Good morning – Chances are you haven’t heard of OneMain Holdings (OMF). But its shares are plummeting more than 47% on the day (see chart), and they’re dropping to their lowest level ever (the company went public in 2013).
Why should you care? Well, OMF loans money to higher-risk personal loan and auto loan borrowers. And the company just confessed that delinquency rates and charge-off rates are starting to surge. This mirrors the lousy news we’ve seen from other higher-risk lenders like Credit Acceptance Corp. (CACC) and even Ally Financial (ALLY), the old GMAC that got bailed out during the 2008 credit crisis. So their shares have been falling sharply, too.
This matters because bad-credit borrowers are the first to default when the credit cycle turns. The rot invariably spreads up the food chain to larger and larger banks, until the whole lot of them gets hit – and hit hard. Think back to the mortgage crisis. Bank of America, Washington Mutual, Wachovia, and Countrywide Financial didn’t fail or get bailed out on Day One. It was little crappy lenders like Ownit Mortgage Services that did. Then the failures migrated up the food chain to companies like New Century Financial, Accredited Home Lenders, NovaStar Financial, and so on.
In other words, OMF, CACC, ALLY, etc. are canaries in the coalmine. Keep that in mind when you think about investing in larger financial stocks, particularly those with a lot of exposure to sectors like autos, credit cards, and commercial real estate …
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the yield curve inverted during the 2008 credit crisis. we’re not there yet nowadays.