, these companies will lose around $4 billion – or more than their total equity.

But losses don't have to get that big for the company to collapse. Just the fear of a decline in used-car prices would wipe out the company, because that would lead to much higher borrowing costs...

Shares of fellow Stansberry's Investment Advisory short recommendation Hertz Global (HTZ) tumbled more than 15% in after-hours trading after reporting first-quarter earnings.

CAR and HTZ are down around 25% each over the last three months alone. Stansberry's Investment Advisory subscribers are up around 40% on the combined position so far.

Apparently, we aren't the only ones worried about these problems...

Don Foss – the billionaire inventor of subprime auto loans – is clearly concerned, too. As Blomberg reported on Thursday...

When Foss was inducted into his industry's hall of fame in 2015, he was adamant he wasn't retiring. Addressing a Las Vegas audience of easy-credit used-car dealers who lauded him for creating the subprime auto-loan business, he said, "I'm just getting started."

Last summer, however, the 72-year-old billionaire sold Carite Corp., a chain of used-car dealerships that he founded in 2011. In January, he stepped down as chairman of Credit Acceptance, the company he started in 1972 that pioneered extending auto loans to customers with rock-bottom credit scores or none at all. A month after he left, he sold a big chunk of his Credit Acceptance shares for $128 million.

The company didn't say why Foss sold his shares and declined to comment. Foss didn't respond to requests for comment.

As Stansberry's Investment Advisory senior analyst Bryan Beach noted in a private e-mail last week, this is a BIG deal...

The creator of the subprime-auto-loan market – a man who likely knows more about the industry than anyone else alive – has quietly cashed in cashed in his chips and left the casino.

The weekend brought good news for the euro...

Yesterday, pro-European Union ("EU") candidate Emmanuel Macron defeated far-right nationalist Marine Le Pen to become France's next president.

While we had no horse in the race, the victory was a clear win for the EU and the euro. It should also help ease concerns about the spread of populism following last year's "Brexit" vote.

If so, the market's focus could return to the European economy, which continues to show signs of strength. As the Wall Street Journal reported last week...

Signs of economic revival in the euro currency zone are multiplying, indicating that Europe is finally healing from a crisis-racked decade.

The 19-country eurozone enjoyed a second successive quarter of strong growth in early 2017, outpacing the U.S. Business surveys point to a further acceleration in the current quarter. Markets are rising strongly as confidence in the economic outlook swells. Corporate earnings are rising briskly from a year ago...

Gross domestic product in Europe's single-currency bloc grew at an annualized pace of 1.8% in the first quarter, the EU said, maintaining an acceleration over the past year. The purchasing-managers index in April hit a six-year high, suggesting more improvement to come. Economists say the eurozone could grow by close to 2% this year, a fast pace by the region's standards, especially if France joins Spain and Germany in a more vigorous recovery.

Regular Digest readers know our colleague Steve Sjuggerud has been bullish on Europe for several months now...

Back in January, we noted Steve had just recommended European stocks for the first time in years.

In short, not only did they meet all three of his favorite investment criteria – cheap, hated, and in an uptrend – but they had dramatically underperformed U.S. stocks for nearly 10 years. He predicted they could soar triple digits as they play "catch-up" over the next few years.

Steve's call is off to a great start so far... True Wealth Systems subscribers are already up 31% and 14% on his two favorite ways to profit from the "stealth bull market" in Europe.

It's still early, but the latest news and data from Europe suggest further gains are likely.

While Steve is bullish on Europe, it's not his favorite opportunity today...

Believe it or not, he says your best chance to safely make life-changing money isn't in Europe or the U.S... It's in China.

If you're like most folks, you've probably never considered investing in Chinese stocks. You probably think they're too risky. But Steve says that isn't the case today...

You see, he used to believe the same thing... until he visited and saw for himself just how much has changed in recent years.

Steve now recommends that even the most conservative investor put at least a little money in Chinese stocks immediately... And he held a free emergency briefing last week to explain it all.

If you missed it, it's not too late to learn more... You can still view a summary of Steve's presentation, including why he's so bullish on China today... why this opportunity is so urgent... and how you can make up to five times your money in the next few years. Simply click here to see it now.

New 52-week highs (as of 5/5/17): Apple (AAPL), Allianz (AZSEY), Boeing (BA), CBRE Group (CBG), First Trust Nasdaq Cybersecurity Fund (CIBR), Ctrip.com (CTRP), WisdomTree Japan Hedged Equity Fund (DXJ), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), iShares MSCI Italy Capped Fund (EWI), iShares MSCI South Korea Capped Fund (EWY), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), Global X MSCI Greece Fund (GREK), PureFunds ISE Mobile Payments Fund (IPAY), JD.com (JD), Nuveen Preferred Securities Income Fund (JPS), McDonald's (MCD), Naspers (NPSNY), ProShares Ultra Technology Fund (ROM), Shopify (SHOP), Sanofi (SNY), ProShares Ultra S&P 500 Fund (SSO), and Stanley Black & Decker (SWK).

In today's mailbag, great feedback from a new Stansberry Portfolio Solutions member... And a subscriber has a question about stock buybacks. Send your questions, comments, and concerns to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, but we read every e-mail.

"Porter/Doc... I recently switched to The Total Portfolio in March (late, but better than standing still). I am up 4% in two months. In a different account not using The Total Portfolio, I am down 61%. Fortunately, the down account represents 0.63% of my available investment capital.

"I learned a lot from you, Steve, and some of the men who write your trading and options letters. Don't 'chase' when prices rise, if you are going to try something risky/stupid use tiny positions, avoid concentration, sell when you hit your stop, don't buy things you can't/don't understand, hedge, and perhaps best, don't be afraid to hold cash.

"I literally avoided a catastrophe by using your research, TradeStops, and The Total Portfolio. The loss avoided has paid for the lifetime Stansberry Alliance membership and TradeStops many times over. Thank you." – Paid-up Stansberry Alliance member Dr. Jon Larson

"Please explain stock buybacks to me. I understand that the buyback strengthens the company overall, but where are the shares coming from that the company buys back. I am curious about [Apple] buying back shares. Will they buy my shares even though I want them? I only have 50 shares and realize I'm a VERY SMALL fish in the pond. Thanks." – Paid-up Stansberry Flex member Gary M.

Brill comment: Don't worry, Gary, your shares are safe. When a company buys back its own stock, it does so in the market, from other investors who wish to sell. And for any reasonably liquid company, there are usually plenty of shares available for them to do so. For example, on average, nearly 24 million shares of iPhone maker Apple (AAPL) are bought and sold in the market every day.

Also, we should point out that buybacks aren't always a positive... Yes, they reduce the number of shares outstanding. All things being equal, the company's earnings "pie" is divided into fewer "pieces." But there's more to consider...

First, as legendary investor Warren Buffett has explained, buybacks are only beneficial for investors when shares are purchased for less than they're actually worth. Unfortunately, this often isn't the case... Just like most individual investors get bullish when the market rallies and bearish when the market falls, corporate executives often choose to buy back shares after they've rallied and have become expensive.

Second, as real earnings have slowed in recent years, executives have been incentivized to increase buybacks regardless of value. Again, this is because buybacks reduce the number of shares outstanding. By reducing share counts, the same amount of earnings is magically transformed into higher earnings per share, Wall Street's favorite metric of growth. Worse, many companies have been loading up on debt – weakening their long-term financial health – to keep the buyback "party" going.

Regards,

Justin Brill
Baltimore, Maryland
May 8, 2017