The next subprime crisis is coming to fruition... Feds investigate GM... Doc responds to a subscriber... Why investing abroad makes sense today...
In the March issue of Stansberry's Investment Advisory, Porter identified what he believes is the next subprime crisis: The growing volume and declining credit quality of auto loans. He wrote...
"Outstanding auto loans have grown from around $700 million in 2010 to $860 million today – a 22% increase. But that's not the whole story. What has really changed about auto loans is the type of lending. Just as we saw with mortgages back in the early 2000s, car loans have gone from being relatively safe and secure to completely nonsensical.
"The average auto loan today is for 65 months (five years), and 20% of all auto loans are now for durations between 73 and 84 months. Likewise, the average amount of these loans (more than $26,000) is the largest ever recorded. And finally, the percentage of subprime borrowers is now at a record high – 27% of all car borrowers. That's almost double the amount of subprime borrowers that were in the car market back in 2009."
And while the volume and duration of loans are growing, the number of "subprime" and "deep subprime" borrowers is growing. From Porter...
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As Porter notes, we all know how this will eventually end...
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Color us surprised that folks that stretched to buy cars are struggling to pay that money back.
"We're starting to see a slight uptick in the number of consumers struggling to make their automotive payments on time," Melinda Zabritski, senior director of automotive finance for automotive-data provider Experian Automotive, said in a company report.
Automobile repossessions jumped 70% in the second quarter versus the same quarter a year ago, according to Experian. And delinquencies more than 60 days were up by 7% over the same time frame.
Meanwhile, the volume of auto loans keeps rising... Total outstanding auto loans hit $839 billion in the second quarter, a 12% increase from the same quarter a year ago.
The Federal Reserve Bank of New York estimates that 23% of auto loans went to borrowers with credit scores lower than 620... Another 10% went to "deep subprime," those with scores lower than 550.
And the government is already looking into the lax lending... Federal prosecutors began a civil investigation into subprime auto lending. They're specifically looking into General Motors' practices... Regulators are concerned lenders are ignoring lending standards.
We're doing something a little unusual to close out today's Digest... We're addressing feedback from a subscriber...
On Tuesday, we discussed the idea of "home-country bias" – the notion that most people have far too much money invested in their domestic market... Not counting the fact that they likely generate their income and own property and other investments in their home country.
As we wrote...
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We showed a list of countries around the world, alongside their price-to-earnings ratios and dividend yields. The message is clear: You can buy high-quality stocks abroad while locking in higher yields than the U.S. market generally offers today.
Dr. David "Doc" Eifrig showed Income Intelligence subscribers a way to buy some of the highest-quality companies around the world for bargain prices and lock in a near-5% yield.
But one reader wasn't convinced. He told us he would rather invest in multinational, U.S.-based companies (thereby giving him global diversification)... And he likes the future prospects of the U.S. rather than the rest of the world.
We asked Doc to address this reader's feedback. You'll see the point/counterpoint below...
From paid-up subscriber Arthur R.:
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Doc's reply: Agreed. We've written about this before... For example, Coca-Cola is an American company, but as you said, it can be a good way to gain international exposure. Coke books 55% of its revenue abroad.
While it's important to understand the home-country bias, and make sure some of your money is diversified outside the country... The more important idea is investing in the international markets via undervalued companies.
If $100 of equity in a U.S. company gets me $5 of profits... I'd rather own a company that brings in $10 of profit for that same share price.
In that example, one company has a price-to-earnings (P/E) ratio of 20. The other trades at 10 times earnings. Assuming the second company is an internationally based conglomerate in markets that are similar to the U.S. company, I want to buy the cash flows that are half as expensive.
Imagine you went to Wal-Mart and saw a TV... Then you saw the same exact TV at Target for 50% cheaper. You'd buy the TV from Target. It's obvious.
Arthur's e-mail continues...
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Doc's reply: Beware the hype and promise of commodity goods and those serving them up. When prices drop, margins get really thin really quickly.
Arthur ends his email with the following...
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Doc's final reply: As for Europe not "working out so well," that's the perfect time to buy. And Russia is risky because President Vladimir Putin is unpredictable. Beware Russia. That's why our preferred way to invest outside the U.S. doesn't have any Russian stocks.
We're just buying steady revenues and cash flows at good prices. We look for steady top-line numbers with good, shareholder-friendly businesses... Then we love to trade around these picks for income!
We hope you have a better idea why it's important to move some money outside of U.S. stocks today.
That's why, in last month's Income Intelligence, Doc recommended a way to buy a portfolio of some of the world's best non-U.S. companies and collect a near-5% dividend. Plus, you're paying 14 times earnings for the companies while the S&P 500 is trading for 20 times earnings and yielding less than 2%. We think this company is a no-brainer.
Plus, today, after market close, we're sending out the August issue of Income Intelligence... Out of fairness to Doc's subscribers, I can't share many details about this company. But this energy firm yields around 4.5% today. It aims to grow its payout by 8%-9% a year... And it has increased its payout every quarter for the last six years.
In today's zero-percent-interest world, finding two high-quality securities yielding more than 4% is rare. Income Intelligence subscribers will receive all of the details after market close today.
If you would like to try a risk-free trial to Income Intelligence and gain immediate access to Doc's brand-new recommendation, click here. (You won't have to sit through a long promotional video.)
New 52-week highs (as of 8/20/14): Apple (AAPL), Automatic Data Processing (ADP), Brookfield Asset Management (BAM), CVS Caremark (CVS), Integrated Device Technology (IDTI), Pepsico (PEP), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Technology Fund (ROM), RPM International (RPM), ProShares Ultra Health Care Fund (RXL), Sprott Resource Corp (SCP.TO), ProShares Ultra S&P 500 Fund (SSO), Skyworks Solutions (SWKS), Cambria Shareholder Yield Fund (SYLD), Guggenheim China Real Estate Fund (TAO), Union Pacific (UNP), and W.R. Berkley (WRB).
In today's mailbag, subscribers continue the discussion on the true value of gold... Let us know what you're thinking. Send your thoughts to feedback@stansberryresearch.com.
"People walking around with bags of gold dust will need an army to protect them, or doesn't that matter in this rioting population? Gold is not practical money, never has been in the modern world. With all the S&A talk of another S&P peak, how can the middle class keep vanishing. They must work to purchase their needs otherwise who will support the economy? Looks to me that some of your future themes have holes in them, we don't see this vanishing middle class here in Fla's East Coast." – Paid-up subscriber Joe Severa
"I have to agree with the reader about his views on gold. If it is the barbarous relic that mainstream media portray it to be, then why did governments go to great lengths to suppress the pricing and why did they even go so far as to confiscate it (as the US President Roosevelt did in the 1930's).
"Also, keep in mind that the Creature from Jekyll Island, masters of our universe, have gone to great lengths to suppress the price of gold, silver, platinum, and palladium. It is my belief that it would be trading at multiples from where it is today if it were not for the outrageous price management scheme of JPM. The suppression is so blatant it is even reported in Europe and other international press, but never in the land of the Free. The gangster cartel, as you might imagine, is the US Federal Reserve; a private entity exploiting the poor and robbing nations of their wealth. They cause misery, war, and destitution around the globe. And they do so with the full consent of the governments they manage (read: USA, EU, and the big powers).
"Promises of 5% pay in a world where the currency is not sound are just that: promises. The price management scheme by the Creature must end someday: Wall Street accumulates paper gold; China and Russia accumulate the real stuff. In the current currency war environment we are seeing, I would not want to hold paper promises. Buy gold for currency safety. Hard assets and businesses you understand for investment returns. I speculate with stocks recommended by True Wealth: so far, so good. Cheers!" – Paid-up subscriber Victor George
Regards,
Sean Goldsmith
August 21, 2014
Porter: Here's why I'm bearish on Tesla...
Porter has long been one of the most outspoken bears on electric-car maker Tesla. On Saturday, he is taking the stage in Los Angeles to debate J.B. Straubel, one of the company's cofounders.
In today's Digest Premium, we're featuring part of Porter's bearish argument...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Porter: Here's why I'm bearish on Tesla...
Editor's note: Porter has long been one of the most outspoken bears on electric-car maker Tesla. So far, his opinion has been in the minority. His short position recently stopped out in the Stansberry's Investment Advisory portfolio.
But his view of the company's long-term prospects hasn't changed. And on Saturday, he is taking the stage in Los Angeles to debate J.B. Straubel, one of the company's cofounders. In today's Digest Premium, adapted from the June issue of Stansberry's Investment Advisory, we're featuring part of Porter's bearish argument...
To date, Tesla has sold more than 30,000 of its $70,000 Model S cars. All of Tesla's cars are powered by expensive 1,000-pound lithium-ion batteries. While exact figures aren't known, the costs of the batteries range from 25% to 50% of the cost of the cars.
Time, hard temperatures, and repeated recharging cause a battery's electrical and chemical potential to break down. This limits an electric car's range. After three years, a battery pack might be at 80%-90% of its original charge or less in extreme climates. Over the next couple of years, the rate of deterioration accelerates. So these battery packs will need to be replaced after several years of use. And it won't be cheap for the owners.
Last year, Tesla began offering a "Resale Value Guarantee" ("RVG") that allows Model S owners to sell their cars back to Tesla after 36-39 months, regardless of the buyers' loan term. That buyback price is 50% of the original base purchase price of the 60-kilowatt Model S plus 43% of the original purchase price for all of the options, including an upgrade to the 85-kilowatt battery pack.
This is a great selling point for its customers, who don't have to worry about the battery or if the cars will hold their value. Tesla is guaranteeing it.
That means eventually, Tesla will have to spend hundreds of millions of dollars buying back these used cars. Once it buys back these cars, it will have to sell them in the used-car market and hope it can sell them for what it paid to buy them back.
Would you rather spend $50,000 on a three-year-old Tesla with a depleted battery, or a brand-new BMW? Plus, Tesla expects to have its own brand-new $35,000 electric car on the market within five years. Why would anyone pay $50,000 for a used Tesla when a new model is $35,000? Sure, the $35,000 model will probably not be as fancy as the used Model S... but it will reportedly have a far better battery.
In order to take its business to the next level, Tesla plans on building several "gigafactories" to make its batteries more economical... and the first factory will cost more than $5 billion.
Tesla can't pay for this growth with its current net income margins. So it has to borrow or issue new equity to get the cash to pay for these factories. And this is exactly what it's doing.
In February, Tesla issued $2 billion of convertible notes to help finance the first of these gigafactories, which are potentially convertible into approximately 6 million shares of stock. That's a 5% dilution to existing shareholders.
And this is just the beginning. In order to keep pace with its planned growth, it will need to build more factories with enormous price tags. But these investments cannot be financed from its operations... they can only be financed by issuing more debt and/or equity.
And we know that no matter how Tesla decides to account for its gains and losses, the business will never earn a reasonable return on the huge amount of capital it needs to build these cars and factories. When investors finally begin to wake up to this, they'll flee.
– Porter Stansberry
Editor's note: On Saturday, Porter will debate Tesla cofounder J.B. Straubel live on stage at our S&A Conference Series event in Los Angeles. It's one of the first times Straubel has agreed to speak in public... And we believe it will be the highlight of the event. You won't want to miss it.
We've made it possible for you to watch the event live as it happens from the convenience of your own home. Plus, when you sign up for online access, we'll also give you access to our final event of the year in Nashville... headlined by former Congressman and presidential candidate Ron Paul, as well as finance expert Jim Rickards. Click here to learn more.
Porter: Here's why I'm bearish on Tesla...
Porter has long been one of the most outspoken bears on electric-car maker Tesla. On Saturday, he is taking the stage in Los Angeles to debate J.B. Straubel, one of the company's cofounders.
In today's Digest Premium, we're featuring part of Porter's bearish argument...
To continue reading, scroll down or click here.