Porter’s bold prediction is playing out… Auto sales are crashing

From Justin Brill, Editor, Stansberry Digest:

U.S. auto sales ‘surprise’ to the downside…

Yesterday, major U.S automakers reported that sales declined sharply in July. This now marks the fifth straight month of falling sales. As news service Reuters reported…

GM sales dropped 15% from a year ago to 226,107 vehicles, as the company cut rental fleet sales more than 80%. The automaker said inventories of unsold vehicles at month’s end were 104 days, down from 105 days at the end of June. GM has promised investors to reduce inventories to 70 days by year-end.

Ford said its July sales dipped 7.5% to 200,212 vehicles, as it cut fleet sales more than 26%. Inventories fell to 77 days from 79 the previous month.

Fiat Chrysler said sales dropped 10% to 161,477, as it also cut back sales to daily rental fleets.

As we noted last month, these companies have been intentionally cutting back on sales to rental-car companies (which earn them little profit) in a desperate attempt to boost margins. Unfortunately, this means giving up their single largest source of new-car demand. It’s truly a no-win situation.

But the problem isn’t falling fleet sales alone. Retail sales to consumers have also been falling. And as regular readers know, this is despite a dramatic increase in both subprime financing – including the longest average loan terms on record – and new-car leasing. But this trend could soon accelerate, too, as credit begins to tighten for the first time in years.

Subprime auto lending has already started to slow as defaults tick higher. And now, even leasing is beginning to wane as used-car prices plummet. As the Wall Street Journal noted yesterday…

Car makers also facing a new problem: lenders are backing away from offering the cut-rate lease deals that kept monthly payments low and sheet metal flying off dealer lots in recent years.

Leasing accounted for 31.1% of all retail sales in the first half of 2017, falling slightly from last year’s record of 32%, according to Edmunds.com. Buyers had been increasingly reliant on leases – which keep payments low even as car prices rise – until this year. “For a long time, we were all wondering where the ceiling was for leasing. Now, it has been hit,” said Jessica Caldwell, an analyst for Edmunds.com.

Swelling used-vehicle supply is accelerating the pullback on leasing, The increased supply comes after used-car values had grown steadily in the years following the 2009 financial crisis.

‘One of the most important lessons of finance’…

Of course, none of this should come as a surprise to Stansberry’s Investment Advisory subscribers. It’s exactly what Porter and his team have been predicting for years. As they originally explained in the March 2014 issue (emphasis added)…

It’s one of the most important lessons of finance: The easier the lending standards become, the larger the credit losses will eventually grow

The average auto loan today is for 65 months (five years), and 20% of all auto loans are now for durations between 73 and 84 months. Likewise, the average amount of these loans (more than $26,000) is the largest ever recorded. And finally, the percentage of subprime borrowers is now at a record high – 27% of all car borrowers. That’s almost double the amount of subprime borrowers that were in the car market back in 2009.

Americans currently owe more than $800 billion against their cars and trucks – 34% of this debt is owed by subprime credits. Another 10% is owed by “deep subprime” – folks with credit scores below 550. Businessweek quotes Morgan Stanley analyst Adam Jonas pointing out the obvious: “Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery.”

If you lived through the subprime-mortgage debacle, you must know what will happen… Defaults will suddenly rise. Credit losses will follow. Used car prices will fall as more and more cars are auctioned off. More and more car buyers will find credit suddenly unavailable. They will be unable to roll over their loans or get into a new lease, as credit becomes tighter. More and more vehicles will pile up on dealer lots.

Of course, conditions grew even more extreme since they originally issued this warning. Today, American’s owe more than $1 trillion against their cars, while new-car prices, average loan terms, and the percentage of subprime borrowers all sit at new record highs. But this only means the resulting bust will be even bigger than originally predicted.

We continue to recommend staying far away from the auto industry. There is more pain ahead for these stocks.

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