Why we were cheering on election day... Household debt hits a record... Led by auto loans... The weird world of underwater car owners... Your last chance for Stansberry's Big Trade...
On November 8, while most folks were glued to their TVs watching the votes roll in, we were watching something far more dire...
Something that has more severe implications for the American economy and your wealth than any president.
On that day, shares of the world's leading car-rental business, Hertz (HTZ), fell 50%. And we saw another victim of the bubble in subprime auto debt – one we've been warning about since 2014.
We shorted both Hertz and its competitor Avis (CAR) in the October issue of Stansberry's Investment Advisory...
Regardless of political beliefs, all of our readers had something to cheer about on election day.
But the problems in the auto market aren't even close to being over. As we wrote in the November 8 Digest...
The U.S. auto industry has been a primary beneficiary of the current inflation. As you'll remember, the government injected more than $80 billion in the bailout of one of the automakers alone – General Motors (GM). It also made guarantees to major banks and finance companies that allowed lending in the sector to grow massively. But the greatest insanity was the "Cash for Clunkers" experiment, which saw the government paying people for worthless automobiles.
The result was predictable. We've seen an unprecedented boom in auto sales. And as the cycle aged, they had to find more and more buyers. That meant loaning to folks who can't actually afford a car. Subprime lending soared in 2013 and 2014. Those loans have started to go bad at a shocking rate. (At least, it's shocking to most people. It seemed inevitable to us, as we warned in 2014.)
Defaults on the shoddiest auto debt are already going bad at alarming rates...
More from that Digest...
Last month, credit-ratings agency Fitch shocked the market by reporting that car loans packaged into securities were going bad at a record rate. Losses on securitized car loans soared 27% over the last year.
Fitch now expects capital losses on securitized car loans to exceed 10% of loan values by the end of this year. That will exceed the losses seen during the crisis of 2009. And this is just the beginning.
Despite mounting losses, the game continues...
The New York Fed just released its latest quarterly report on household debt and credit today.
Total household debt rose $63 billion in the third quarter to a record $12.4 trillion. And that was driven by a $32 billion increase in – you guessed it – auto loans... which also hit a record $1.1 trillion. As you know, record-low interest rates and yield-starved investors are driving this boom. What's to stop an auto lender from making a bad loan if it can immediately sell that paper to Wall Street for securitization?
You can see a chart of outstanding auto loans below...
Auto-finance companies originated more than 75% of outstanding subprime loans...
According to the latest New York Fed report. That's why Porter and his team shorted the leading subprime auto-finance company, Santander Consumer (SC), last year in Stansberry's Investment Advisory. Subscribers who took their advice made 52% on the position in seven months.
The subprime lenders are the first domino to fall. Then the problems move up the chain.
We bet they would then come to roost in the rental companies. The car-rental business is essentially a giant leveraged bet on the value of used cars.
Since 2010, Hertz and Avis have spent more than $110 billion on new cars. Over the same time, their used-car sales generated $85 billion. That's a $25 billion shortfall.
The car-rental business is dependent on easy flowing credit. With access to more debt, these firms can continue to grow their fleets. But when the credit stops, the problems start.
What would happen to the value of Avis and Hertz's used-car fleet if the market was suddenly flooded with inventory?
And what could cause a surge in used-car inventory?
Before answering these questions, let's revisit a story we told in the September 2015 issue of Stansberry's Investment Advisory...
Jonathan and Marcelina. These are real people. They live in the Bronx. They've struggled to get back everything they lost during the last financial crisis. Finally, Marcelina declared bankruptcy in 2012, and they started over.
Soon after she declared bankruptcy, Marcelina got a solicitation in the mail. The pitch? Re-establish your credit, plus buy whatever car you want. She took the bait... and Marcelina and Jonathan now own a 2011 Hyundai.
Thanks to a 20%-plus interest rate on the loan, their monthly payment is $600. By the time their loan is satisfied, the couple will have paid more than $30,000 for a 10-year-old Hyundai. They're skimping on groceries today so that they can afford the car payment. But it's only a matter of time before they either lose a job or simply mail back the keys because they would rather go out to eat.
It doesn't take a financial whiz to know how Jonathan and Marcelina's story ends...
It's the exact same situation we saw play out during the subprime mortgage crisis.
Lenders loosen standards to meet Wall Street's voracious appetite for securitized debt. Credit scores go down, then loan balances and terms go up. Eventually, defaults rise. Credit losses follow.
Car prices will plummet as repossessed vehicles go to auction (just as home prices plunged during the housing crisis). Credit dries up... Borrowers can no longer roll loans over when they're underwater (meaning they owe more on their loan than the value of the underlying asset).
Today, car buyers are more underwater than ever before...
From yesterday's Wall Street Journal...
The latest stress signal comes from auto research firm Edmunds.com, which said in a recent report that record numbers of shoppers are trading in old cars for new ones when they still have substantial amounts due on their existing car loans.
In the first three quarters of 2016, the number of these new-car purchases with negative equity on previous loans reached a record 32% of all trade-ins, according to Edmunds data. That is up from 30% in the same period a year earlier and just 22% five years ago. The average amount of negative equity also reached a record, at $4,832.
That is significant when one considers that the average selling price for a new car is around $33,000, says Edmunds analyst Ivan Drury.
Here's all you need to understand...
Rolling over loans with this level of negative equity (for a car, nonetheless) is causing the subprime auto-loan bubble to swell.
And as we noted in the September 2015 issue of Stansberry's Investment Advisory...
It is a basic fact that borrowers who owe less than their collateral is worth – those who have "equity" – are much better payers than borrowers who are "underwater" (those who owe more on the loan than the asset is worth).
How much equity does a subprime borrower have in his car when he has an 84-month loan and an annual interest rate of 20% or more? The answer is none. In fact, it takes five years of steady payments before a subprime borrower has any equity in his car. As a result, we believe credit losses on 72- to 84-month auto loans will be much worse than expected.
A quick Google search of current incentives shows things aren't slowing down...
End-of-the-year deals abound...
Ford is now offering $1,000 cash back on any purchase of a new car. GM is offering 20% of MSRP cash back on certain models.
Despite this aggressive financing, monthly payments for the borrower have stayed relatively flat. That's only because the lender is pushing out the loan term further and further.
If you go online today, you'll see GM is offering 0% loans for 72 months! If you go to Ford's website and estimate your payment for a new vehicle, it gives you the option for an 84-month loan (73-84 month loans make up around 26% of all used-car loans). The current average term for a car loan is already at a record 69 months. But it's heading even higher.
So car makers are lending far more money than their cars are worth (at already inflated prices) to subprime borrowers for longer terms at rock-bottom interest rates. What could possibly go wrong?
The problems for the car-rental companies are just beginning...
We're on the cusp of a wave of auto-loan defaults... which will be followed by repossessions and car auctions. Used-car prices will plummet, and credit in the space will dry up.
That's what happened in 2008 in the housing market. And that's what will soon happen today in auto loans. It will destroy the rental-car companies.
What if you knew a company would go bankrupt well before anyone else? How would you position yourself for maximum profit?
Well, that's the position we're in today. It's obvious to us how the follies in the credit markets will end... Some of the largest players in the space – names most people would never suspect – will go bankrupt. And their stocks will fall to zero.
That's why we created "The Dirty Thirty" for Stansberry's Big Trade. It's a list of the 30 companies we think are most likely to go bankrupt as problems worsen in the credit markets. We have subprime lenders, auto companies, mall operators... It's a big bag of garbage. And thankfully, it should make readers lots and lots of money.
But the stock market is near all-time highs today...
The world is caught up in Trump mania. Everyone is bidding up the value of financial assets. And based on the Volatility Index (or "VIX"), nobody sees any dark clouds.
Simply put, we couldn't have manufactured a better environment for our Big Trade. And today is the last day you can sign up as a charter member.
I won't go over the details today...
We've written loads of Digests about the Big Trade strategy (buying long-dated puts on corporate deadbeats). And no doubt you've seen an e-mail or two from us on the topic.
But there's a reason we're spending so much time talking about the troubles in the credit markets today... And how you can buy cheap insurance to protect yourself (and make 10-20 times your money as some of the world's most indebted companies collapse).
Great ideas are rare. Positioning yourself to make huge profits before anyone else even sees the opportunity is even rarer. It happens once every decade or two.
So when you have the opportunity, you must act. It's simply too costly to do nothing.
But we know most of you will never act on this...
And that's fine. We realize Stansberry's Big Trade is outside of most people's comfort zones. That's the thing about opportunities like this... They rarely feel great at the time. And that's why they're so profitable: Nobody else is paying attention.
So if you've been on the fence about Stansberry's Big Trade, you have to act now.
The handful of people who do sign up for this service will make some of the biggest gains of their careers.
Again, the deadline to join is midnight tonight. You can subscribe here.
New 52-week highs (as of 11/29/16): Automatic Data Processing (ADP), American Financial (AFG), Altius Minerals (ALS.TO), Boeing (BA), iShares Select Dividend Fund (DVY), short position in Hertz Global (HTZ), Spirit Airlines (SAVE), and W.R. Berkley (WRB).
We finally got some action in the mailbag. We always welcome your e-mails. Send them our way at feedback@stansberryresearch.com.
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"Interesting you should ask. I am due for my once-a-decade shoe replacement. I bought my last shoes at the local Macy's. Since I knew they were comfortable I saw no reason not to buy the same shoes, but since I abhor clothes shopping I figured I would order them online. I logged on to Macy's and immediately encountered a notice that they were experiencing heavier than normal traffic with the suggestion that I try again later. An hour later and traffic was still heavy. I then went over to Amazon. Apparently their traffic control is more up to speed as I was able to order my shoes through my son's Prime account in about 60 seconds." – Paid-up subscriber KS
"Holy Jumping Holiday Christmas Stocking Stuffers!!!! After the first paragraph I knew the Digest was back – great Christmas gift! Thank You – Sean!
"Quick question – I'm 3 for 5 in Big Trade Puts. Problem, the vast majority of the other 25 option prices are rising rapidly and don't appear to be stabilizing anywhere near the target. Do I stay Put, or, is there a stop the elevator going up button to press?" – Paid-up subscriber KJL
Goldsmith comment: Thanks for the note. It was fun being back in the saddle for a few days.
But let me make an important clarification... We've only recommended two trades so far in Stansberry's Big Trade. We plan on recommending one or two more each month while the opportunities exist.
We do have our list of the 30 worst corporate credits – The Dirty Thirty. And we do list options as a reference. But those aren't our actual trade recommendations.
So stay put. We'll have plenty of more recommendations on the way. Especially with the VIX below 13. And remember, The Dirty Thirty is an evolving list. We'll add more deadbeats as we find them.
Allow me one last plug... The deadline to sign up for Stansberry's Big Trade is tonight at midnight. Click here to sign up.
Regards,
Sean Goldsmith
Baltimore, Maryland
November 30, 2016