Ford Issues a Warning
'Subprime credit losses are accelerating'... Used-car prices are plunging... Big trouble for big automakers... Ford issues a warning... More bad news for malls... The 'retail apocalypse' is here... P.J. shares another chapter from his new book...
Subprime auto loans are going bad at the fastest rate in years...
So said a new report out yesterday from Michael Taiano, a director at credit-ratings firm Fitch. From the report...
Subprime credit losses are accelerating faster than the prime segment, and this trend is likely to continue as a result of looser underwriting standards by lenders in recent years...
Fitch expects that deteriorating credit performance will be more acute in the subprime segment, driven to some extent by the expansion of less-tenured independent auto finance companies that have demonstrated higher-risk appetites and less underwriting discipline.
According to Fitch, delinquencies of 60 days or more on these loans are now well above 5%... And they're quickly closing in on 6%. As you can see in the following chart, these loans are going bad faster than they did during the 2008-2009 financial crisis...
Meanwhile, market-research firm J.D. Power reports used-car prices are plunging...
According to its National Automobile Dealers Association ("NADA") Used Car Guide – out earlier this week – prices fell 1.6% last month. This marks just the second February decline in 20 years. And the firm's used-vehicle price index plunged nearly 4%, the largest one-month decline since 2008. From the report (emphasis added)...
In a reversal of what typically occurs in February, wholesale prices of used vehicles up to eight years old fell substantially last month, dropping 1.6% compared to January. The drop was counter to the 1% increase expected for the month and marked just the second time in the past 20 years prices fell in February (last years' scant 0.2% being the other instance).
NADA Used Car Guide's seasonally adjusted used vehicle price index fell for the eighth straight month, declining 3.8% from January to 110.1. The drop was by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble. February's index figure was also 8% below February 2016's 119.4 result and marked the index's lowest level since September 2010.
As you can see in the chart below, the index has given up virtually all of its gains of the past six years...
February's plunge in used-car pricing coincided with another massive 18.1% average increase in new-vehicle incentives. More from the report...
Automakers grew incentive spending once again in February, making it the 23rd month in a row where spending was increased. On average, spending reached $3,594 per unit versus $3,043 per unit in February 2016 according to Autodata.
Among the U.S. Big Three, GM raised incentives by 27.4% in February to an average of $5,125 per unit. Spending at Ford Motor Company rose by 20.9% to $4,012 per unit, while FCA increased incentives by 10.6% to $4,365.
Considered together, these two reports paint a troubling picture...
They suggest the latest auto boom is now rolling over.
Of course, regular Digest readers aren't surprised. We've been warning about these problems for months. As Porter explained in the November 11 Digest (emphasis added)...
Demand for cars has been wildly inflated by both fleet sales to rental companies (which as you've seen are now falling apart) and by subprime auto lending... And that means, as subprime lending goes, so goes demand for cars... When auto loans go bad, the cars are repossessed and sold at auction... Big increases in repos and big sales from rental fleets are significantly reducing used-car prices.
Most investors won't see these important declines in collateral values because they're watching the Manheim Used Vehicle Value Index. The price index maintained by the wholesale car-auction firm Manheim remains strong... But the key index to watch is the National Automobile Dealers Association (NADA) index. It tracks the market for older cars and records.
The NADA index of used-car prices just "broke down"... Prices are falling down past levels they've been above since 2011. This tells us that much lower prices for used cars are coming.
We've already seen these problems weigh on some of the most vulnerable companies...
Shares of subprime auto lenders like Santander Consumer USA (SC) plunged last year, and still remain well below their 2015 highs. And shares of car-rental firms Hertz Global (HTZ) and Avis Budget (CAR) have plunged in recent months along with used car prices.
But the big automakers have been relatively resilient. Shares of General Motors (GM), Ford Motor (F), and Fiat Chrysler (FCAU) remain at or near all-time highs. But Porter warned it was only a matter of time before they too suffered. More from that Digest...
To profit from the collapse in subprime lending, I'd rather target the auto makers themselves, whose big debts and razor-thin margins put them at big risk from any decrease in sales value.
We've already seen sales volumes falling (down about 8%) and moves to further reduce supplies. (GM is closing two plants and laying off 2,000 employees.) I'm certain we'll see more of both moves over the next year.
This, too, now appears to be starting in earnest...
Today, Ford warned that its 2017 results are likely to fall far short of analyst expectations. As the Wall Street Journal reported...
Ford raised a caution flag for the auto industry, saying higher interest rates and a steady decline in used-car values will hurt the most important factor in the recent U.S. sales boom: affordability.
The outlook, coming as the company forecast leaner results for the first quarter, comes amid a broader view that car sales in the world's two largest markets have peaked after a string of record profits and sales for the U.S. auto industry. Ford estimates volumes will fall in the U.S. and China in 2017 and again in 2018...
Ford expects full-year adjusted operating profits of $9 billion this year, a 14% decline over 2016, due to higher costs and continued investment in autonomous cars and other advanced technologies. The company also guided to first-quarter earnings per share of between 30 cents and 35 cents, lower than the same-period a year earlier and far below analysts' expectations of 47 cents.
Ford shares fell about 1% today. They're now down more than 7% in the past five trading days.
Again, this should sound familiar to regular Digest readers...
Porter laid out the bearish case for Ford in particular months ago. As he explained in the November 19 edition of our Digest Masters Series...
Now, I like Ford automobiles. I drive a Ford truck. I don't have any problems with its products. But Ford didn't declare bankruptcy back in 2009... like GM and Chrysler did. That puts it at a grave competitive disadvantage. It's still holding on to $130 billion worth of debt.
What you may not know is that, for all the auto sales over the last five or six years, the growth in the auto industry was powered completely by subprime leases and subprime loans. Those loans are now going bad at an alarming rate... Something like 20% of all of the subprime auto loans securitized over the last three years have defaulted.
The entire business model of selling cars to deadbeat borrowers is done. It won't come back for another five years or so. As a result, we saw Ford's sales decline by 8% – which was pretty shocking – year over year.
We think that's going to continue. We think, eventually, that's going to put pressure on Ford's debts. Because within five years, Ford has to come up with half of $130 billion. We know it can't do that. So whether or not Ford goes bankrupt, in our minds, is completely dependent upon the grace of its creditors.
If we end up in a default cycle, Ford is going to have a really hard time refinancing that debt. And that, of course, could see the share price go from around $12 (where it is now) to well below $5, or maybe even to zero.
Meanwhile, the outlook for shopping malls continues to darken...
We last reviewed the bearish case for mall operators in the March 13 Digest, when we noted Wall Street had found its next "Big Short."
Since then, the news has only gotten worse, as a number of mall retailers have announced significant store closings or worse... leading some in the financial media to declare that the "retail apocalypse" has begun...
Last week, common "anchor" retailer JC Penney (JCP) announced it will close 138 additional stores by June, or 14% of its existing locations.
On Tuesday, Sears Holdings (SHLD) – the parent of fellow anchor store Sears – said it would close another 150 stores, and it admitted for the first time that it may not survive. Shares plunged as much as 16% on the news. As Bloomberg reported...
Sears suffered its worst stock decline in more than two years after acknowledging "substantial doubt" about its future, raising fresh concerns about the survival of a company that was once the world's largest retailer.
Sears added so-called going-concern language to its latest annual report filing, suggesting that weak earnings have cast a pall on its ability to keep operating. The 131-year-old department-store chain, which has lost more than $10 billion in recent years, was cited last year by Fitch Ratings as a company carrying a high risk of defaulting...
"Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern," the Hoffman Estates, Illinois-based chain said.
Also this week, women's-apparel chain Bebe Stores (BEBE) announced it is planning to shut all 170 of its remaining mall-based stores and relaunch as an online-only brand. And discount-shoe chain Payless announced it is planning to close 400-500 stores and could file for bankruptcy as soon as next week.
These closings join those previously announced in recent months by Macy's (M), The Limited, Wet Seal, BCBG, Guess (GES), and others. In total, more than 3,500 mall-based retail stores are expected to close by mid-year, according to Bloomberg.
As you might expect, shares of GGP (GGP) continued to fall this week, too...
The Stansberry's Investment Advisory short recommendation – previously known as General Growth Properties – is heavily dependent on many of these same struggling retailers. As Porter and his team explained in the September issue of Stansberry's Investment Advisory...
Of GGP's 115 malls, 90% have a Macy's, J.C. Penney, or Sears as an anchor store. Even worse, 41% of GGP's malls have all three of these struggling department stores as anchors...
So... department stores are dying, and GGP has the most exposure to these big-box relics. GGP's underlying business is also weak: It's not growing revenues. Furthermore, GGP has higher leverage than its closest peers and several problematic properties.
Of the mall owners still sporting expensive valuations, GGP has the wrong tenants, in the wrong types of malls, while sitting in the weakest financial position. It's the best short candidate in the bunch.
GGP closed at a new two-and-a half year low of just $22.66 on Wednesday... Stansberry's Investment Advisory subscribers are up 20% as of yesterday's close.
New 52-week highs (as of 3/22/17): Longfor Properties (0960.HK), National Beverage (FIZZ), short position in GGP (GGP), and Sanofi (SNY).
In today's mailbag, several subscribers share their thoughts on Doc Eifrig's big options webinar. Did you attend? Let us know what you thought at feedback@stansberryresearch.com. If you weren't able to join us, be sure to catch the highlights – including the details on a special limited-time offer to try Doc's excellent Retirement Trader advisory – right here.
And be sure to stick around for the latest excerpt from Digest contributing editor P.J. O'Rourke's new book below the mailbag.
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Regards,
Justin Brill
Baltimore, Maryland
March 23, 2017
Editor's note: Stansberry Digest contributor P.J. O'Rourke has just published his latest book: How the Hell Did This Happen? The Election of 2016.
He covers the entire election cycle from its 2015 start (when voters were perplexed, confused, and split into angry partisan factions) until its 2017 finish (which left voters perplexed, confused, and split into angry partisan factions).
Along the way, P.J. uses his dark sense of humor and biting satire to offend everybody who ran for president and anybody who voted for them. He even tries to offend himself, as one of the "media elite" political pundits who so miserably failed the American public.
He may make you mad, but he will make you laugh.
Last week, we shared P.J.'s "road trip" test for selecting a president. This week, in the second of three chapters adapted from How the Hell Did This Happen?, P.J. offers an alternative means of selecting our chief executive. (The full book is available for purchase here.)
Another Way to Choose a President, Part II – Ladies First!
As I mentioned last week, the long, drawn-out, exhausting, and aggravating 2016 presidential campaign left people thinking, "There must be another way to do this."
Last week, my idea was for voters to pick the presidential candidate they'd like to go on a road trip with.
This week, I have a new idea: Elect the president and let the first lady run the country.
As before, we'll leave out the most recent election. It's too complicated. Would Melania Trump be disqualified because she isn't native born? Would Bill Clinton become "gender fluid" if Hillary won? If Bill was transgender, would he be able to resist groping himself? Is than an impeachable offense?
Instead, let us examine past evidence...
Historical research and analysis suggest that making the White House hostess head of state would create a freer, stronger, more peaceful and prosperous America.
Martha Washington is richer than George. She bribes the Red Coats to bugger off back to England, saving us the bother of a Revolutionary War.
Abigail Adams is smarter than John. She doesn't pass the Alien and Sedition Acts, which (to judge by the names of the things) caused America to be full of illegal aliens and people who (as the dictionary defines sedition) "stir up discontent, resistance, or rebellion against the government" aka the media.
Martha Skelton Jefferson is dead before Thomas becomes president. America gets its first black woman chief executive, Sally Hemings, in 1800. Hemings proclaims emancipation and passes equal rights legislation. She wins the Civil War with much less bloodshed because modern weaponry, the telegraph, and accurate maps have not been invented so Union and Confederate soldiers keep getting lost in the woods.
Dolley Madison's diplomatic poise and social graces prevent the pointless War of 1812. The British, who've been invited to tea at the White House, do not burn it down.
While her husband James was the ambassador to France Elizabeth Monroe rescued Thomas Paine and La Fayette's wife from the Reign of Terror. Elizabeth is a force to be reckoned with. Her "Monroe Doctrine" tells Europeans to stop messing around in the Western Hemisphere and stop messing around in Europe.
Louisa Adams suffers from depression. She lets stay-at-home dad John Quincy take care of the household budget. He pays off the national debt, so there's plenty of money for federally sponsored medical research. Prozac is invented in 1825. Washington has been a calmer and more cheerful place ever since.
Widower Andrew Jackson's niece Emily Donelson is too busy with Washington society squabbles (such as the "Petticoat Affair" over whether Secretary of War John Eaton's wife is a floozy) to sign the Indian Removal Act.
Native Americans aren't caused untold suffering on the "Trail of Tears." Emily also neglects to destroy the Second Bank of the United States. It prints "greenbacks," and green is her favorite color. There's no "Panic of 1837." America's first great depression never happens.
Angelica Singleton Van Buren fails to use father-in-law Martin's influence with the New York State political machine to create the modern Democratic Party. Today, Bill de Blasio is an obscure Sandinista Studies professor, and Rahm Emanuel is still running the meat slicer at Arby's.
Anna Harrison doesn't stand in the freezing rain giving the longest inaugural address ever and die 30 days later from pneumonia like her husband William Henry. And she doesn't, as Harrison's Vice President John Tyler did, annex Texas. Instead, Anna prudently waits for oil to be discovered, so Texas can annex the United States.
Because Anna Harrison stayed out of the rain, John Tyler's wife, Letitia Tyler, a sickly invalid, is never first lady and neither is Tyler's next wife, Julia Tyler, a silly rich girl.
Texas is so rich that instead of laying siege to the Alamo, General Santa Anna starts "Occupy the Alamo," which, like all "Occupy" movements is a complete flop.
Lacking casus belli, Sarah Polk refrains from waging James K.'s war against Mexico. Therefore, today, the state of California is an undocumented immigrant, and we can deport it.
Margaret Taylor doesn't have much to do.
Ditto for Abigail Fillmore. And thanks to the good work of Sally Hemings, Mrs. Millard F. doesn't need to compromise her anti-slavery principles with the "Compromise of 1850."
Jane Pierce is reclusive. While in the White House, she never comes downstairs. Since there is no Kansas-Nebraska Act or Fugitive Slave Act to be signed, she has no reason to.
Bachelor James Buchanan's niece Harriet Lane is fashion-forward. The big event of the Lane Administration is Harriet lowering the neckline of her Inaugural Ball gown by two inches.
Mary Todd Lincoln is a flake. But the nation doesn't need Abe, so who cares?
Eliza Johnson never comes downstairs, either. So she can't get impeached. And because the House of Representatives never learns how to impeach anybody, history is spared Monica Lewinsky.
Julia Grant has no hard-drinking, poker-playing cronies to mar her administration with charges of corruption. The "Gilded Age" is so-called because it is a golden period of business probity, labor peace, and charitable concern for the poor.
"Lemonade Lucy" Hayes is a strict teetotaler. The hard-drinking Americans of the 1870s laugh off her attempt to impose national prohibition, and nobody ever tries that again.
Lucretia Garfield is safe in the Ladies' Waiting Room of the Sixth Street Station in Washington, while disappointed office-seeker and would-be assassin Charles J. Guiteau is on the prowl.
She completes a full term, as does her successor, Mary Arthur McElroy, the sister of widower Chester Alan Arthur. The most serious problem facing the nation is a budget surplus. So Lucretia and Mary go shopping.
Between 1885 and 1897, there are five first ladies. Rose Cleveland, Grover Cleveland's sister, is replaced when Grover marries Frances Cleveland, followed in office by Caroline Harrison who dies in 1892, whereupon Benjamin Harrison's daughter Mary Harrison McKee takes over, after which Frances Cleveland returns to the White House.
Despite the rapid turnover, first lady policy remains consistent on the leading issue of the day, the gold standard. Gold, they firmly maintain, makes much nicer bracelets, rings, and necklaces than paper does.
Ida McKinley is another invalid First Lady. She simply doesn't have the energy and pep for a Spanish-American War. When unhinged anarchist Leon Czolgosz ties to attack Ida, a nurse clobbers him with a bedpan.
Ida lives until 1907, allowing an orderly transition to the Nellie Taft Administration, 1905-1913. Teddy Roosevelt, having charged up San Juan Hill with nobody there to stop him, just keeps going. Instead of "Trust Busting," Nellie institutes "Trust Bosoming."
Ellen Wilson is a talented painter. Like most artsy types she holds "advanced" opinions. Women get the vote right away. And, due to government medical research programs begun under Louisa Adams, Ellen doesn't die of kidney disease in 1914. She's around to heed peace protests and keep America out of World War I. She does not, however, establish the Federal Reserve. Banking "makes her head ache."
Florence Harding is a shrewd businesswoman. There's no Teapot Dome scandal. She already owns those oil-drilling rights, under her maiden name. And Florence instructs the Secret Service to "23 skidoo" Warren G.'s mistress Nan Britton. "And Warren, too, if necessary."
Grace Coolidge minds her own beeswax.
Lou Hoover is a cultivated and scholarly woman, a graduate of Stanford and fluent in Chinese. Her thorough understanding of economics and geo-politics set the trend for cautious personal investments during America's "Boring Twenties".
One look at Eleanor Roosevelt changes Adolf Hitler's life – Pablo Picasso is a realist. Hitler embraces "degenerate art," forgets about politics and anti-Semitism, and becomes a minor painter of the Munich Expressionist School.
When North Korea invades South Korea in 1950, Bess Truman has her opera singing daughter Margaret give a solo performance on the front lines and the North Koreans retreat.
Mamie Eisenhower and Nina Khrushchev bond over clothes shopping, leading to the 1950s' signature dumpy-frock-and-babushka look and also to peaceful co-existence.
Jackie Kennedy provides a sharp contrast to Mamie. Jackie has exquisite taste. When she hears about something called a "Bay of Pigs," she vetoes it. "Honestly," she says, "I mean, perhaps a Baie des Cochons... But, really, no."
Lady Bird Johnson undertakes a "Vietnam Beautification" program.
Pat Nixon suggests Dick take up a hobby, such as drinking. Henry Kissinger is unnecessary because of enduring Mamie-Nina Détente. Betty Ford goes to the Richard M. Nixon Center to dry out.
Rosalynn Carter gets all her policy advice from her 10-year-old daughter Amy who thinks "Stagflation" would be a swell name for a pony. It is, and the American economy begins to revive.
Nancy Reagan's astrologer calculates that the nation (Sun Sign Cancer with Sagittarius rising) has its Moon in Aquarius and Mars in Gemini. It's an auspicious moment. Nancy dresses up and gives a party for eight years.
Saddam Hussein's invasion of Kuwait makes Barbara Bush mad. And when Barbara gets mad... Hussein surrenders immediately. Ayatollah Khamenei and Hafez al-Assad surrender too, just to be on the safe side. Yasser Arafat also agrees to do whatever Barbara tells him. There is peace in the Middle East.
Hillary Rodham, an obscure real estate developer and cattle-futures trader from Little Rock, Arkansas, occupies the Oval Office for one term. She is little remembered today except for (thanks to the precedent set by Florence Harding) the shy, quiet, devotion of her husband Bill.
Meanwhile, with peace reigning in the Middle East, Osama bin Laden abandons al-Qaeda, goes into the family construction business, and dies in 2011 in the collapse of a shoddily-built housing compound in Abbottabad, Pakistan.
Laura Bush perceives that America is facing a health care crisis. She talks to hospitals, insurance companies, pharmaceutical manufacturers, and health care providers and asks them if they can't, please, work something out. Laura is so nice, who can refuse?
With nothing to be irate about Michelle Obama devotes her full energy to making America fit. Average U.S. Body Mass Index is now 18.5, and Chris Christie can do 75 push-ups, 80 sit-ups, and run two miles in 13 minutes.
Regards,
P.J. O'Rourke