|Dow||+60.43 to 17,039.56|
|S&P 500||+5.87 to 1,992.38|
|Nasdaq||+5.62 to 4,532.10|
|10-YR Yield||-0.019 to 2.407%|
|Gold||-$17 to $1,278.20|
|Crude Oil||+$0.59 to $94.04|
When I bought my first home in 1999, I used a 15-year mortgage. Why? I could get a lower interest rate than I could with a 30-year loan. I’d build equity more quickly. And I’d slash my overall interest bill.
But boy have times changed! These days, many auto borrowers are getting what I like to call “Car-gages” — car loans with terms almost as long as my first home mortgage! At the same time, the industry is cranking out subprime auto loans at a rate unseen since the peak of the mid-2000s credit bubble!
The question is, how much is too much? And related to that, are we just setting ourselves up for yet another bursting bubble?
|Do auto-financing companies have a clear enough view of what today’s easy money can lead to?|
Look, there’s no question car and truck sales are booming again. We’re on track for a full-year sales rate of 16.5 million units in 2014. That would be the strongest year since 2006. Companies up and down the vehicle “food chain” have reported improving sales and earnings, and the economy has benefited from the increase in manufacturing and dealer activity.
But that growth is increasingly being fueled by riskier, long-term and subprime “Car-gages.” The facts:
==> The average new-vehicle loan term has now swelled to 66 months from 60 months in 2008, according to research from Experian.
==> You can easily find 0 percent loans out to 72 months from the major manufacturers, too. Even 84-month terms (that’s seven years folks!!) are increasingly common. That’s helping drive auto loan debt up at a rate of around 12 percent.
==> Subprime auto loan volume alone has surged 130 percent in the past half-decade. We’re on track for more than $100 billion in originations this year, the most since 2007’s $108 billion.
==> Subprime loans now finance a fourth of the cars sold these days. That’s up sharply from 15 percent in 2009.
==> Private equity firms are cashing in on the boom by buying into the business. And of course, market leader GM bulked up its subprime lending business by purchasing subprime firm AmeriCredit for $3.5 billion in 2010.
“Growth is increasingly being fueled by riskier, long-term and subprime ‘Car-gages.'”
Back in the housing bubble, a key force that allowed subprime mortgages to proliferate was securitization. That’s when bundles of home mortgages are packaged into bonds called Mortgage Backed Securities (MBS), then sold to investors eager for income in a low-yield world.
Now, less than a decade later, the same thing is happening in the car loan business. Issuance of Asset Backed Securities (ABS) comprised of bundled car loans surged to $17.6 billion in 2013, more than double the post-credit-crisis level of $8 billion in 2010.
With long-term and subprime “Car-gages” proliferating, the government is starting to take notice. The Justice Department is now reportedly investigating GM’s financing unit. Bank regulators are also making noises about the increased risk associated with lending to troubled car buyers.
There’s no sign the industry is going into full-scale lockdown mode. Delinquency rates on car loans also remain much lower than they were during the depths of the Great Recession.
But if the flow of easy credit to car buyers dries up, it could hurt auto and truck sales volume. And if delinquency rates start rising, as they may be starting to do, we could have another massive wave of credit losses for the financial industry to deal with down the road.
So what do you think? Is this a trend we should be concerned about? Is the boom in riskier “Car-gages” as bad as the bubble in crappy mortgages from a few years ago? Or do you think banks and borrowers can handle the risk? Will any fallout from rising car loan losses be more or less toxic than the fallout from surging mortgage losses? Let me know at the website.
|OUR READERS SPEAK|
Yesterday I wrote about how this is a totally different energy market, one that doesn’t need booming crude oil or natural gas prices to make select companies a gusher-ful of money. And sure enough, many of my favorite energy stocks continue to rally strongly, with some trading at or near record highs.
That brought a few questions out at the website. Reader Margaret asked in regards to my new Energy Stock Alert service: “On your buying alert, do you inform when to buy, and when to sell. How does it work?”
Meanwhile, Reader Chuck B. said: “Especially in the energy field, there are likely to be companies whose stock is both conservative, and likely to rise substantially, or otherwise provide better than average gains over a little time. I hope, if you identify such companies, you will give Safe Money Report subscribers a chance at them, and not save them exclusively for subscribers to your new service. Don’t forget your friends who aren’t into rapid trading.”
Thanks for your questions everyone. To answer them one-by-one, Margaret, yes my new service will contain specific recommendations on what to buy, when to buy it, what prices to pay, when to take profits, and so on.
And Chuck, if you’ve been a subscriber to Safe Money over the past few years, then you have already received multiple conservative energy recommendations. Many of those have delivered both closed and open profits — in one current case, more than 100 percent.
My new service is designed for investors who are willing to take on more risk in search of greater rewards — a strategy that doesn’t really jibe with my more conservative approach in Safe Money. You should feel free to choose whichever approach best suits your investing style and goals.
Finally, Reader Bret S. wrote: “With your most recent recommendation regarding the ProShares Short 20+ Year Treasury (TBF), I believe this brings you to four times since the 2008 crisis where you have told your subscribers in no uncertain terms that the Bond Bubble was upon us, and with Martin’s dad’s sage advice you and Martin were going to guide us (subscribers) to record profits as the bond markets tanked, and interest rates rose dramatically. Anyway you can reimburse me for the $ I have lost following your advice?”
Let’s see, where to start with this one. First off, bonds suffered the worst year in 2013 since 1999. I warned in advance — accurately — that the collapse would occur. TBF consequently rose by the double digits in a year where many Treasury funds lost 10 percent, 15 percent or more. So I got that call 100 percent right.
But clearly, this year hasn’t worked out as anticipated. Why? Well, the U.S. central bank and U.S. economy behaved exactly as I expected. The U.S. Federal Reserve has slashed QE all the way down to $25 billion from $85 billion, and it’s laying the groundwork for interest rate hikes. At the same time, several U.S. indicators are at their best levels since 2007, 2006, or even 2001.
What I didn’t appreciate enough was the suppressing effect that lousy European growth and problems in other countries like China would have on long-term yields. Nor did I anticipate that Russian President Vladimir Putin would invade Crimea, that new shooting wars would break out in Iraq and Gaza, and so on.
Do I think the jury is still out on TBF? Yes, I do. Long-term yields are still comfortably above the record-lows we saw in 2012 and early-2013 (2.4 percent, give or take for a 10-year Treasury vs. 1.6 percent back then). Inflationary pressures are building, the economy is on a recovery track, and the Fed is changing policy tacks slowly but surely.
Last but not least, TBF is but one recommendation among several in the Safe Money model portfolio. Many, many other picks have delivered solid single-digit, double-digit, and even triple-digit open or closed gains. So while I can’t stop you from focusing on one loser, I can point out that the overall model portfolio is doing well in 2014. And I’m confident that performance will continue well into the future!
Hopefully that addresses some of your questions. But please do keep them coming at the website!
|OTHER DEVELOPMENTS OF THE DAY|
What do you know? It’s another multi-billion settlement from the banking industry! This time, it’s Bank of America (BAC, Weiss Ratings: B) agreeing to a $16.7 billion deal with the Justice Department.
The bank will have to provide $7 billion in mortgage relief and cough up $9.7 billion in cash as part of the suit, which stems from alleged transgressions dating back to the housing bubble. JPMorgan Chase (JPM, Weiss Ratings: B+) already reached a $13 billion deal, while Citigroup (C, Weiss Ratings: B) inked a $7 billion settlement.
Look no further than Sears’ news that it lost another $573 million in the second quarter. Revenue sank almost 10 percent to $8.01 billion, the ninth straight quarter of declining sales. Are they going away or can they turn these trends around? Let me know your thoughts at the website.
Israel managed to take out three top Hamas commanders in a Gaza airstrike yesterday. It remains to be seen if negotiations on a cease fire will go anywhere in the days ahead.
See, there is hope for humanity after all! A whopping 378 customers at a Florida Starbucks paid for the drinks the person behind them ordered … just to be nice. Way to go!
Reminder: You can let me know what you think by putting your comments here.
Until next time,