Where's the inflation?...

 The latest inflation numbers for Europe are out... and further quantitative easing looks even more certain.

 

The annualized rate of inflation in May for the European currency union (the so-called "euro zone") was 0.5% (the lowest since March 2009), below expectations of 0.6%. And it was below the 0.7% growth in April.

 

The European Central Bank (ECB) had set an inflation target of 2%... So we're sure it will announce further accommodative monetary policy at its meeting on Thursday.

 

 As we discussed yesterday, Steve Sjuggerud believes ECB President Mario Draghi will announce further quantitative easing tomorrow. He has already made it clear the ECB will take some kind of action... But we're not sure how far the ECB will go.

 

"It's a surprise, but not enough of a surprise to change materially the global economic outlook that the ECB will release on Thursday," Michel Martinez, an economist at Societe Generale in Paris, told Bloomberg about the euro-zone inflation data. "What seems highly likely is that the ECB will cut key rates and probably also inject further liquidity."

 

 And by "cut key rates," Martinez means potential negative deposit rates. Right now, banks earn a small rate of interest to park their cash with central banks. The Federal Reserve pays 0.09%. The ECB pays 0%.

 

If rates went negative, banks would actually pay the central bank to hold their funds. It's just another way to urge banks to start lending more money... If they can't make a decent return sitting on cash, they'll start lending to individuals and businesses.

 

 As Steve noted, Draghi's fear is that low growth in the euro zone will lead to permanently high unemployment. Unemployment fell to 11.7% in May from 11.8%... But the situation is still dismal. So the view is further easing is necessary to boost the economy.

 

We'll update you following Draghi's announcement.

 

 We're not sure if Draghi's U.S. counterpart, Federal Reserve Chair Janet Yellen, needs to force deposit rates into negative territory... Lending is already picking up in the states...

 

Americans are borrowing record amounts of money to pay for their cars. According to credit-rating company Experian, car buyers are borrowing an average $27,430 for their vehicles – the largest amount ever.

 

And nonprime borrowers (folks with credit scores between 620 and 679) are borrowing even more, an average of $29,385.

 

In total, outstanding auto loans have grown around $700 million in 2010 to $860 million today – a 22% increase.

 

 In addition to borrowing record amounts of money to buy a depreciating asset, people are also taking more time to pay that money back... According to market research firm J.D. Power, around one-third of new-car auto loans in February were at least six years in length.

 

The world is starved for yield... So waves of cash are coming into car loans (which yield more than safer debt, like Treasurys). According to JPMorgan, Wall Street has sold $39 billion worth of securities backed by auto loans this year – on pace to exceed last year's $78.9 billion.

 

"Auto-loan securitization markets are red hot," Jose Pluto, an analyst at Thornburg Investment Management, told the Wall Street Journal. "Lenders can finance everything."

 

 Traditionally, auto loans have been a safe haven of the debt markets. In the past 28 years, fewer than 1% of "auto-loan-backed debt securities" rated by Standard and Poor's have defaulted. None have defaulted since 2011.

 

But we know how this will turn out... Car companies' lending standards will fall, as Wall Street throws seemingly unlimited amounts of money at the sector. Everything will look great... for a while.

 

Car sales, which are approaching the record 17.4 million sales in 2000, will rise... These companies will mint cash (pulling their sales forward, of course). But eventually, the bubble will burst. And we'll see massive defaults. Already, one in four auto loans is subprime.

 

 Defaults are already inching up... The average delinquency rate on prime and subprime auto loans backing securities was 1.22% in February, up from 0.96% a year ago. But we're still below the 1.33% in 2009, according to S&P.

 

 But we have a larger problem than auto loans...

 

You see, there's far less U.S. auto debt outstanding than mortgage debt ($8.2 trillion in mortgages at the end of the first quarter, versus $875 billion in auto loans).

 

And remember… leading up to the mortgage crisis… more and more homeowners tapped the equity in their house to pay for everything from TVs to college tuition. They relied on something called a home equity line of credit (HELOC).

 

It seems they're at it again…

 

 In the fourth quarter of last year, homeowners borrowed $111 billion against the equity in their homes, topping 2009 numbers. At the end of last year, the Federal Deposit Insurance Corp., the agency that insures bank deposits, estimated banks held $510.8 billion in outstanding HELOCs.

 

Many HELOCs allow borrowers to make interest-only payments for the first 10 years... Then, they reset and payments balloon. Lots of those loans are about to reset, leaving cash-strapped borrowers in an even worse position.

 

Credit-monitoring bureau Equifax and the U.S. Office of the Comptroller of the Currency estimate that this year alone, 817,000 borrowers owing more than $23 billion in HELOCs will have to start paying down principal. Additionally, $50 billion in loans will reset in each of the next three years.

 

The usual suspects from the housing collapse – California, Arizona, Nevada, and Florida – will get hit the worst.

 

 Many borrowers with 10-year-old HELOCs can't readily re-finance because home prices are below where they were when they signed the loans. According to the Wall Street Journal, a homeowner who owes $100,000 on a HELOC that carries a 3.5% interest rate would see payments rise from $292 to $715 when the interest-only loan converts to a 15-year amortizing mortgage. If interest rates were to rise by three percentage points, payments would go up an additional $150.

 

 Ballooning HELOC payments are yet another burden forcing more and more people into America's underclass... As if stagnant wages and rising prices across the board weren't enough.

 

Fortunately, the team at Stansberry's Investment Advisory has been readying the newsletter's model portfolio to profit from the widening wealth gap.

 

They argue that the Federal Reserve's monetary policies will cause prices to rise across the board. Meanwhile, wages for most Americans will be stagnant or falling. This will result in hordes of people struggling to maintain their quality of life.

 

They've been recommending companies that cater to the poor – rental homes, cigarettes, discount retail, etc. One of those companies, Dollar General (DG), just announced solid earnings...

 

 Porter and his team of analysts recommended the discount retailer in the December Investment Advisory. Its recent strong earnings are more evidence that the consumer is moving toward discount retailers.

 

Dollar General makes the bulk of its profits selling household supplies, frozen food, and other consumer staples. It also recently introduced tobacco products to increase traffic. The company is also benefiting as more shoppers migrate away from supercenters like Wal-Mart and toward smaller discount retailers like Dollar General.

 

The company has 11,000 retail outlets around the country. It plans to open another 700 stores this year.

 

Dollar General said its fiscal first-quarter profit edged up 1.1% (albeit with tighter margins) as it recorded higher overall sales. Same-store sales again improved in the most recent period, rising 1.5%, while customer traffic and average transaction amounts also continued to grow.

 

Additionally, Dollar General has spent more in adding better-known brands to its offerings. Gross margin narrowed from 30.6% to 30% as input costs rose 7.7%. The company said increased sales of lower-margin consumables, like tobacco and perishable products, and higher markdowns weighed on margins.

 

Overall, for the quarter ended May 2, the company reported earnings of $222.4 million ($0.72 a share), up from $220.1 million ($0.67 a share) a year earlier. Excluding a loss associated with restructuring the company's credit facility and other items, the year-earlier period's adjusted per-share earnings were $0.71. Net sales climbed 6.8% to $4.52 billion.

 

Investment Advisory analyst E.B. Tucker sent us this note about Dollar General…

 

Recently the stock has traded down on the alleged weakness of the low-end consumer. As consumers weaken, more customers migrate to Dollar General. The positive results of their earnings are no surprise because they are the most efficient operators in the small-store discount-retailer space.

 

 

 New 52-week highs (as of 6/2/14): Alcoa (AA), American Homes 4 Rent (AMH), Becton-Dickinson (BDX), Discover Financial (DFS), Enterprise Products Partners (EPD), Energy Transfer Equity (ETE), Freehold Royalties (FRU.TO), SPDR International Health Care Fund (IRY), Johnson & Johnson (JNJ), Leggett & Platt (LEG), ProShares Buyback Achievers Fund (PKW), Sabine Royalty Trust (SBR), Superior Energy Services (SPN), ProShares Ultra S&P 500 Fund (SSO), Sysco (SYY), Targa Resources (TRGP), and Walgreens (WAG).

 

 More positive feedback from our Dallas event. Keep the good stuff coming... feedback@stansberryresearch.com.

 

 "Justin S Fowler has his head screwed on right… which sets him apart from some of the naysayers recently quoted. I am a recent convert to Stansberry after a previous advisory service folded despite its excellent performance, possibly because they, too, suffered from foolish feedback. That caused me to switch to Stansberry. Now, I'd rather fight than switch." – Paid-up subscriber Goetz Oertel

 

 "I attended the conference in Dallas and I came back home more invigorated and positive about investing than I have been in a long time! I actually work in financial services and this conference was hands down the best investment event I have ever attended (many times over). The speakers were relevant and I liked the time allotted to each.

 

"My only gripe is that Porter is a god awful ugly woman.

 

"I will definitely attend another in the future and this conference is making me seriously consider becoming an alliance member! Thank you!" – Paid-up subscriber Kate Eiland

 

 "A hearty congratulations and major thanks for putting on such a great show in Dallas. Miami was good, but Dallas was several orders better. Starting with the scavenger hunt, it was a brilliant way to get the members to interact and get to know each other better. Icing on the cake was that I walked out with a new iPad Mini (that I've been lusting for, ever since it was introduced), and four ounces of silver.

 

"One thing I thought could have been improved from Miami was having a bit of Q&A. The iPad was the perfect solution. Kudos to whomever came up with that idea.

 

"T. Boone was an inspiring speaker. I rarely read biographies, but I actually am looking forward to reading his. What an amazing man he is - smart as a whip, and funny at the same time.

 

"Loved loved loved the Chairman of GM and was completely engaged with the other speakers as well. I had the opportunity to sit with Matt Badiali and Cactus Schroeder at dinner that evening and promised both that I'd be paying much more attention to the resource sector going forward. They made what I formerly considered a dry topic to be something I really want to pay more attention to.

 

"And I learned something new about wine from Doc after that same dinner.

 

"The entertainment was also an improvement over Miami. The comedy act was a fine idea, but the pickpocket was much better. Once again, I think the improvement was about getting the audience engaged.

 

"I preferred the dinner as well. I wouldn't say that the food was either better or worse. Overall I thought all the food was excellent. But the venue was nicer. We had the opportunity to mingle beforehand and didn't feel as crowded in the dining room.

 

"My only real critique is with the Arboretum tour on Sunday. There was absolutely nothing wrong with it. We were greeted with delicious adult beverages and pastries, and had a lovely time strolling the gardens with a few of our fellow members, before another delicious meal. But as nice as it was, it just wasn't different. The bar got set pretty high in Miami with the airboat ride.

 

"Before I close, I want to say that I've never been a very good writer of thank you notes. I've been remiss on many more occasions than not. But I wanted to shoot this off to you before another day passes. I haven't even started to unpack yet!

 

"Overall, I thought you all did a fabulous job. Thank you thank you thank you. I can't wait to see you all again in Los Angeles." – Paid-up subscriber Laura Okin

 

Goldsmith comment: We appreciate the feedback. And we're looking forward to seeing you in Los Angeles.

 

We already sold a big chunk of our discounted "early bird" tickets to Los Angeles at the event in Dallas. And we've been so busy, we haven't had time to make them available online (it will be ready this week).

 

In the meantime, if you'd like to join us in LA at a big discount, e-mail us at thesociety@stansberryresearch.com. Again, we've made an extremely limited number of seats available at the "early bird" price... We'll honor the first respondents.

 

Regards,

 

Sean Goldsmith

June 3, 2014

 

Why it's a great time to be poor...

 

In today's Digest Premium, Stansberry's Investment Advisory analyst E.B. Tucker explains why poor people have so much access to cheap credit today... And what they're buying...

 

To subscribe to Digest Premium and access today's analysis, click here.

 "The bottom line is that too many of our customers did not fulfill the requirements of their contracts."

 

That's what William "Hank" Henderson said last week as he explained his company's disappointing earnings. Hank's the CEO of America's Car Mart (NYSE: CRMT). The company sells and finances used cars. Its customers are mostly subprime borrowers. They can't qualify for traditional financing at name-brand dealerships.

 

Traditionally, car dealers make 20%-25% gross margins on used car sales. CRMT makes about 40%. Then, it finances the purchase and charges rates as high as 19%. It should be a great business... but not lately. CRMT has to charge that much to make a profit... because poor people are sharks.

 

 In the Investment Advisory, we've recommended Rent-A-Center (NYSE:RCII) and American Homes 4 Rent (AMH). Both of these companies will do business with subprime customers. The credit risks are managed because it's not so hard to evict a tenant or repossess a dining-room table. I have done both.

 

CRMT has the same customer base, but its collateral has wheels. It's a lot harder to chase down.

 

 Hank Henderson's doing the best he can, considering the circumstances. In the old days, poor people had to adhere to the golden rule: The one with the gold made the rules. But the Fed has changed that. It has made it a great time to be poor.

 

The Fed has set interest rates at 0%. The result has made savers and investors desperate for any return ON capital. They've started ignoring the risk of getting a return OF their capital.

 

 CRMT's chief financial officer elaborated: "We believe that our customers have never been more stressed financially and, at the same time, have never been presented with more aggressive financing options for their vehicles."

 

The company says it's hoping for higher rates. That would "redirect" some of the institutional money that has found its way into the subprime auto-lending market. Those institutions need yield, too. They're attracted to the industry's yields, which on the surface look high.

 

But as we can see from CRMT's results, sometimes these subprime borrowers don't pay back the loans. Net charge-offs increased from 7.1% during the same period last year to 8.3% today. And its allowance for credit losses rose from 21.5% year earlier to 23.5%.

 

It's all eerily reminiscent of what happened to the housing market in 2008. The patterns are the same but the assets are different. And the fallout will be different.

 

When the new-money entrants to the subprime auto-loan business get a taste of default, they'll exit as fast as they entered. This will mean less financing options for buyers and more repossessed cars hitting the auction block. That'll be good for CRMT... and it will hurt companies like GM – which has sold a lot of cars to buyers who wouldn't have been in the market for a new car under normal lending conditions.

 

In the Investment Advisory portfolio, we have a section called the "Disappearing Middle Class." We've done a lot of work explaining the cause of this trend and how to profit from it. And the good news for Investment Advisory readers is that it's just getting started.

 

– E.B. Tucker

Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)

Investment

Sym

Holding Period

Gain

Publication

Editor

Seabridge Gold	SA	4 years, 73 days	995%	Sjug Conf.	Sjuggerud
Rite Aid 8.5% bond		4 years, 356 days	773%	True Income	Williams
ATAC Resources	ATC	313 days	597%	Phase 1	Badiali
JDS Uniphase	JDSU	1 year, 266 days	592%	SIA	Stansberry
Silver Wheaton	SLW	1 year, 185 days	345%	Resource Rpt	Badiali
Jinshan Gold Mines	JIN	290 days	339%	Resource Rpt	Badiali
Medis Tech	MDTL	4 years, 110 days	333%	Diligence	Ferris
ID Biomedical	IDBE	5 years, 38 days	331%	Diligence	Lashmet
Northern Dynasty	NAK	1 year, 343 days	322%	Resource Rpt	Badiali
Texas Instr.	TXN	270 days	301%	SIA	Stansberry