More Troubling Signs of Economic Weakness

More troubling signs of economic weakness... Capital One is not alone... Consumers are 'tapping out'... Regional banks loans are contracting, too... Banking insiders are cashing out...

Capital One is not alone...

Regular Digest readers know credit-card giant Capital One Financial (COF) reported unexpected weakness in its loan portfolio last week. As the one of the largest subprime lenders in the U.S., this is a big deal. As Porter explained in Friday's Digest...

Capital One is a major source of consumer credit in the American economy for subprime borrowers – both in credit cards (revolving credit) and auto loans. As I'll explain below, these two channels of credit have been severely inflated over the past five or so years. I'm certain that the losses on these loans will far exceed Capital One's modeling and projections.

But for now, just know this: Total write-offs on the company's domestic card lending now exceed 5% of the loans outstanding. That 5% mark is a threshold that indicates the credit cycle has turned. (The same threshold, by the way, is often used in judging conditions in the corporate-bond market.)

As a result, the company has increased its reserves against losses by 30%, to almost $2 billion. That's a huge increase to the company's expected losses. And mark my words, those loss reserves will continue to grow. I believe that over the next three years losses at Capital One's credit-card business will exceed 25% of its lending balances, implying losses five times bigger than the current loss reserves.

But Capital One isn't the only major credit-card lender warning of much higher losses...

On Friday, Synchrony Financial (SYF) – the largest issuer of private-label credit cards – plunged 16% after it reported a huge increase in loan-loss provisions. As Bloomberg reported (emphasis added)...

Provisions for loan losses surged 21% to $1.3 billion compared with the prior quarter, the Stamford, Connecticut-based firm said Friday in a statement. That exceeded the $1 billion average estimate of analysts surveyed by Bloomberg.

Synchrony's write-off rate climbed to 5.03%, the highest since at least 2012, according to presentations posted on the firm's website.

And this trend isn't limited to the worst credit-card lenders... Even Discover Financial Services (DFS) – which issues credit cards to higher-rated consumers – noted a deterioration in the quality of its loans in the first quarter. While its charge-off rate remains relatively low at just 2.84%, this is the highest level since at least 2014.

In other words, more and more signs suggest consumer credit is rolling over. We continue to expect defaults on credit cards, auto loans, and student loans to absolutely soar over the next several years.

It's likely no coincidence then that U.S. consumer spending has suddenly fallen off a cliff...

On Friday, the U.S. Department of Commerce reported that the economy grew at an annualized rate of just 0.7% in the first quarter. This is the slowest rate in at least three years, and it's well below the 2.1% rate in the fourth quarter of 2016.

According to the report, this was largely due to a huge drop in consumer spending. So-called personal consumption expenditures (or "PCEs") rose by just 0.3% last quarter. This is down from a 3.5% increase in the fourth quarter of 2016.

More concerning, this is the weakest growth in consumer spending since the end of 2009. Said another way, Americans are suddenly spending as if it's the financial crisis all over again.

In the meantime, the slowdown in corporate lending has continued...

As Porter explained in the April 7 Digest, we're now seeing banks begin to reduce outstanding corporate lending for the first time since 2008.

We also noted that three of the biggest U.S. banks – JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) – all highlighted this trend in their recent earnings reports. As we reported in the April 13 Digest (courtesy of the Wall Street Journal)...

At JPMorgan Chase, total loans outstanding at the end of the first quarter rose 6% from a year earlier, a slight deceleration from 7% growth at the end of last year. In the first quarter of 2016, JPMorgan's overall loan growth was a much stronger 11%...

At Citigroup, loans grew by 8% from a year earlier in its global consumer operations, and by 3% at its corporate bank...

Wells Fargo, which acts more like a regional bank because it lacks a big investment-banking operation, said the slowdown is an industry trend. The bank said growth of average quarterly loans slowed to 4% in the first quarter from 6% in the fourth quarter.

As we explained at the time, big banks tend to be more resilient to slowdowns in lending. We noted that smaller regional banks – which hadn't yet begun reporting – were likely driving this trend.

Since then, most regional banks have reported first-quarter earnings. And the news was just as bad as we feared. As Bloomberg reported last week...

Total loans at the 15 largest U.S. regional banks declined by about $10 billion to $1.73 trillion in the first quarter, compared with the previous three-month period, the first such drop in four years, according to data compiled by Bloomberg. All but two of those banks missed analysts' estimates for total loans, as a slump in commercial and industrial lending sapped growth.

As you can see in the following chart, loan growth isn't just slowing as it has at the biggest banks. It is now negative for the first time since early 2013...

We also note that executives at these banks appear to be incredibly bearish today...

According to a recent Wall Street Journal report, they've been selling their own shares like there's no tomorrow. From the Journal...

Insiders at publicly traded commercial banks with a market value greater than $1 billion, but excluding the largest national banks, sold about $1.4 billion in their company stock between the election and the end of March, up 65% from the 10-plus months in 2016 before the election...

The moves are in line with the behavior of insiders at the biggest U.S. banks... Executives at some of the country's largest banks sold about $163.5 million worth of stock since the presidential election, more than in that same period in any year since before the financial crisis, according to an updated Wall Street Journal review of securities filings.

New 52-week highs (as of 4/28/17): Boeing (BA), Alibaba (BABA), Becton Dickinson (BDX), Ctrip.com International (CTRP), Digital Realty Trust (DLR), Facebook (FB), Cedar Fair (FUN), Alphabet (GOOGL), Nuveen Preferred Securities Income Fund (JPS), Microsoft (MSFT), ProShares Ultra Technology Fund (ROM), Sanofi (SNY), and short position in GGP (GGP).

Oh boy, we've done it this time... Porter's Friday mailbag response to paid-up subscriber "Moneyshot" triggered a flood of reader feedback. Many were entertained... some were offended... and a few were just confused. What do you think? Did we go too far? Let us know at feedback@stansberryresearch.com.

"Porter: You really outdid yourself on Part 2 of your tutorial on the credit and debt problems. It was stated simply despite your trepidations to the contrary. I didn't have to re-read a single line to fully understand every point. I agree with your analysis completely. I was really blown away with your efforts to provide 'learning.' But then, I read your replies to 'Moron,' which were every bit as well stated as the Part 2 credit/debt article. Bravo, keep it up. Thanks for all you do." – Paid-up subscriber T.K.

"BTU... one of the best Digest mailbag responses I have ever read. Porter, that was brilliant." – Paid-up subscriber Greg G.

"Fantastic! And most likely well deserved. I, too, get fired up about those kind of idiots. After I write that reply, I stick it in my drawer for a couple of days... let the dust settle, and usually throw the letter out. They simply are not worth our time. I love your dedication. If you didn't really care, you wouldn't even reply." – Paid-up subscriber W.W.

"Porter, kudos to you for 1) holding back, and being polite and diplomatic with Mr. BTU, and 2) for unleashing on him when he kept on. I am sure you have more than once – or a few thousand times – bit your tongue in reply to an unhappy subscriber. But at some point, you are human, and a rude, pushy person needs to be 'corrected.' I do remember your warning us away from coal (and I took a ding on that CNX short), so I seriously doubt you'd have recommended BTU. (I'm also rather sure you guys meticulously track what's been in your portfolios over the years.) At any rate, I hope it feels better to have freed that frustration. Now breathe, Porter, breathe... " – Paid-up subscriber Andrew K.

"And in this corner! Certainly not a PC reply. Loved it." – Paid-up subscriber Bob T.

"Not to further disparage Moneyshot, but I'd be willing to bet a pound of coal that he's upside down on his 72-month GM lease; first of his on-line gaming posse to default on his student loan; and quite perturbed that there is no money back guarantees from Scottrade. You're way too kind." – Paid-up subscriber K.J.L.

"Thanks for the great chuckle regarding 'moron.' My friend lost 30k in Peabody... they must not have been able to pay the bonds. He wouldn't buy TradeStops last year... nor your letters that I kept sending him with specials discounts. I tried to head him off at the pass but he wouldn't listen. Well, he lost 100k in under a year after I helped him gain over 60k on 230k with TradeStops... Guess what. He owns TradeStops now... Take care." – Paid-up subscriber James R.

"Oh my, that was a great Friday's Digest to kick off my weekend...

"That's what I pictured as I finished your reply to Moneyshot, Porter. As Moneyshot LOST 'everything,' I booked a 157% gain with SHOP... sold half my position to lock in gains and leaving the rest to ride. And all tax free. #rothira" – Paid-up subscriber Austin D.

Porter comment: Never has anyone used a picture of Obama in connection with a story about me...

"Just wanted to say great response to the guy who bought the coal company. Even if Porter would have recommended that stock, we still need to take responsibility for our decisions. I am here to get educated and do not expect Porter to make me a millionaire. Great newsletter." – Paid-up subscriber Jim C.

"'It's Friday. And I was told there would be no math'... That put a big Saturday morning smile on my face. Thank you." – Paid-up subscriber Christine C.

"Wow Porter... I don't even inspire a reply like that!! Haha." – Paid-up subscriber Peter G.

Porter comment: Well, you're not a moron...

"Great Digest! It must be Friday: Porter's at it again. Did one of your ex-analysts recommend BTU? Cheers!" – Paid-up subscriber Bob F.

"Porter... I have never before sent in any feedback, but today I could not pass up the opportunity to tell you what a great response you gave to Moneyshot's rude and uninformed comments to you regarding BTU. Thanks for all the good work you do to keep us learning about what's really going on." – Paid-up subscriber Laura J.

"Just for informational purposes, I remember quite a while ago one (or more) of the analysts at Stansberry recommending coal via purchases of James River, BTU, the [KOL ETF], and others. I wish 100% of your newsletter writer's recos only went up, but only a fool would believe that to be true. Anyway, it's a moot point since you are 100% correct in your position that properly thought out position sizing and stop losses would have protected the investor from excessive loss of principal – it's easier to blame someone else. Thanks to your efforts at educating your subscribers, these are lessons many of us have learned a long time ago. Thanks for that." – Paid-up subscriber Gary S.

"Since I do keep pretty good track of all your recommendations... According to my notes, BTU hasn't been recommended by Porter, but it has been recommended by other Stansberry products several times over the years... So while never Porter, it was his 'associates.' Understandable confusion. That said, I didn't lose a penny on BTU, because I was confident that everyone was underestimating the power of the politicos. The depth of commitment, and willful ignorance of negative impact, that liberal do-gooders would use to crater the industry. Yay me! I will say in every case above, there were hard stops put in place at some point by the recommender on or soon after purchase. Getting stopped out is hard, and harder still to honor your stops." – Paid-up subscriber John

"Porter, regardless of whether or not you (or others) ever recommended BTU, what I think many of us suffer from is TMI (too much information). Your business is constantly pouring out information and, as you correctly commented, it is nearly impossible to keep up with it and digest it all. Compounding this is that depending on the writer and his then current strategy, we often see conflicting recommendations. Tough to suss out. But I do agree, use what you have learned, use reasonable position sizing, and (above all) pay attention to stop losses. You don't have to use TradeStops to do this either. I have been doing this for years with a simple Excel spreadsheet. Admittedly, Richard's TradeStops product does provide other benefits above simple following of stops, which is why I am a subscriber. Just my 2 cents. (Paid-up subscriber and Alliance member... the best damn money I ever spent.)" – Paid-up Stansberry Alliance member Dave P.

"Dear Porter, while you personally did not recommend Peabody Coal, [other Stansberry Research analysts] did... Still no excuse for lack of proper position sizing but I thought you ought to know. Still reading everything you (all of you) write." – Paid-up subscriber Andrew M.

Porter comment: Yep. And if that fella wanted to criticize the other analysts, I would have happily printed his letter... But that's not what he said. Instead, he insisted on calling me scum and a liar. Like I said... I tried to be nice. But he wouldn't.

"Yes, Porter, you are cool. Don't let the 'stupid people' get you down. Sometimes it's better to just walk away and not be dragged down with them. The 'stupid people' always look outside themselves to put the blame. Until they are enlightened, no amount of words or explanation will ever get through to them. Thank you for your work." – Paid-up subscriber Betsy B.

"Porter, I read your response to a subscriber's complaint regarding a BTU recommendation. I understand you getting irritated, if he is blaming you for someone else's grave error. The poor man probably does not remember where the recommendation came from. I do not remember either, although I do remember reading quite an elaborate analysis of the coal mining sector with a conclusion being a recommendation of some of the names in this space. I am not sure whether BTU was in fact one of them. I did not invest in any of those recommendations. Coal just did not feel like a 21-st century business for me, so I passed on the 'opportunity'... You need to have compassion for your subscribers. Especially the elderly ones, who may not have the sharpest minds.

"Thanks for all your expertise, clear thinking and writing, telling it as you see it, whether it is politically correct or not. You seem to have a rare intellectual capacity to integrate knowledge and connect the dots. You are doing a superb job!" – Paid-up subscriber Witold W.

"Dear Stansberry Research, I hope this message is of good use to you; it is not hate mail. This is a comment with a suggestion regarding the tone and content of the vitriolic exchange with 'the moron' in today's 'Digest.' Though I may be out of date and in a minority of subscribers, I don't appreciate this kind of language, sentiment, and content in the publication. To me, besides being a waste of time, it shows a glaring bumpkin element within the Stansberry organization. Where there is this kind of rage, one usually finds an individual with personal problems that translate into public displays of little self-control without embarrassment. I don't think that this paints a pretty picture of Stansberry Research...

"An investor should hold no grudge toward anyone whose advice he follows, irrespective of the result. Buying research is a crutch that most investors need in order to increase their probability of success, but it is the investor who should take responsibility for his own decisions – not the advisor. For 'morons' who expect foolproof investment advice and don't want to take responsibility for their own decisions, perhaps Stansberry could either handle these problems off line or respond in more civil tones so as not to tarnish its own image. (A bumpkin from Memphis: it takes on to know one.)" – Paid-up subscriber Roy D.

"I do not like or want to read Porter calling his customers a..holes, morons or anything such. It is quite inappropriate. He can do this in a reply email to that customer, but do not publish such. It shows pettiness and lack of judgement. Keep Stansberry a financial newsletter only and stop rants to customers." – Paid-up subscriber Richard

Porter comment: We were just having some fun... and trying to teach a lesson about responsible investing. It was supposed to be entertainment for a group of subscribers who have long since learned those lessons. And for others... it was hopefully instructive and worth a chuckle.

Most people don't get very far in life by calling other people scum and liars while refusing to take any responsibility for their actions. Hopefully we can at least agree about that...

"First of all don't ever call me a Moron! The topic of the article called me a Moron. I take great offence to that. I read every issue, excuse me if I have not acted on some of your recommendations, but I also subscribe to other news letters as well... To use your language. don't ever call me a Moron again! You f@#$ing piece of s@#$!!!!!!!!!!!!!!" – Paid-up subscriber Todd R.

"WHO IS THE MORON??????? ME, FOR SPENDING GOOD $$$$$$$$$$$ ON YOUR thinking??????????? THANKS A HELL OF A LOT." – Paid-up subscriber Scott Y.

Porter comment: Listen... That was a headline. It was part of a much longer article. It wasn't addressed to you, personally. It was sent to half a million people. So... please go read what we sent you.

Regards,

Justin Brill

Baltimore, Maryland

May 1, 2017