Tag Archives: auto loans

Who’s Going To Stop The Madness?

Every month consumer debt in aggregate hits a new record. Auto loans and student loans have been hitting monthly record highs for quite some time. In November credit card debt hit a record high in total and increased a record monthly amount for any one month. Mathematically this can’t go on forever. In fact, there are signs – indicators not reported widely by the financial media and, predictably, completely disregarded by Wall Street – that indicate the debt party is coming to an end. Events that follow the end of the party will be less than pleasant for the majority of U.S. households.

Every week in the Short Seller’s Journal I present data which reflects the deteriorating condition of middle class America. For definitional purposes, “middle class” is defined as any household that is unable to afford their own politician, which means 99.5% of all households.

As an example, buried in Wells Fargo’s Q4 earnings presentation was data that showed charge-offs in WFC’s credit card loan portfolio in Q4 soared 21% vs. Q3. The charge-off rate as a percent of average loans outstanding increased to 3.66% in Q4 from 3.08% in Q3. This is a 19% increase in the charge-off rate. While this might seem like a low number outright, not only is it headed in the wrong direction, it’s not too far below the nationwide bank credit card charge-off rate in 2007 of 4.15%. Again, this fits my thesis that the financial condition of the average household is deteriorating.

In addition, the dollar volume of auto loan originations at WFC declined 33% and home mortgage originations fell 26%. in Q4 2017 vs 2016. WFC’s mortgage applications in Q4 dropped 16% in dollar volume from Q4 2016. And its application pipeline (applications submitted and waiting for the purchase to close) declined 23% for the quarter vs Q4 2016.

WFC is the second largest mortgage originator after Quicken Loans. It is also a major player in auto loan underwriting. If auto and mortgage loan origination statistics are declining at a double-digit rate at WFC, it’s a good bet that this is a secular trend across the industry. Simply put, middle America – the 99.5%’ers – are running out of capacity to assume even more debt. This in turn will translate into a unexpectedly precipitous drop in consumer spending, especially on large-ticket items like cars, furniture and homes.

I stumbled on a blog a couple weeks ago called  A Cold War Relic. The proprietor works at an auto dealership and presents valuable insight on the factors that will drive auto sales into the ground and send auto loan defaults soaring. His latest post, “What’s Going To Stop Me,” is well worth reading:

This dark momentum could strangle the industry, but everyone refuses to stop it. Every time a customer accepts a $500 monthly payment on another overpriced compact crossover, they are feeding that momentum. When dealers structure deals for far more than the car is worth, they are feeding that momentum. The problem is: who is going to actually tell anybody “no?” Customers want their cars and refuse [do not have the funds] to put money down to get them. A large number of dealerships are fighting to attain sales numbers the market can’t currently support.

I get cursed out every month when our store misses the targets set for us by the manufacturer, even though I’m fighting against larger stores offering deeper discounts on new cars. On top of that, it’s not just your credit criminal customer that isn’t reading what they’ve signed anymore. When you have consumers with 700+ FICO scores rolling over portions of debt they already couldn’t handle on top of new debt and financing the whole thing over increasingly long terms at interest rates they arguably no longer deserve. The problem is that prime credit customers are slowly becoming credit criminals.

You can read the rest of this here (highly recommended):   Auto Loan Crack-Up Boom Coming

In the latest issue of the Short Seller’s Journal, I present a no-brainer homebuilder short idea plus I illustrate the mechanics of shorting a stock for those who only use put options.  In addition I review the Company’s fundamentals.  This is probably the only homebuilder for which unit sales are dropping – in this case falling at a double-digit percentage rate. I believe shorting this stock is good – at the very least – for a 30% ROR by the end of the year, if not sooner. You can find out more details about the Short Seller’s Journal here: Subscription Information.

The Debt Bubble Is Beginning To Leak Air

“The current state of credit card delinquency flows can be an early indicator of future
trends and we will closely monitor the degree to which this uptick is predictive of
further consumer distress.” – New York Fed official in reference to rising delinquency rate of credit cards.

The recent sell-off in junk bonds likely reflects a growing uneasiness in the market with credit risk, where “credit risk” is defined as the probability that a borrower will be able to make debt payments. This past week SocGen’s macro strategist, Albert Edwards, issued a warning that the falling prices of junk bonds might be “the key area of vulnerability that could bring down the inflated pyramid scheme that the Central Banks have created.”

The New York Fed released its quarterly report on household debt and credit for Q3 last week. The report showed a troubling rise in the delinquency rates for auto debt and mortgages. The graph to the right shows 90-day auto loan delinquencies by credit score. As you can see, the rate of delinquency for subprime borrowers (620 and below) is just under 10%. This rate is nearly as high the peak delinquency rate for subprime auto debt at the peak of the great financial crisis. In fact, you can see in the chart that the rate of delinquency is rising for every credit profile. I find this fact quite troubling considering that we’re being told by the Fed and the White House that economic conditions continue to improve.

While the Fed reports that 20% of the $1.2 trillion in auto loans outstanding has been issued to subprime borrowers, there tends to be a significant time-lag between when an individual’s credit condition deteriorates and when the FICO score reflects that deteriorated financial condition. I would argue that the true percentage of subprime auto debt outstanding is likely over 30%.  Bloomberg reported last week that “delinquent subprime loans are nearing crisis levels at auto finance companies.”Before the 2008 crisis, the outstanding level of auto loans peaked in late 2005 at $825 billion. The current level based on the most recent data is over $1.2 trillion, or nearly 50% higher than the previous peak. More troubling, the average loan balance, at close to $30,000, is substantially higher now.

Revolving credit is now over $1 trillion. At $1.005 trillion, it’s slightly below the previous peak of $1.020 trillion in April 2008. Most of the revolving debt category as tracked by the Fed is credit card debt. The Fed reports that 4.6% of credit card debt is 90-days delinquent, up from 4.2% in Q3. I would note that the Fed relies on reporting from banks and consumer finance for the delinquency data. Accounting regulations give banks a fairly wide window of discretion before a loan is officially declared to be delinquent. Banks and consumer finance companies tend to drag their feet before declaring a loan to be delinquent because it directly affects quarterly earnings. I would bet money that the true delinquency rate is higher than is being reported.

Mortgage delinquencies are now following the trend higher in auto, student and revolving loans:

The data in the graph above is sourced from the Mortgage Bankers Association (MBA).  MBA data is lagged. again because of reporting methodology and because banks under-report delinquencies.  As such, the true current rate of delinquency is likely higher. I drew the red line to illustrate that, outside of the period from 2009 to 2014, the current rate of delinquency is at the high end of the historical range going back to 1979.

Let’s drill down a little deeper. The delinquency rate for FHA mortgages soared to 9.4% in Q3 2017 from 7.94% in Q2. That jump in the rate of delinquency is the highest quarterly increase in the history of the MBA’s survey. Recall that the FHA began offering 3.5% down-payment mortgages in 2008. Because of the minimal down payment requirement, the FHA’s share of single-family  home purchase mortgage underwriting went from 3.9%  2007 to it current 17%  share.  In effect, FHA replaced the underwriting void left by the bankrupt private-issuer subprime lenders like Countrywide and Wash Mutual.  It’s no surprise that FHA paper is starting to collapse.  Fannie and Freddie started issuing 3% down-payment mortgages in early 2015.  All three agencies (FHA, FNM, FRE) reduced the amount of mortgage insurance required for low down payment loans. Just in time for the FHA complex to start cratering.

The reduction in mortgage qualification standards was implemented by the Government in order to keep the homes sales activity artificially stimulated. Do not overlook the fact that the National Association of Realtors drops more magic money dust on Congress than the Too Big To Fail Wall Street banks combined.

The rising trend in consumer and mortgage debt delinquencies will, for a time, be dismissed as temporary or related to the hurricanes. The MBA applied a thick layer of “hurricane mascara” on the mortgage delinquency numbers. But the massive debt bubble inflated by the Fed and the Government is springing leaks. And the debt delinquency trend is seeded in economic fundamentals. The BLS released its real earnings report this past Wednesday, which showed that real average hourly earnings declined for the third month in a row. It’s no coincidence that debt payment delinquencies are rising given that after-tax income for the average household is getting squeezed. This will get worse when soaring health insurance premiums hit starting in January.

St Louis Fed President, James Bullard, asserted last Wednesday that there’s no need to raise interest rates with inflation low. I have to believe that these folks at the Fed are intelligent enough to understand that the “official” inflation numbers are phony. Given that assumption on my part, the reluctance of the Fed to raise rates – note: I do not consider the 1% hike in Fed funds over the last two years to be material – is from the fear of crashing the system.

Many of you have seen the recent reports of the “flattening” Treasury yield curve. This occurs when short term Treasury rates rise and longer term rates fall.  A flattening yield curve is the market’s signal that the economy is in trouble.  Currently, the yield spread between 2-yr and 10-yr Treasuries is 59 basis points.  The last time the Treasury curve was this “flat”  was  November 2007.

The front-end of the curve is rising for two reasons. First, the Fed let $10 billion in short term T-bills expire without replacing them, which took away the Fed’s bid for short term Treasuries. Second, when short rates rise relative long rates, it’s the market’s way of discounting an uptick in the potential for financial distress.

If the Fed were in a position of “normalized” monetary policy, it would likely be lowering rates in response to the obvious signs of rising financial distress.  But the Fed is backed into a corner.  Rates have been zero to near-zero for so long that the credit market is largely “immune” to taking rates back down to zero from the current 1% – 1.25% “target.”

The Fed inched its way into reducing its balance sheet by letting  SOMA assets fall $10 billion in value since early October.  At that rate it would take 35 years to “normalize” its balance sheet. Yet, the Treasury curve is telling us that the Fed should be easing monetary policy, not tightening.  The Fed has an 80-year track record of removing liquidity from the system at the wrong time.

The commentary above is an excerpt from the latest Short Seller’s Journal.  Two short ideas were presented in connection with the analysis presented.  To learn more about this newsletter, click here:   Short Seller’s Journal info.

An Impending Economic And Financial Disaster


You’ve probably heard/read a lot lately about the VIX index. The VIX index is a measure of the implied volatility of S&P 500 index options. The VIX is popularly known as a market “fear” index. The concept underlying the VIX is that it measures the theoretical expected annualized change in the S&P 500 over the next year. It’s measured in percentage terms. A VIX reading of 10 would imply an expectation that the S&P 500 could move up or down 10% or less over the next year with a 68% degree of probability. The calculation for the VIX is complicated but it basically “extracts” the implied volatility from all out of the money current-month and next month put and call options on the SPX.

The graph above plots the S&P 500 (candles) vs. the VIX (blue line) on a monthly basis going back to 2001. As you can see, the last time the VIX trended sideways around the 11 level was from 2005 to early 2007. On Monday (May 8) the VIX traded below 10. The last time it closed below 10 was February 2007. The VIX often functions as a contrarian indicator. As for the predictive value of a low VIX reading, there is a high correlation between an extremely low VIX level and large market declines. However, the VIX does not give us any information about the timing of a big sell-off other than indicate that one will likely (not definitely) occur.

In my opinion, an extremely low VIX level, like the current one, is signaling an eventual sell-off that I believe will be quite extreme.

The true fundamentals underlying the U.S. economy – as opposed the “fake news” propaganda that emanates from uncovered manholes at the Fed, Wall Street and Capitol Hill – are beginning to slide rapidly.   The primary reason for this is that the illusion of wealth creation was facilitated by the inflation of a massive systemic debt and derivatives bubble.  Government and corporate debt is at all-time highs.  The rate of debt issuance by these two entities accelerated in 2010.  Household debt not including mortgages is at an all-time high.  Total household debt including mortgages was near an all-time high as of the latest quarter (Q4 2016) for which the all-inclusive data is available.  I would be shocked if total household was not at an all-time high as I write this.

The fall-out from this record level of U.S. systemic debt is beginning to hit and it will accelerate in 2017.  In 2016 corporate bankruptcies were up 25% from from 2015.   So far in 2017, 10 big retailers have filed for bankruptcy, with a couple of them completely shutting down and liquidating.    Currently there’s at least 9 more large retailers expected to file this year.   In addition to big corporate bankruptcies, the State of Connecticut is said to be preparing a bankruptcy filing.

The household debt statistics show a consumer that is buried in debt and will likely begin to default on this debt – credit card, auto, personal, student loan and mortgage – at an accelerated rate this year.  The delinquency and charge-off statistics from credit card and auto finance companies are already confirming this supposition.

In the latest issue of the Short Seller’s Journal, I review the VIX and the deteriorating consumer debt statistics in detail and explain why the brewing financial crisis will be much worse than the one that hit in 2008.  I also present a finance company stock and a housing-related stock as ways to take advantage of the crumbling consumer.   You can find out more about subscribing to the Short Seller’s Journal here:  Subscription information.   There’s no monthly minimum require and subscribers have an opportunity to subscribe to my Mining Stock Journal for half-price.

I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K. and in the U.S.  – U.K. subscriber, James

 

Auto Sales: The Fake Economic News Bubble

The headlines are reporting that auto sales in December hit a record, when looked at on a “seasonally adjusted annualized rate” basis.  No one questions the validity of the seasonal adjustments.   The average news consumer sees or hears the headline word-byte/soundbyte and that becomes the truth.   Fake economic news is another form of Establishment propaganda:   seduce the populace into believing what you want them to believe rather than presenting the truth.  It’s Jim Sinclair’s “MOPE:”  Management of Perception Economics.”

Along with the geopolitical and domestic political fake news epidemic is an epidemic in economic fake news.  Collectively it’s a “fake news bubble,”  with one of the highly insidious consequences of this bubble being the messy abortion otherwise known as the “Presidential election.”

Turning to the auto sales fake news, based on the SAAR estimates, automobile sales allegedly hit a selling rate of 18.2 million units in December.  But seasonal adjustments notwithstanding the facts, does the data fit the facts of the related areas of consumer spending?   By this I mean restaurant and retail sales.

Though not reported yet for December, restaurant same store sales declined 1.3% in November from October and dropped 3.3% from November 2015.  It was the ninth consecutive month of negative same-store sales and the worst decline since July.  Perhaps with constrained disposable income, consumers cut out restaurants to buy holiday gifts?

Looking at what we know about retail sales during the holiday period so far, First Data reported that holiday spending is up 2% vs. last year (through Dec 12).  Last year that number was 2.4%.  So there’s a deceleration in retails sales growth spending.   Cowen research reported that foot traffic at malls was down 10% in December through December 17th.  Granted online sales growth of 9% this holiday season is taking some mall spending away, but online spending represents only 8% of total retail sales spending.  I guess maybe consumers cut back on holiday gifts this year to spend $40,000 (average cost of a new GM car according the auto sales report) on a new car?

Finally, I cover two companies that provide subprime auto loans.  Both companies were reporting declining loan application volume in their last financial reports.  Interest rates spiked up 100 basis points during November and December, which means the cost of auto loans spiked up as well.   Even though auto lenders are reporting lowered loan application volumes, we’re to assume that – despite significantly higher interest rates – consumers decided to skip eating out and buying holiday gifts in order to buy a new car during December?

Does any of this make sense?  To make matters less believable and uglier, GM reported that its unsold inventory of cars sitting on dealer lots exploded to 844,942 cars in December, a nearly quarter of a million unit increase over December 2015.  Call me skeptical but I would suggest that a large portion of those cars sitting in dealer lots were counted as sales when the cars left the factory floor.

The likely source of “record” auto sales is in the “seasonal adjustments” that are applied to the data. Moreover, I would suggest that the data itself is suspect.  I would like to see a study that correlates a “sale” with the actual transfer of title to either an auto finance company or to a buyer who paid cash – i.e. tie a “sale” to an actual end-user taking delivery and driving off the lot.  THAT number, based on all of the related supporting evidence as detailed above, is likely a much different (lower) number than what was reported.