| MARKET ROUNDUP | |
| 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?
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| 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.
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“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.
Reminder: You can let me know what you think by putting your comments here.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 30 comments }
I took a car note on a new car (in 2012) for 6 years at near zero interest rate. At that interest rate, there is no reason not to stretch it out. Its predecessor was 20 years old (same make and near same model), and one of the best vehicles I ever owned. If this new one turns out to be a keeper, I’ll easily keep it ten years or more — driving it for years after the note is paid off, maybe even handing it down to one of my kids.
I paid cash for my wife’s car, because it was used, and wouldn’t have had zero or near zero interest on a loan. She has been driving it for nine years now. Maybe we’ll look at a new model for her next year — with a zero or near zero interest rate, maybe even a seven-year note.
A 15 year mortgage is the only way to go. The goal is to own the house not perpetually finance it.
Free cars for GM buyers to get the stock to 35 so US and UAW could sell their shares-now subprime will haunt them—Sears and JCP will go away.
Seems like everything is in a bubble or close to,Im scared stiff to invest at the moment something has got to give pretty soon
I use to only buy 2 year old cars, but now it is better to lease a car with the least amount of money a month under $100 ,no money at signing. In 3 years the will be giving cars away when the leases come back. About TBF dont be a fool and keep it and keep adding to it at lows ,interest rates are going up some time .So if you dont need the money keep buying TBT, or TBF.
If you got the cash, take the zero interest and invest, if you do not, buy the best used car you can for cash or get it on a short term car loan. I never buy new cars myself, they drop in value too much and are taxed too high!
These new car loans and Payday loans are simple the old Loan Sharks that the Democrats got rid of back in the 70’s….. Amazing how quickly they came back after the Republican Revolution….. Once the GOP looses the House this Fall for good, I would expect to see new legislation that puts maximum interest rates back into law again… I find it amazing how many ways the GOP is allowing any con man to screw the average unemployed American citizen… Whatever happened to ethics and representing the majority of the citizens in your district? Oh Yea, I forgot, they are Republicans who are only beholden to the Conservative Ultra Wealthy (CUWs) who paid for their election ads… :(
I think that the business model that both Sears and JC Penny employ has been taken out and shot and they are trying to keep the corps moving!
My view of your inappropriately named newsletter “Safe Money Report” is that it is a hodge podge, willy-nilly market timing service! You engage in a constant stream of recos that are already richly priced and accompany most with a recommended Stop Loss. As if price does not matter at all! And when you give a stop along with the reco, it tells me that you have no conviction in your own judgement. The portfolio is in constant turmoil. Nothing is held for long and most are sold at a smallish gain or often at a loss! This is not the look of a “safe” investment strategy! A series of quick (short term) gains is not the way to riches!
Tell anyone that holds SHLD to run for the doors.
Buying new is great when the auto manufacture or after market vendors will still have parts for the vehicle 15, 20, or even 30 years later.
Buy quality that will last the test of time.
As a owner of a 30 year old. Porsche parts are available from the local dealer and online vendors. The 944 has been driven cross country, driven daily, and parked at the mall.
Fuel injected for 25+ mpg with low maintenance.
Would I buy another Porsche – yes. The only thing holding me back is lack of a good paying job. My MA in Public Relations with lack of real work experience, and will not leave the southern states, keeps me back.
I am not young but over 35, another downer.
I bought a 2002 Chevy Impala, new, with 60 months interest free GMAC financing. Still have it, so we have been driving a paid-for auto for 7 years. We have very good credit rating and will look hard for another interest free auto loan for as long a term as possible when we buy again. Why not? As a retiree even low return on savings is still infinitely better than 0 interest.
TBF is not your only loser Mike. REK is a big loser so far and I`ve lost other money on your inverse ETFs. Unfortunately I didn`t have enough money to follow every recommendation from you and Larry Edleson so I went with the inverse ETFs and my account is down about 25% after two years. I`ve been with Martin Weiss now for 4 years and only a big net loss to show for it. But you have to sell your service and that would not sell very well. I still read the Safe Money Report and other services also. I just wish I could make some money following the recommendations.
Mike,
Tell us more about the invasion of Crimea by Vladimir Putin.
-I wonder what price discount was available with a 0 % car loan ?
– Manufacturers and dealers can only offer such generous loan terms due to the extremely low “prime” interest rates offered or car loans offered by banks,
-If one calculates what the “0” interest rate loan actually costs the seller, in present worth, over the contract period, it is probably roughly equivalent to the discount that would have been available if you had paid cash instead of taking a long period “0” interest rate loan,
— Generally, nothing is for nothing. Of course it also depends what pressure the manufacturer is under to reduce stock levels or to maintain or increase market share.
It’s not Sears or J.C.Penney – It’s the economy – people not working. People on Food Stamps, tons of people riding the bus. Lots of Section 8, dying Middle Class. The IN STORES are whatever is the cheapest DD’S, ROSS, BIG LOTS, FAMILY DOLLAR, DOLLAR GENERAL, GENERAL DOLLAR, ETC. + any DISCOUNT CLOTHING STORE.
If Sears , & J. C. Penney want to survive – they need to be the NEW DISCOUNT STORE
How can I bet against these ” asset backed securities” ?
The attendant problems with sub prime car loans will not come close to the sub prime mortgage disaster. People value their cars much more than their houses. If you lose your house after years of non-payment you can easily rent. Stop paying your car loan and it will likely be repossessed as soon as the creditor calls the repo company. On the creditor side It’s much easier and timely to repossess a car than foreclose on a house. Many used car dealers outfit their cars with GPS locators and charge exorbitant rates, knowing owners will likely default. I don’t think the banks will take as much as a hit as the manufactures as car buyers ruin their credit, used car lots and auctions fill up with repossessed cars and demand for new cars drops.
Sub-prime auto loans are a direct result of Fed money printing since sub-prime rates more than cover current repo losses with zero cost of money. What lenders fail to see time after time is that easy financing is a bubble in progress, and they all burst in the end. Easy money cannot compensate for declining growth and declining income in the economy, its all based on unsound money. The major reason for declining income and declining growth in spending is an excess of increasing debt. The Fed has never allowed the economy to flush itself out and re-boot. Pouring cheap money on the problem is a temporary fix with the same bad results we saw in the housing bubble, and for the same reasons. When will they ever learn?
Jean is spot-on – “Easy money cannot compensate for declining growth and declining income in the economy”, both of which are directly attributable to the caustic transfer of wealth in this country in the last 30 years from the middle class to the 1% royalty – a fact that I have written about in Mr. Larson’s column previously. Google “Demhoff Who Rules America ?”
There is not a politician on the planet – not Republican, not Democrat, not independent – with the moral courage to fix the real problem – rebalance the distribution of real wealth and income in this country that made the prosperity after the Great Depression possible.
Let’s see, greed and stupidity gave us the Great Depression, men of courage who could NOT be intimidated by the 1% royalty made the necessary changes to get us back on track – read that as sensible regulations for the banking system, Wall Street, and associated endeavors. Of course, a global war and a couple “police actions†in Indochina helped us crank up our industries, but Bush43’s administration is ample proof that war is not the great panacea – the Middle Class HAS TO BE ALLOWED to prosper. Then greed and stupidity started taking over again in the 1980s – greed was even celebrated by Gordon Gekko’s “greed speech” in the film “Wall Street”. Seems to me there is a whole generation of folks who do not realize Oliver Stone was criticizing, not celebrating, the Wall Street mentality.
Fast forward past more weakening of banking regulations, then the collapse of the banking system as represented by the Resolution Trust Corporation, and we finally get to another politician with some courage who did not give a tinker’s dam about the 1% royalty’s influence, and the Middle Class starts to rally. Clinton produced the only balanced budget in my adult life, and when he left office, the United States was a job creating MACHINE.
Yes, Martha, I have written these facts previously, but as we all know from experience, repetition is the key to learning. Jean asks, “When will they ever learn ?” The answer is, “they” are not capable of learning because (1) they are not listening, (2) they cannot relate to history, and (3) they have a completely different agenda than does Jean.
Anyway, we have the Religious Right phenomenon of Bush43 – the only person in my life time to lose the popular vote but still gain the Presidency – and stupidity and greed takes over yet again. During Bush43’s administration, the Middle Class gets crushed, Wall Street and Corporate America steals everything they can, and the world’s economic system comes within a whisper of a collapse that would have made the Great Depression look like a picnic in the park.
Bush43 and Obama44 did not have the moral courage to do what was necessary. Instead, they rewarded Wall Street and Corporate America for consummate greed and stupidity by spending and/or printing trillions of dollars to prop up the stock market and help Corporate America make enough profits that they could fool themselves into thinking everything was once again OK. The 1% royalty ? They prospered enormously. The Middle Class ? They lost about 1/3 of their share of the real wealth in this country. Don’t argue with me, Martha. Go educate yourself so you can discuss the issues intelligently.
Bottom line, the politicians wanted to save the stock market – instead of letting the economy purge itself of the poison that had infected it – because that was the only way they could survive in their cushy jobs and comfortable perks. Rule number 1 – if the stock market is perking, the incumbent gets reelected.
I will give you an analogy that even the 1% royalty can understand. When your pool gets dirty, you have to give it a shot of chlorine – it is called “shockâ€. If it gets green and slimy, you gotta drain it, scrub it, and start all over again.
Jean, I am sorry to say that I believe the answer to your question is…they ain’t ever gonna learn…
William,
I would recommend that you reread history……. In the past 100 years there have been two periods of Republican Domination and two periods of Democratic Domination…..
1920-1932 Republican domination (Crash of 1929 which brought the Great Depression)
1932-1982 Democratic domination (See Below)
1982-2009 Republican domination (Crash of 2007 which brought the current Depression)
2009-Present Democratic domination (See Below)
1932-1982: The Crash ended within months of FDR being elected…. Then we had the greatest and longest up trend in the DJI in history. That period also saw the greatest growth of American Manufacturing and Economic Output in history. That period also saw the greatest growth of the Middle Class and the greatest improvement in the standard of living for the average American in history…..
2009-Present: The Stock Market Crash ended within three months of Obama being elected and at present is at new highs….. Unemployment is improving. The economy is improving…. The deficit is improving… And living standards are improving…..
I have not received a safe Money Report in my inbox for two months now. Whats up?
Mike,
Are auto lease numbers up as well? Are the “lease” numbers within the purchase number or are they separate?
I hope this does the same thing to car prices as what happened to real estate. I need a car.
Your comment on SEARS loss…..All other sources (Seeking Alpha, CNBC, etc,are saying they lost $ 773 Million. Can you explain the difference or was that a typo?
Dave
Your Car-gage point brings up a reason why it’s having an affect of home buying!
With 7 years of car payments, monthly cell phone payments, credit card(s) payments, monthly rents, and the result is very little money in savings, equals the inability to afford a down payment on a home!
Just a few words about your comments on Sears Holdings (SHLD).
I have been to any number of their stores (Sears and Kmart) in an attempt to understand and characterize what their strategy is. What I concluded is they are attempting to transform their business model to a hybrid that includes not only their brick and mortar stores but also a major online presents such as Amazon that is tied together with an internet based point system for rewards. On paper it looks interesting however the point system is riddled with inconsistencies and exclusions that are causing frustration at the retail level to the extent they have to run an entire phone bank just to correct errors and handle customer complaints. The employees they have hired at the retail end are excellent, friendly, and courteous but they all express frustration with the current situation while attempting to sort it out. In the mean time the parent company often presents products at above market margins then ends up buying customers with huge reward point offers.
In a way it is a shame because they own some excellent brands that they are attempting to ride out of a swamp by beating them to death.
Unless they somehow thread the needle and create organic traffic increased in their stores while making a profit on ongoing sales I don’t see how they can stop their hemorrhaging of money. I am thinking that successful competing online will mean reduced, not increased margins at the front end and never generate the sort of growth that gives Amazon their stratospheric PE ratios. Also, their natural client base does not include beneficiaries of QE and ZIRP which is not helping their attempt at a turnaround.
If I am right they are as safe short. (Full disclosure I have no position in this stock).
You are right, car loans are getting more and more like house notes. As car prices have risen over the years it now requires alot more time to payoff the financing. $10,000 priced new cars are being replaced by $30,000 to $50,000 priced new cars. It’s price escalation across the board which is far outpacing the average consumer’s ability to pay. It’s only a matter of time before the bubble goes KABOOM!
I only use 5-yr car loans to keep abreast of the depreciation. If I can’t buy new, I buy used. On my home, I traded in a 30-yr loan for a 15-yr loan when interest rates dropped in the late 1990’s. Refinanced again in 2009 with a 20-yr loan when skyrocketing insurance rates forced a new roof install. Never going to re-fi again if I can help it, because after a 2-year respite, the sky-high homeowners insurance came back to bite hard. Now, with interest earned in the toilet, and interest paid increasing rapidly, all I can do is hold on.
Mike,
The problem is a systemic one in that it is the system will allows faulty financing for high priced autos. When the debt burden crashes the auto loan business as well as the crippling effects of higher education loans the cry will be “greedy banks”, which is true; however, the real fault is, as the bard Willy S. says, not in our stars but in ourselves. Or, as some astute folks would say ” It’s the system stupid”. It is getting harder to beat the system.