Tag Archives: credit collapse

Crashing Auto Sales Reflect Onset Of Debt Armageddon

July auto sales was a blood-bath for U.S auto makers.  The SAAR (Seasonally Manipulated Adjusted Annualized Rate) metric – aka “statistical vomit” –  presented a slight increase for July over June (16.7 SAAR vs 16.5 SAAR).   But the statisticians can’t hide the truth.  GM’s total sales plunged 15% YoY vs an 8% decline expected.  Ford’s sales were down 7.4% vs an expected 5.5% drop.   Chrysler’s sales dropped 10.5% vs. -6.1% expected.  In aggregate, including foreign-manufactured vehicles, sales were down 7% YoY.

Note:  These numbers are compiled by Automotive News based on actual monthly sales reported by manufactures.  Also please note:  A “sale” is recorded when the vehicle is shipped to the dealer.  It does not reflect an economic transaction between a dealer and an end-user.   As Automotive News reports:  “[July was] the weakest showing yet in a year that is on tract to generate the industry’s first decline in volume since the 2008-2009 market collapse.”

The domestics blamed the sharp decline in sales on fleet sales.  But GM’s retail sales volume plunged 14.4% vs its overall vehicle cliff-dive of 15%  And so what?  When the Obama Government, after it took over GM,  and the rental agencies were loading up on new vehicles, the automakers never specifically identified fleet sales as a driver of sales.

What really drove sales was the obscenely permissive monetary and credit policies implemented by the Fed since 2008.  But debt-driven Ponzi schemes require credit usage to expand continuously at an increase rate to sustain itself.   And this is what it did from mid-2010 until early 2017:

Auto sales have been updated through June and the loan data through the end of the Q1. You can see the loan data began to flatten out in Q1 2017.  I suspect it will be either “flatter” or it will be “curling” downward when the Fed gets around to update the data through Q2. You can also see that, since the “cash for clunkers” Government-subsidized auto sales spike up in late 2009, the increase in auto sales since  2010 has been driven by the issuance of debt.

Since the middle of 2010, the amount of auto debt outstanding has increased nearly 60%. The average household has over $29,000 in auto debt.  Though finance companies/banks will not admit it, more than likely close to 40% of the auto loans issued are varying degrees of sub-prime to not rated (sub-sub-prime).  Everyone I know who has taken out an auto loan or lease has told me that they were not asked to provide income verification.

Like all orgies, the Fed’s credit orgy has lost energy and stamina.  The universe of warm bodies available to pass the “fog a mirror” test required to sign auto loan docs is largely tapped out.  The law of diminishing returns has invaded the credit market.  Borrower demand is tapering and default rates are rising.  The rate of borrowing is rolling over and lenders are tightening credit standards – a little, anyway – in response to rising default rates. The 90-day delinquency rate has been rising since 2014 and is at a post-financial crisis high.  The default rates are where they were in 2008, right before the real SHTF.

The graph above shows the 60+ day delinquency rate (left side) and default rate (right side)
for prime (blue line) and subprime (yellow line) auto loans. As you can see, the 60+ day
delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in
2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the
2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%,
which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about
200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day
delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this
year.

We’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is nearly 60% greater. But the real problem will be, once again, the derivatives connected to this debt.

The size of the coming auto loan implosion will not be as large as the mortgage implosion in 2008, but it will likely be accompanies by an implosion in student loan and credit card debt – combined it will likely be just as systemically lethal.   It would be a mistake to expect that this problem will not begin to show up in the mortgage market.

Despite the Dow etc hitting new record highs, many stocks are declining, declining precipitously or imploding.  For insight, analysis and short-sell ideas on a weekly basis,  check out the  Short Seller’s Journal.  The last two issues presented a uniquely in-depth analysis of Netflix and Amazon and why they are great shorts now.

This Homebuilder Could Default In 2016

UPDATE: This stock is down over 3% today and headed lower

I was responsible for forecasting at Toll Brothers during the peak bubble years. My forecasting model showed a massive downtrun coming. The CFO refused to look at and consider my forecast.  Bob Toll ignored the signs and bought $1 billion of land at the peak in 2006. I saw the writing on the wall and quit before the brown stuff hit the fan I left the company to dodge the coming storm. Toll then lost money for 14 quarters in a row…It’s about to happen again.  – email yesterday from a well-known blogger

We’ve seen four homebuilders report their quarterly and or fiscal year end results so far. Two builders showed considerable unit volume delivery declines and two reported increases.  Going forward from here it will be all down hill.

In revising and updating my stock report for one particular homebuilder, I discovered that this Company has a huge debt repayment in second half of 2016.  This company must be worried about that because for the first time since 2012, it did not add homes to its inventory, it only replaced what it sold.  It’s cash balance still declined significantly year over year.

The stock is still down 22% from its price when I first published this report.  Even if I’m still early BlogPicon my call for the overall market, and I’m more confident everyday that the market is in trouble, this Company’s stock will likely head lower.   The section on prudent capital management and using options (puts and calls) has been updated to reflect my current suggestions.

Despite an increase in both price and unit deliveries, this Company’s operating income declined year BlogLOGOover year for its fiscal year.  That fact alone tells us that something is wrong with the way this Company operates.  Imagine that, in the greatest new home price inflationary environment in history, this Company is still having trouble generating a profit.

You can access this report here:  This Homebuilder Could Face Involvency In 2016.  The section on prudent capital management and using options (puts and calls) has been updated to reflect my current suggestions.

The Bond Market Is Headed For A Historic Crash

We are certainly living in strange times. An unprecedented monetary experiment is coming to a staggered end and no one knows the potential repercussions – a plague of frogs cannot be entirely ruled out. – Telegraph UK

Just like in 2008, no one knows where the next big derivatives accident daisy chain will start.  Looking back, it would appear that the collapse of Bear Stearns trigged the chain of mortgage derivatives that took down Lehman and then AIG and Goldman.  It was “fortuitous” (note the sarcasm) that former Goldman was CEO Henry Paulson happened to coincidentally be the U.S. Secretary of Treasury when Goldman blew up.  It enabled he and Ben Bernanke to run around Capitol Hill in order to frighten and intimidate Congress into passing the $700 TARP package that was used to bail out Goldman and enable Wall St. to pay massive bonuses that year.

Fast-forward to today.  We know that the globally, including here in the U.S. financial system, the notional amount of derivatives of is larger than it was in 2008 and considerably more risky. Interestingly, the Telegraph UK wrote an article that should be seen as an ominous warning:  The world’s next credit crunch could make 2008 look like a hiccup.

We’re also beginning to see continuous warnings about the severe illiquidity of the bond market.  I have been doing some research on this and it’s worse than anyone outside of Wall Street bond desks understands.   Your pension fund that at least 50% bonds and illiquid “alternative” assets?  LOL.  Good luck.   The Fed, along with every other major Central Bank in the world, has created a destructive monster in the world’s bond market that makes Frankenstein look like a small, plastic Ken doll…

Collapsing Price Of Lumber = Expected Collapse In New Home Sales

The price of lumber has dropped 3% today.  It’s dropped 25% since October.   It’s dropped 36% since mid-2013, which is when I have shown in several articles that unit volume in the housing market began to decline.

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This has nothing to do with the expectation that the Fed might not raise interest rates after today’s horrible retail sales report.   Unit home sales volume has been in a decline since July 2013 despite the Fed’s zero interest rate policy, record low mortgage rates, big reductions in down payment requirements my Fannie Mae and Freddie Mac, big reductions in mortgage insurance premiums by the FHA and the proliferation of zero down payment mortgages by the USDA:  LINK

By the way, although the USDA states that its “no down payment” mortgage is for rural homebuyers, the definition of “rural” includes most lower-end housing communities that have sprung up less than 20 miles from big cities like Denver.   Areas that used to be called “ex-urbs.”

The collapsing price of lumber is telling us the same thing as the collapsing Baltic Dry Index and the collapsing price of oil:  this country is headed into a deep recession. Numerous recent economic reports, including today’s disastrous retail sales report, are showing economic activity that is now back to 2008/2009 levels.

The Fed is caught in a trap.  The market manipulation is breaking down.  The housing market is next….Homebuilder Research Reports.   Click to enlarge:

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