Porter's Bold Prediction Is Playing out Now

Auto sales plunge for the fifth straight month... Porter's bold prediction is playing out now... 'If you lived through the subprime-mortgage debacle, you must know what will happen'... New all-time lows for SNAP... In the mailbag: A 'Melt Up' or a correction?...

U.S. auto sales 'surprise' to the downside...

This morning, major U.S automakers reported that sales declined sharply in July. This now marks the fifth straight month of falling sales. As news service Reuters reported...

GM sales dropped 15% from a year ago to 226,107 vehicles, as the company cut rental fleet sales more than 80%. The automaker said inventories of unsold vehicles at month's end were 104 days, down from 105 days at the end of June. GM has promised investors to reduce inventories to 70 days by year-end.

Ford said its July sales dipped 7.5% to 200,212 vehicles, as it cut fleet sales more than 26%. Inventories fell to 77 days from 79 the previous month.

Fiat Chrysler said sales dropped 10% to 161,477, as it also cut back sales to daily rental fleets.

As we noted last month, these companies have been intentionally cutting back on sales to rental-car companies (which earn them little profit) in a desperate attempt to boost margins. Unfortunately, this means giving up their single largest source of new-car demand. It's truly a no-win situation.

But the problem isn't falling fleet sales alone. Retail sales to consumers have also been falling. And as regular readers know, this is despite a dramatic increase in both subprime financing – including the longest average loan terms on record – and new-car leasing. But this trend could soon accelerate, too, as credit begins to tighten for the first time in years.

Subprime auto lending has already started to slow as defaults tick higher. And now, even leasing is beginning to wane as used-car prices plummet. As the Wall Street Journal noted this morning...

Car makers also facing a new problem: lenders are backing away from offering the cut-rate lease deals that kept monthly payments low and sheet metal flying off dealer lots in recent years.

Leasing accounted for 31.1% of all retail sales in the first half of 2017, falling slightly from last year's record of 32%, according to Edmunds.com. Buyers had been increasingly reliant on leases – which keep payments low even as car prices rise – until this year. "For a long time, we were all wondering where the ceiling was for leasing. Now, it has been hit," said Jessica Caldwell, an analyst for Edmunds.com.

Swelling used-vehicle supply is accelerating the pullback on leasing, The increased supply comes after used-car values had grown steadily in the years following the 2009 financial crisis.

'One of the most important lessons of finance'...

Of course, none of this should come as a surprise to Stansberry's Investment Advisory subscribers. It's exactly what Porter and his team have been predicting for years. As they originally explained in the March 2014 issue (emphasis added)...

It's one of the most important lessons of finance: The easier the lending standards become, the larger the credit losses will eventually grow...

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.

Americans currently owe more than $800 billion against their cars and trucks – 34% of this debt is owed by subprime credits. Another 10% is owed by "deep subprime" – folks with credit scores below 550. Businessweek quotes Morgan Stanley analyst Adam Jonas pointing out the obvious: "Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery."

If you lived through the subprime-mortgage debacle, you must know what will happen... Defaults will suddenly rise. Credit losses will follow. Used car prices will fall as more and more cars are auctioned off. More and more car buyers will find credit suddenly unavailable. They will be unable to roll over their loans or get into a new lease, as credit becomes tighter. More and more vehicles will pile up on dealer lots.

Of course, conditions grew even more extreme since they originally issued this warning. Today, American's owe more than $1 trillion against their cars, while new-car prices, average loan terms, and the percentage of subprime borrowers all sit at new record highs. But this only means the resulting bust will be even bigger than originally predicted.

We continue to recommend staying far away from the auto industry. There is more pain ahead for these stocks.

SNAP's 'day of reckoning' arrives...

Elsewhere in the market, the troubles for trendy social-media firm Snap (SNAP) continue...

The company's first post-IPO "lock up" period expired over the weekend. This meant early investors were suddenly allowed to sell up to 400 million shares for the first time this week. And apparently, many of them wasted no time to do so...

Shares fell as much as 5% to a new all-time low of $13.10 in Monday's trading. But the news didn't get any better following the close...

Last night, S&P Dow Jones Indices announced it would be joining competitor FTSE Russell in excluding SNAP from its widely followed indexes, including the benchmark S&P 500 Index. As Reuters reported...

The S&P 500 will start excluding companies that issue multiple classes of shares, managers of the index said on Monday, a move that effectively bars Snap after its decision to offer stock with no voting rights...

The S&P changes, which extend to the S&P MidCap 400 and S&P SmallCap 600 indexes, reflect a toughening stance by index firms and the investors they represent who increasingly emphasize the importance of corporate governance rights...

Inclusion in a stock index has been an important milestone for young companies, bringing their shares into many passive funds and others that closely follow indexes like the S&P 500, a guide for trillions of dollars of capital worldwide.

The decision likely means that funds like $243 billion SPDR S&P 500 ETF will not buy Snap any time soon.

Snap tumbled another 4.2% today to a new all-time low.

Shares have already lost nearly 50% of their market value since going public in March. But we could see even more selling ahead... Company insiders and employees own another 800 million shares that become eligible for trading later this month.

New 52-week highs (as of 7/31/17): Automatic Data Processing (ADP), Aflac (AFL), Allianz (AZSEY), Boeing (BA), Baidu (BIDU), iShares MSCI BRIC Fund (BKF), Global X China Financials Fund (CHIX), Ctrip.com (CTRP), Euronet Worldwide (EEFT), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), iShares China Large-Cap Fund (FXI), iPath Bloomberg Copper Subindex Total Return Fund (JJC), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CSI China Internet Fund (KWEB), Lockheed Martin (LMT), iShares MSCI China Index Fund (MCHI), Koninklijke Philips (PHG), Guggenheim China Real Estate Fund (TAO), Tencent (TCEHY), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).

A busy day in the mailbag... Several subscribers send kudos for the latest from P.J. O'Rourke, and a couple of others are confused about the "Melt Up." What's on your mind? Let us know at feedback@stansberryresearch.com.

"'My own central bank.' One of my favorites since we have had the pleasure of your perspective, P.J. Thanks for all the enlightenment. Porter did us all a favor bringing you into the family. I'd say I have been reading you since Rolling Stone, but I recently told a member of the Marshall Tucker Band 'I saw you open for Joe Walsh in 1973!!!' He was standing outside a local no tell motel... His reaction to my excitement? His dentures hit the pavement. He had that 'you think I still wanna be playing roadside attractions and sleeping in truck stops?' look in his eye. So I won't mention that I have been reading you since high school... and I watched Captain Kangaroo and Leave it to Beaver and saw all the early NASA rocket launches... in black and white... even the one that burst into flames... from my own cardboard box adorned with magic-markered USAs and grills just like the NASA ones. I was 5 when my sister had her tonsils out and all the ice cream she could stomach as JFKs funeral blared from the Zenith..." – Paid-up subscriber Chris Kelley

"PJ's central bank... I love it! I want one, too! Why don't you patent the idea, make up a 'do-it-yourself' kit, and sell it on Amazon? Once it becomes the instant hit that I am sure it will, go to Shark Tank and ask for a million dollars to open store fronts for brick and mortar retail sales. The kids would have week-end and after school jobs, and the dogs could greet customers as they enter, or act as bouncers if need be." – Paid-up subscriber Nancy Dancu

"Best two articles by P.J. ever! My personal central bank is thriving and is the 'depository' for a billion bit coins which I have declared to be mine. Wahoo!" – Paid-up subscriber Jim Bean

"I just finished reading P.J.'s 'A Blockhead Confronts the Blockchain', and I'm still giggling and snorting as I type. I first got put on to his ramblings and writings in his killer funny book, All The Troubles In The World, and I've looked forward to more of them ever since.

"His snarky comments on everything have such a direct and high impact way of giving us perspective on whatever he's on about. And in this brief but beautiful broadside, he shows us why we shouldn't trust cryptocurrencies any further than our keyboard! It's 'cuz they're not backed by anything tangible. So tax avoidance be damned – if it means I still keep SOME of my hard-earned money in my jeans – rather than have it disappear with the geek that invented it, I'll stick with the good old petrobucks thank you non-veddy much. A great article P.J.! Always a pleasure to read your stuff. And now, I'm forwarding it on to my kin! Best regards." – Paid-up subscriber Vaughn McMillan

"Confused again... I know, you are still 90% long in the Portfolio, but [you say] 'Time for a Correction' [in the Digest] while Steve S. continues with his 'Melt Up' theme. I would like to know if Steve S. considers a 5-10% correction acceptable and fitting within his 'Melt Up' thesis over the next 12-18 months? Taking a double-digit hit... is not my view of a 'Melt Up.' FYI... I am hedged across the board, but have lightened those hedges since Steve S. early May 17 call for 'the Melt Up is here.' Thank you." – Paid-up subscriber Dewey T.

"What happened to the grand Melt-Up and buying all tech stock ETF or international growth or whatever? That was less than two weeks ago and now it's a correction on the way due to low VIX? Which is it??" – Paid-up subscriber Ken B.

Brill comment: The answer is simple: It's BOTH. Steve's Melt Up is still in play. But that doesn't mean we can't experience a pullback – or even several pullbacks – along the way.

In fact, during the last Melt Up in the late 1990s, the tech-heavy Nasdaq Composite Index saw multiple double-digit declines over the final 14 months of the rally. Even the blue-chip S&P 500 Index experienced two different corrections over that time... Yet they went on to gain more than 125% and 25%, respectively, before the bull market finally ended.

In other words, if you're going to profit from the Melt Up, you must be prepared for volatility.

You can learn how Steve recommends positioning for the Melt Up – including what to buy, and how to know EXACTLY when it's finally time to sell – with a 100% risk-free subscription to his True Wealth advisory. At just $0.27 per day, it's easy to understand why we believe no better value exists in the investment research universe. Click here for all the details.

Regards,

Justin Brill
Baltimore, Maryland
August 1, 2017