The 'Subprime Collapse of 2016' Could Be Here Now
The 'subprime collapse of 2016' could be here now... The Federal Reserve is 'wary'... Another sign of a slowdown... An important week for stocks?...
We wrote it... Did you short it?
In the November 20 Digest, Porter warned that problems in the auto-loan market were becoming critical...
The amount of super-low-quality auto lending is now surpassing the totals of dubious lending that peaked in 2006. Total auto lending in the U.S. is now more than $1 trillion – the all-time highest amount of debt tied to cars in the U.S.
Newsletter publishers like to say the "sky is falling" all the time about every small problem we face. But this isn't a small problem. The comptroller of U.S. currency is issuing a warning to anyone who will listen. He says this situation with auto loans reminds him "of what happened in mortgage-backed securities in the run-up to the crisis" of 2008…
Today, subprime lending makes up nearly 40% of all auto loans. These loans will go bad. When they do, the industry will be completely devastated – every bit as bad as when the mortgage bubble popped. The size of the auto-lending business (more than $1 trillion in loans) means that when this happens (and it certainly will happen), the resulting damage will hurt the entire financial sector and our economy.
In that Digest, Porter recommended shorting shares of Santander Consumer USA (SC), one of the largest subprime auto-lending companies in the U.S. He even "unlocked" an issue of his subscribers-only Investment Advisory so every reader could see his team's detailed analysis on the sector.
He then repeated the recommendation three more times in the Digest here, here, and here. We hope many of you took his advice...
Yesterday, shares of Santander Consumer USA plunged more than 18% following its latest quarterly earnings announcement.
The company reported a 73% year-over-year drop in profits last quarter. It blamed most of the losses on a change to its business model.
Last summer, new CEO Jason Kulas announced that the company would exit "personal lending" – a relatively small part of its business – to focus entirely on auto lending.
In other words, the company was jumping even deeper into subprime lending. Or as Porter and his team put it in the November issue of Stansberry's Investment Advisory...
With the personal-lending portfolio out of the way, the company plans to intensify its focus on its bread and butter – the ultracompetitive business of making and servicing 84-month auto loans to people who can't afford them.
However, signs of credit deterioration – and warnings from the company that it could get even worse – were especially concerning...
Credit charge-offs – loans that the company admits are "severely delinquent" and unlikely to ever be paid back – jumped 13% to $668.7 million. Worse, the company warned investors to expect "further declines" in coming months as it moves deeper into the subprime market.
Kulas tried to explain the decline by noting "deeper subprime loans have steeper losses earlier." He added that the company is still producing "acceptable returns in a challenging environment."
Clearly, the market disagrees...
After yesterday's 18% decline – and today's further drop, down 4%-plus as of midday trading – Stansberry's Investment Advisory subscribers are already up around 50%.
It appears investors aren't the only ones worried about a slowdown in the global economy...
Last month, the Federal Reserve raised short-term interest rates for the first time since 2006. It said it expected the economy would continue to improve. It also suggested it would likely raise interest rates four more times this year, possibly as early as March.
But that may no longer be the case...
In its latest policy statement released yesterday, the Fed said it is "closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for balance of risks to the outlook."
According to Wall Street Journal reporter Jon Hilsenrath – considered by many to be a Federal Reserve "insider" – this means the Fed is worried... and further rate increases are unlikely unless these problems resolve.
Unfortunately, the news isn't getting any better. In fact, new data suggest even the U.S. economy could now be slowing...
This morning, the U.S. Commerce Department reported that orders for "durable goods" plunged 5.1% in December, the biggest monthly decline in a year and a half.
If you're not familiar, durable goods are simply long-lasting manufactured items – things like planes, tanks, construction equipment, cars, consumer electronics, and home appliances – produced in the U.S. That makes them a good general "yardstick" of the U.S. manufacturing sector.
The report also noted that orders for "core capital goods" – a subset of durable goods that tracks business investment – fell 4.3% in December.
These measures also plunged for the full year. Durable-goods orders fell 3.5% in 2015, while core capital goods plunged 7.5%. Both represent the largest year-over-year declines since 2009, and the largest declines outside of a recession in history.
We should note that manufacturing no longer accounts for the majority of economic activity or jobs in the U.S. That title now goes to the consumer-services sector.
But that doesn't mean it isn't a useful indicator anymore...
Big purchases are often the first things consumers and businesses cut back on when times get tough. When both are doing so at the same time, it could be an early warning sign for the broader economy.
The message from the markets isn't much better...
Despite rallying over the past several days, U.S. stocks are virtually guaranteed to end January in the red. The benchmark S&P 500 Index is down 7% for the month, with just one day of trading to go.
Barring a historic rally tomorrow, the ominous "January Barometer" may come into play. As we explained in the January 4 Digest...
According to the Stock Trader's Almanac... If stocks end the month up, they're likely to end the year up. If they end the month down, they're likely to end the year down.
Before you dismiss it, you should know it has an impressive track record...
It has registered only eight major errors over the past 65 years, for an 87.7% win rate. Even more impressive, the Almanac notes, "every down January in the S&P 500 since 1950, without exception, has preceded a new or extended bear market, a flat market, or a 10% correction."
But that's not all... Our colleague Jeff Clark – editor of the Stansberry Short Report – says the market is also about to close below an important "line in the sand."
Jeff uses a long-term average – the 20-month exponential moving average ("EMA") – as the defining line between bull and bear markets. If the S&P 500 is trading above this line, he considers stocks to be in a bull market. If it dips below, it signals the bears are "in charge."
We last shared this signal with Digest readers when stocks plunged last summer.
The S&P 500 closed below the 20-month EMA in September, but quickly rallied back above it in October.
In early November, we shared the following chart...
The first two red circles show the starts of the bear markets in 2000 and 2007, while the blue circle shows the "fake-out" in 2011.
At the time, we noted that latest move – shown in the red circle on the top right of the chart – looked similar to 2011. A new rally could be starting.
But Jeff wasn't convinced... He believed it could be one of the biggest false signals – or "bull traps" – ever.
He said that despite the huge rally in October, the moving average convergence divergence (MACD) indicator – a measure of momentum behind the market's moves, shown in the red circle on the bottom right – had not yet turned higher.
Jeff said this "negative divergence" was a warning sign of a pending reversal. Unless momentum turned higher, the rally was unlikely to last.
Of course, we know now that Jeff was right...
Stocks moved lower in November and December before plunging more than 10% this month.
Jeff updated the chart for his Stansberry Short Report subscribers this week. As you can see below, the S&P 500 is trading back below the 20-month EMA today...
Barring a significant rally tomorrow, stocks will end the month well below this line... meaning a bear market could be starting.
In the near term, Jeff believes a bounce is likely.
The S&P 500 is still extremely oversold... and in both 2000 and 2007, the market rallied back up to "test" the 20-month EMA before heading lower.
As always, we would never recommend basing your investment decisions on indicators alone. But this is one more reason to believe risk is increasing.
If you still haven't prepared your portfolio, we urge you to act now. Use any rallies over the next several weeks to raise cash and build your "bear-market lifeboat."
We've covered all these ideas in detail in the Digest over the past several months. But if you'd like more guidance – if you want step-by-step instructions on exactly how to position your portfolio – you're in luck.
We're putting all these recommendations together in one place for the first time, in our "2016 Bear Market Survival Program."
This program consists of seven individual modules that cover everything you need to know to protect yourself, from raising cash, to shorting stocks, to taking advantage of distressed opportunities.
Last Friday, we published the first of these modules: "How to Raise Cash, How to Safeguard It, and How to Hedge It With Gold." Module 2 will be published tomorrow.
If you sign up today, you'll get instant access to last week's module, and be among the first to receive Module 2 tomorrow. Click here for the details.
New 52-week highs (as of 1/27/16): McDonald's (MCD), and short position in Santander Consumer USA (SC).
More subscribers share their thoughts on P.J. O'Rourke's recent essays... Send your questions, comments, and criticisms to feedback@stansberryresearch.com.
"In regards to the comment by Robert W. His critique of P.J. O'Rourke made me chuckle. When asked by anyone if I'm a Republican or Democrat, I reply 'No, I think for myself.'" – Paid-up subscriber Andy G.
"Fascinating email that Robert W. sent. When one belongs to the religious denomination of the welfare wing of the Demopublican party, do not bother to criticize their sacred cows like Bernie or Hilary, even though a realistic assessment would be very close to what Mr. O'Rourke has written. Don't confuse me with facts, I have made up my mind!! That is OK, the skewering of the warfare wing is coming and their religious fanatics will cry foul as well. I imagine that Mr. O'Rourke will do his usual comprehensive and hilarious assessment of those fools as well.
"Good grief, can't you Americans laugh at yourselves? We up here in the far North of Canada just elected the son of Pierre Trudeau, who contributed mightily to the Canadian economy's destruction in the late 70's and early 80's. Same economic principles in Trudeau [Jr.], with FAR MORE debt on board. Politicians just do not understand that you cannot run a deficit and make it up on volume, as that great philosopher Rick Rule said. PJ is welcome to comment on the silliness up North any time. We all need to laugh at ourselves and each other more, as well as being kind and considerate. We can still be friends, you know, even if we disagree. More, more from Mr. O'Rourke is always welcome." – Paid-up subscriber Leslie Kasza
Regards,
Justin Brill
Baltimore, Maryland
January 28, 2016
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