Auto-Loan Delinquencies Are Soaring

Another Alzheimer's drug has failed... Why we're still optimistic the disease can be stopped... And bullish on Biogen... Avis plunges on dismal earnings... Auto-loan delinquencies are soaring... Your best chance to make 10 times your money in stocks...

Editor's note: The Stansberry Research offices will be closed along with the markets on Monday, February 20 for Presidents' Day. We'll resume publishing the Digest on Tuesday.

There was "virtually no chance of finding a positive clinical effect"...

So said an independent panel of experts about pharmaceutical giant Merck's (MRK) once-promising Alzheimer's drug.

As a result, the company announced this week it will halt its ongoing trial of the drug – verubecestat – in patients with mild to moderate symptoms of the disease.

The news may sound familiar to regular Digest readers... A similar new drug being developed by Eli Lilly (LLY) failed its Phase III trial in November.

Merck's drug is what's known as a "BACE inhibitor." In simple terms, it blocks an enzyme thought to be involved in the formation of Alzheimer's plaques in the brain. It's similar to Lilly's approach, which also tried to halt the precursor proteins that form plaques. And both failed to show improvement in patients who already have the disease. (Merck is continuing a trial in patients with only "symptomatic hints" of the disease, to see if it can prevent further advancement.)

Of course, these are just the latest in a long line of failed Alzheimer's drugs...

As Porter explained in the December 9 Digest, so many firms have failed so many times (and lost so much money in the process), many folks have all but given up on the prospect of a cure...

A tremendously powerful belief is held almost universally across Wall Street and inside major pharmaceutical companies. The belief is that all Alzheimer's drugs fail...

These beliefs are so widely held that some investors simply bet against any Alzheimer's drug, no matter who is developing it. And many pharmaceutical executives kill any Alzheimer's research project that comes up their pipeline. It's just too difficult a disease. Nothing anyone has tried works... or so virtually everyone believes.

Regular readers know we disagree...

Stansberry's Investment Advisory portfolio holding Biogen (BIIB) has already shown – via data published in the prestigious journal Nature­, no less– that its new drug, BIIB-037, is effective.

The early data show the drug can substantially decrease plaque burden within a year and significantly slow the progression of patients' cognitive decline.

The drug's Phase III trial is ongoing, so final results likely won't be known until later this year...

But our senior technology analyst Dave Lashmet says there is good reason to believe Biogen will finally succeed where Merck and others have not. You see, its plaque-targeting drug is far different than those that have failed. As Dave explained in a private e-mail...

Merck dropped a bombshell on Valentine's night, when nobody was looking. But here are the crucial details:

Merck's experimental BACE-1 pill for treating Alzheimer's was just stopped by the doctors running its pivotal trials... Not for side effects, but because it utterly failed.

Worse, Merck's drug was the first, best chance to prove that BACE-1 was a valid drug target. It hit its target with 92% effectiveness. In other words, Merck's failure puts this entire class of drugs in doubt.

But we aren't surprised... You see, Alzheimer's is not driven by BACE... This is actually a disease caused by the accumulation of a plaque formed by beta amyloid protein. When amyloid builds up, this kills the connections between nerve cells, where your thoughts travel. And when you run out of thoughts, you die.

We know all this because we can see it on a contrast MRI image, which relates the amount of plaque to the level of cognitive brain damage. Plus, we know that Biogen's experimental antibody BIIB-037 both clears out this plaque and stops the loss in human cognition. In other words, Biogen's antibody slows and then freezes the progress of the disease.

As Dave noted, Merck's failure is also unequivocally good news for Biogen investors...

It means the firm has now lost its biggest potential competitor...

More than 5 million Americans have Alzheimer's. If Biogen's antibody continues to work in its pivotal trials like it did in its earlier trials, it's quite possible this becomes a $20 billion drug.

One threat to this incredible gold mine is rival antibodies, but none of those (except Biogen's partner, Eisai) seem to be working. The difference in the antibodies is when they hit the amyloid protein...

Pfizer (PFE) and Eli Lilly were trying to hit it as a liquid. This approach failed. Sure, it's the same substance. But if you have ever tried to gather rainwater with a snow shovel, you realize it's the state of a substance that matters. Put simply, solid protein sticks together, just like solid snow does. As a liquid, it's much harder for these antibodies and your white blood cells to clear it.

There's a biological reason for this, too. It's not a coincidence. Amyloid is a natural antibiotic in your brain: It's trying to capture rogue bacteria. This means that by design, your immune system wants to clean up the trapped bacteria in a plaque. Biogen's antibody helps this natural process. So does the antibody from Eisai.

But what the other antibody companies were trying to do is short circuit the body's natural defenses so it fights back. What Merck was trying to do with BACE-1 was the same kind of "short-circuit strategy," but using it earlier in the process, and with a once-daily pill.

We never expected this to work, and now we know it doesn't. To go back to our metaphor, it's like trying to clean up snow by stopping clouds from forming. As it turns out, this was an impossible task. It didn't work for Merck, and it likely won't work for anyone else. So the only solution is Biogen's antibody.

Regular readers know we've also been warning about the rental-car industry...

Porter and his team originally turned bearish back in October, when they recommended Stansberry's Investment Advisory readers short shares of both Hertz (HTZ) and Avis Budget Group (CAR).

The primary reason for this stance was simple... Since 2010, both firms had spent far more on new-car purchases ($110 billion) than they were able to generate in used-car sales ($85 billion). That $25 billion shortfall came from debt. And as Porter noted, more than 40% of that debt is due before the end of 2018. From the October issue of Stansberry's Investment Advisory...

That's a mountain of debt for these companies. But it gets even worse when you study their company filings... Avis and Hertz have committed to purchase another $13 billion next year from the major auto manufacturers. So that's an additional $13 billion that has to be raised next year and paid for by approximately 2020.

Of course, as Porter's team explained, renting cars is also a low-margin business. These firms generated razor-thin, 3% profit margins from 2011 through 2016. And that was during a roaring bull market in the industry. From the same issue...

Keep in mind, those margins were earned during a huge boom period for the auto and rental-car industries. The rental-car fleet size hit a 10-year high last year at more than 2.1 million cars – up 33% from 2009. And it hit 10-year revenue highs at $27 billion – up 35% from its 2009 lows. If revenues were only 4% smaller, those profits would completely disappear.

In early November – just a month after their short recommendation – Hertz shares collapsed...

As Porter explained in the November 8 Digest...

Today, the leading car-rental business in the world, Hertz (HTZ), saw its share price fall more than 50% in the first few hours of trading. The collapse erased more than $2 billion from the accounts of some of the world's best investors, including Carl Icahn, who owns more than 12 million shares.

While some of the best investors in the world got hurt by changes they never saw coming in the credit markets, many of our subscribers saw their portfolios increase in value by huge amounts.

This is only the latest example of how our understanding of the credit markets greatly increases our ability to guide investors in the equity market. These credit trends are by far the most powerful force in the stock market. Ironically, however, they're largely invisible to virtually all investors – even the most sophisticated.

While Hertz shares have continued lower, Avis had held up. Until this week, that is...

Yesterday, Avis reported dismal fourth-quarter earnings...

The firm reported a loss of $31 million for the quarter, compared with a loss of $5 million in the same quarter last year.

It also reported revenues unexpectedly declined from $1.90 billion to $1.88 billion, due to lower prices and a falling rental demand. Analysts had expected revenues to rise to $1.96 billion.

Stansberry's Investment Advisory subscribers likely weren't surprised...

As Porter and his team explained in the October issue, falling revenues are exactly what we expect to see as more and more auto loans go bad...

One of the ripple effects of massive auto-loan defaults will be a precipitous decline in used-car prices... Think about it. As thousands of cars are repossessed, desperate lenders dump these cars all at once, flooding the market with supply. These treacherous trends will kill rental-car companies...

These two companies spend billions of dollars each year replacing their older used cars... They partially pay for these massive ongoing purchases by selling their older used-car fleet.

Most of their used-car sales happen in open market auctions. These sales are a critical source of the working capital for rental-car companies. This is why the state of the used-car market can make or break the cash flows for a rental-car business... Their success hinges on it.

Unfortunately, the latest data show auto loan distress is only getting worse, not better...

As the Financial Times reported yesterday, more than 1 million U.S. consumers are "at least two months behind on car loan repayments," noting that the delinquency rate in the $1.1 trillion market hit its highest level since 2009. And that's not just limited to subprime borrowers. That figure includes everyone with a U.S. car loan.

Meanwhile, the number of U.S. car leases and loans rose 4.3 million from 2015 through the end of 2016. Today, the average borrower holds about $18,400 in debt – up nearly $2,000 from 2014.

Citing data from credit bureau TransUnion, the Financial Times noted a 13% increase in "the proportion of soured car loans." From the article...

Delinquencies on credit cards also rose by about the same amount over the period to 1.79% – the highest since 2011. The rise in bad loans comes despite persistently low borrowing costs and unemployment levels – suggesting lenders may be letting consumers take on bigger debt burdens than they can handle.

Lending to consumers with weak credit scores has been one of the fastest-growing parts of the industry. Still, the increased delinquency levels follow a period of rapid expansion and could be a natural consequence of that growth. Separate figures published on Thursday by the New York Federal Reserve showed the total amount of debt held by American households rose last year at the fastest clip since 2007.

Adding insult to injury, analysts at banking giant Credit Suisse downgraded Avis from "outperform" to "neutral" following the news...

Shares tumbled 12% yesterday, and fell another 5% today. CAR is now trading below its 200-day moving average for the first time in nearly a year – another bearish sign for shares going forward.

Credit Suisse also slashed Hertz's rating from "neutral" to "underperform," and lowered its price target from $27 to $15, according to CNBC. Shares fell 4% yesterday, and were down nearly 8% today... just shy of a new 52-week low.

Finally, our colleagues Scott Garliss and Greg Diamond note that Avis shares have now broken down from a bearish "rising wedge" pattern...

As they explained in our brand-new Stansberry Newswire service earlier today...

Shares dropped significantly after bad earnings yesterday and broke BELOW the lower bound support of the wedge. Prices tried to rally but fell short and traded lower this morning in a continuation of weakness.

In technical analysis, once support breaks, it then becomes resistance. Expect the lower bound of the rising wedge to now become new resistance for shorts who want to add on any bounce.

The Newswire team explained that long-term support for Avis shares sits as low as $25... meaning the stock could have another 25% of downside from today's already beaten-down levels.

In short, the outlook for the car-rental business is bad on both a fundamental AND technical basis. Porter's subscribers are up 24% on their combined short position.

One last note before we sign off today...

As you've likely heard, our brand-new small-cap research service – Stansberry Venture Value – is now live.

We officially launched the service during our live event on Wednesday night. And if you were there, you know why Porter is so excited about this project: It could very likely become the most profitable research we've ever published.

We believe subscribers could easily see total long-term returns of 1,000% or more... in regular, "plain vanilla" stocks... and without taking big risks, using leverage, or trading options. There is no simpler, safer, or easier way to make a fortune in the stock market.

Folks who took advantage of our charter offer to join Venture Value have already received our first two recommendations. But if you've been "on the fence" about joining us, it's not too late.

Both of these recommendations remain within buy range for now... And Porter and his team just published another brand-new opportunity today just after market close.

In other words, you haven't missed anything... yet. But we can't say how long these opportunities will last. Click here to learn more about Stansberry Venture Value now. (You won't have to sit through a long promotional video.)

New 52-week highs (as of 2/16/17): China Construction Bank (0939.HK), Agricultural Bank of China (1288.HK), Industrial & Commercial Bank of China (1398.HK), Bank of China (3988.HK), American Financial Group (AFG), AMETEK (AME), Axis Capital (AXS), Boeing (BA), Bank of Montreal (BMO), Berkshire Hathaway (BRK-B), C.H. Robinson Worldwide (CHRW), CommScope (COMM), Cisco Systems (CSCO), iShares Select Dividend Fund (DVY), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), Cedar Fair (FUN), Huntington Ingalls Industries (HII), JD.com (JD), 3M (MMM), Altria Group (MO), Shopify (SHOP), and W.R. Berkley (WRB).

A busy day in the mailbag: Subscribers weigh in on Wednesday night's live event and our new Stansberry Venture Value service... Stansberry Portfolio Solutions and the real-time Stansberry Newswire service... the latest essay from best-selling satirist P.J. O'Rourke... and yesterday's note from the Atlas 400. What's on your mind? Let us know at feedback@stansberryresearch.com.

"Yes, I joined you [on Wednesday night]. And I couldn't help smiling the entire time and patting myself on the back. You see, I am an Alliance member from 2006, and I was a Phase One subscriber for many years as well. I always bought my Phase One subscription in two year blocks, because lifetime wasn't offered. Well, when Phase One was rebranded to Venture and lifetime access was offered, I jumped all over that in a heartbeat. And now Venture has a sister publication. Which I get for free!!!!! Booyah!! So, I am still smiling...actually my face is starting to hurt a little. Stansberry Research is the absolute best investment I have ever, or will ever, make. Period. Even though we have been partners for over 10 years (!) I am still blown away by the value you continually deliver. It is hard to find people these days that keep their word – but you, Porter and team, are seriously honorable. Thank you again." – Paid-up Stansberry Alliance member Jake B.

"I am an Alliance Member who recently took the plunge, fired his money manager, and resolved to use your research as a guide. I subscribe to TradeStops, and found your portfolio service to be invaluable. If I am honest, doing it with your research without TradeStops was too time consuming, and my position sizing was way off. The portfolio helped me to buy things I never would have considered. I'll see how it goes, so far I am up 1.7% in less than a month. Not too shabby considering my advisor tread water for 4 years during a bull market. I really needed this kind of guidance in order to really benefit from your work. Great Service!" – Paid-up subscriber Jon L.

"Just want to tell you the Stansberry Newswire is a great addition. Now I know why the market moves in a day." – Paid-subscriber Phillip M.

"I almost split a gut reading PJ's essay today about political bias on the pages of the Washington Post. I don't read the WP, but I did subscribe to the New York Times – until recently, that is. PJ's comments might as well apply directly to the NYT. I put up with them during the campaign, knowing that they were heavily biased towards the liberal left. After the election, however, they reached a new – I would have thought impossible – level of frenzy for a newspaper that used to pride itself on reporting the facts. Trump is right, they make up their own 'facts.' On my last day as a subscriber (about 3 weeks ago), I counted 22 'news' articles that were as heavily biased as those reported by PJ in the Washington Post – and that did not include the editorials and columns. On the other hand, I counted two (yup, TWO) news articles that seemed to report actual facts without bias.

"So, I called them that day and cancelled my subscription. When they asked me 'why...' I told them that I was done spending my money on what appeared to be an official publication of the Radical Liberal Left. They offered me half-price for 3 months if I would re-consider!! Thanks, PJ, please keep telling it like it is!" – Paid-up Stansberry Alliance member RJL

"P.J... Fantastic essay. In the words of Spinal Tap, everything seems dialed up to 11, with a lack of respect or even common decency between normally sane people. He is doing what he said he would at a great pace, so take your medicine and if the country doesn't like it, they have a chance to change it in less than 4 years time. Thanks again." – Paid-up subscriber Dan S.

"If you work to accomplish things, you inevitably will make mistakes!! If you sit on your duff and produce nothing except gripes and condemnation, you accomplish nothing. Enough said!!!!" – Paid-up subscriber C.C.

"Your comments relative to Cabin Bluff bring back many fond memories! In the late 60's through the 80's I had the privilege to visit Cabin Bluff many times. Back then, Cabin Bluff was owned by the Mead Corporation (Mead Paper) and Scott Paper. Both companies switched months every year for holding seminars and entertaining customers." – Paid-up subscriber Roger M.

Regards,

Justin Brill

Baltimore, Maryland

February 17, 2017