I’m holding in my hand a printout from the website for Holy Rosary Credit Union (HRCU). It’s a small institution based in Rochester, New Hampshire, founded in 1962.
Mike’s Moves to Make
Buy: Food and beverage stocks; consumer staples stocks; Targeted investments that rise in value when auto-related stocks fall
Sell: Autos; auto parts suppliers; Select banks and other lenders with elevated auto exposure
Scroll through the small print on its auto loan page, though, and you’ll see the kind of auto lending they’re doing is downright scary. They’ll happily lend you money against a depreciating asset – your car – at a 125% loan-to-value ratio. In other words, they’ll give you $31,250 on a $25,000 vehicle, exactly the kind of malarkey that blew up the mortgage industry and housing sector a decade ago.
HRCU is far from alone. USE Credit Union, which serves teachers, students, and alumni in the University of California system, will lend you up to 125% of your car’s value – and for up to seven years. Sacramento Credit Union will do you one better – 130% LTV, all according to their websites.
First Credit Union of Chandler, Arizona really takes the cake, though. Buried in the fine print of its October 17, 2016 online rate sheet, which spells out terms and interest rates on all of its loans, you find this gem: “Max All-in LTV 140%.” One-hundred and forty percent!
And if you’re looking for a “car-gage” … a loan so long-term it might as well be a mortgage … head on over to R-G Federal Credit Union in Belton, Missouri. They’ll let you borrow for as long as 108 months. Nine … long … years.
Even Pentagon Federal Credit Union, the “Pen Fed” company that’s running all those commercials on CNBC these days, is getting in on the fun. They offer a “Payment Saver” auto loan, which gets you a lower payment up front by charging you a “balloon payment” at the end of the term.
In other words, you might pay $379 per month on a $27,000 new car for five years … and at the end, still owe a whopping $6,729. Pen Fed does say you can “sell, trade, or refinance” (with asterisks after the word “refinance,” which lead to small print saying “not a guarantee to refinance” because you have to meet “current creditworthiness standards”) at the end of the term.
If you, or a loved one, are covered by Medicare, there’s a secret your insurance company is hoping you never find out … Because it allows them to take thousands of dollars out of YOUR pocket every year.
But let me ask you this: If a borrower can’t even afford the payment on a fully amortized loan (one where the balance is paid off entirely at the end of the term), do you really think that person will have the financial wherewithal to cough up several thousands of dollars later?
Or are they going to be left hopelessly upside down … stuck with a car they can’t sell … and unable to buy a new one because they need to spend every last penny of potential down payment money just to get out of their last bad deal?
You want to know why I rail so much at the ridiculous monetary policies we’ve been pursuing, or harp on the importance of turns in the credit cycle? It’s because this is the kind of garbage that goes on as a result. It happened in housing a decade ago, and it’s happening in the auto industry today.
By the way, it isn’t just the credit unions. Regional and national banks, as well as the so-called “captive finance” companies who work hand-in-glove with car manufacturers, have also gone wwwaaayyyy overboard in the kind of lending they’re willing to do.
Just look at this chart, which shows the amount of car and truck loans outstanding in this country. We have never, ever seen an explosion of auto credit like this, and we wouldn’t have seen it if standards weren’t slashed to the bone. But the percentage increase is very similar to what we have seen before – in mortgage lending ahead of that sector’s crash.
So what lessons can you take away, as an investor, from all of this?
First, understand that auto lenders are now, belatedly, starting to tighten standards. That’s just like what happened in the early stages of the housing bust, so you can pretty much guarantee the auto industry is topping out. Industry executives and apologist analysts on Wall Street will try to convince you otherwise. Don’t listen to them.
Second, the auto industry is a key driver of the economy. Roughly 1.5 million Americans work directly for car makers here in the U.S., according to the Alliance of Automobile Manufacturers. But if you factor in suppliers, finance firms, and other auto-related companies, you get a number north of 7 million. That’s almost 4% of total private sector jobs. The industry also accounts for about 3.5% of GDP.
Anyone who tells you an auto sector downturn won’t hit the U.S. economy where it hurts doesn’t know what they’re talking about. Just look at what Ford Motor (F) admitted this week: It will have to temporarily halt production and idle workers at four separate plants in Mexico, Kentucky, and Missouri because of bloated inventories. That comes shortly after Ford said it would idle a Michigan plant that produces the Mustang because of plunging sales and surging supply.
My advice: Don’t touch any stock that’s levered to the health of auto sales, auto production, auto lending, and more. If you’re lucky enough to get an oversold bounce, sell your shares and don’t look back.
Or better yet, don’t get mad, get even! Sign up for my All Weather Trader service, where I’m recommending investments that RISE in value when auto-related stocks FALL. My analysis tells me those investments are going to hit pay dirt, just like plays on falling housing and mortgage-related stocks did a decade ago.
If you’re a more conservative investor, favor less-economically sensitive stocks in sectors like food and beverage and consumer staples over sectors like manufacturing and industrials. There are even a handful of stocks that are poised to profit from the purging of the excess auto supply and from the shift toward ride-sharing options versus individual car ownership by more Americans.
Lastly, be sure you don’t chase seemingly generous dividend yields of stocks like Ford and General Motors (GM) … because price declines can eat those yields up and then some. GM sports an indicated yield of 4.8%, for instance, but the stock is down almost 8% year-to-date. Ford yields around 5%, but its shares have dropped almost 14%. Again, better — and safer — dividend and income ideas can be found in my Safe Money Report.
Do you agree with my assessment? Or do you think things aren’t as bad in the auto industry as I’m suggesting? Be sure to add your comments below, and keep your eyes out for ongoing updates on this major economic and market story.
Until next time,
P.S. To see my 5 steps to take IMMEDIATELY to protect yourself from the shadow trillionaires, and their secret plan to crush your stocks in the coming months, please click here now!