A question and some interesting observations came in today from reader “FW” who works at Ford. He asks about shorting the auto sector including auto-backed collateralized loans.
A few years ago while going through Khan Academy I stumbled on his series of videos about cause of financial collapse. It was a revelation to me. Ever since I have been looking for for an alternative sources of financial information. That is how I found your blog. I have been reading it almost every day. Thank you for your opinions and knowledge.
I work as an electrician for Ford Motor Co. I have been with the company for 15 years. Two contracts ago Ford and UAW agreed to a 2 tier wage system. Which means that Ford can hire new production workers at $15-$17 per hour rate rather than $23-$25 rate (approximate rates).
I notice that whenever we have a large group of new hires few months later I see number of new vehicles on company’s parking lot. I assume that most of the new cars belong to the new hires. It also seems to me that most of them did not have the best credit and had to finance the loans for the long terms. If the car sales take a down turn contractually this new hires would be the firs to be laid off. Seems to me like a big risk.
- Do auto-backed loan securities exist?
- If so, do they look similar to the mortgage CDOs?
- Is there a way to short them for somebody with limited financial abilities?
- Not easy, perhaps impossible to do so directly as a small investor. In any case, not recommended.
Recall that it was hedge funds who took the opposite side of mortgage CDOs in leveraged ways. Indirectly, one might look for companies that engage in subprime auto loans and short them. That is possible but certainly not a recommendation.
In fact, for someone with limited financial means, I would not recommend shorting at all. It is very difficult to short successfully.
Instead, I would recommend buying gold or gold miners or simply sitting on cash waiting for far better opportunities.
For small investors seeking a low-cost broker, for those who buys small numbers of shares, and for those who trades frequently, I suggest looking into Interactive Brokers. IB is not a full service broker but they have an excellent trading platform and among the lowest fees in the industry. Don’t expect advice or lots of service.
Other than having accounts and some client accounts at IB, I have no other relationship with them, and I get nothing out of this recommendation. I do own gold and miners among other investments.
Auto Loan Securitization Probed by U.S., States
Returning to the initial question, here is a pertinent article from about a year ago: Auto Loan Securitization Probed by U.S., States.
The Justice Department and state authorities are looking into the securitization of auto loans for possible fraud as part of an effort to seek out emerging areas of abuse, Acting Deputy Attorney General Sally Quillian Yates said.
The department’s No. 2 official, in a speech to state attorneys general Tuesday in Washington, said prosecutors were taking a hard look at the auto lending industry to stem any abuses before they could harm the marketplace.
“We shouldn’t wait until there is a crisis to pay attention,” Yates said. “We can and should use our experience investigating mortgage-backed securities to be on the lookout for, and head off, any potential threat, rather than waiting until after losses have been suffered.”
While the auto-loan securities market is much smaller than the market in subprime mortgages that was at the heart of the 2008 financial crisis, there are parallels. Ratings companies are awarding top grades to the securities, while it isn’t easy for buyers to verify the accuracy of those assessments, according to attorneys, academics and other auto-loan securities experts.
Scrutiny of the market is intensifying at the same time more borrowers are falling behind on their payments and sales of securities backed by the loans increase. Auto-finance firms that lend to people with bad credit lowered their standards amid increased competition as new entrants flooded the business to capitalize on cheap funding, according to Moody’s Investors Service.
The Justice Department is looking broadly at potential auto loan abuses. General Motors Co.’s financing unit and Santander Consumer USA reported receiving Justice Department subpoenas last year. GM was asked to turn over documents on underwriting criteria, origination, warranties and securitization of subprime loans since 2007.
Surge in Subprime Auto Lending Draws Attention
On November 19, 2015, the Wall Street Journal reported Surge in Subprime Auto Lending Draws Attention.
Subprime auto lending is shifting into higher gear, raising some concerns in Washington where top financial regulators have sounded alarms about this category of loans.
Over the six months through September, more than $110 billion of auto loans have been originated to borrowers with credit scores below 660, the bottom cutoff for having a credit score generally considered “good,” according to a report Thursday from the Federal Reserve Bank of New York. Of that sum, about $70 billion went to borrowers with credit scores below 620, scored that are considered “bad.”
But when it comes to auto loans, in particular, a rising volume of loans is going to borrowers with poor credit. The sum in that category has nearly reached the same level as in 2006, raising questions about the health of the nation’s auto-lending portfolio and drawing uncomfortable comparisons to the rise in subprime mortgages that helped fuel the housing collapse, financial crisis and recession.
The comptroller of the currency, Thomas Curry, said in a speech last month that some of the activity in auto loans “reminds me of what happened in mortgage-backed securities in the run-up to the crisis.”
And Richard Cordray, director of the Consumer Financial Protection Bureau, warned in September 2014 that subprime auto-loan borrowers “may be more vulnerable to predatory practices” and that “direct oversight of their lending practices is essential.”
The subprime auto sector is due for a big hit. Is this the year?
Assuming so, many of the subprime auto lenders were gobbled up by larger companies with other more diversified businesses. For example, subprime lenders Safeco was bought by Liberty Mutual.
Even if one can find some direct plays, shorting is not a good idea for inexperienced traders, especially those with limited funds. Shorting CDOs or buying credit default swaps is out of the question.
Mike “Mish” Shedlock
My recollection is that in the movie “the big short” those short of the MBS were close to failing themselves. Mish’s advice appears to be “the only way to win is not to play.” Keep yourself out of debt. That is the best advice. We can watch this burn from the sidelines.
I just watched “The Big Short”. You are correct the guys who shorted the bonds because they correctly analyzed the situation were nearly bankrupted by the fraudulent bond ratings. Before the bonds were allowed to fail, the Big Boys had to off load or hedge their losing positions.
read James Grants latest newsletter
Something like 40% of private sector profit goes to the FIRE sector. I believe this entire lot is in trouble. This explains central banks buying all sorts of equities and bonds. Basically the govt. is trying to protect the finance industry from an asset bubble that is ripe for popping. The same FIRE sector plunged in the Great Depression. Not surprising now since this is a second Great Recession. The F in FIRE is for finance. These are the guys originating the sub prime auto paper.
My wife and I desperately need a new car, and having worked 35 years in Engineering for one of the big 3 (ouch, that sounds old), I know well enough to stay away from the auto market right now. I remember the days when 15-16 million domestic sales were peak (1999 and 2000). Last year and the year before they produced 18 -18.5 million units… we used to call it “robbing from future sales”. When it comes to buying, I buy price, not interest rates. Soon, there is going to be a huge glut on the used car market at 1/2 price, because the latest round of subprime auto borrowers includes people with “NO CREDIT SCORE” and loans are now lasting 84 months. My guess is that a lot of these kids dwelling in their parent’s basements are going to be walking soon. There was an article on Zero Hedge last month that spells out the insider’s view of the subprime lender’s market from the inside, complelte with the lingering securiitzation problem popping up for FCA’s main source of lending funds.
Old Guy said:
Spot on Greg. Many forget that once these vehicles that are financed longer then their warranties will end up back on the dealer lots. People that are maxxed out on credit will not be able to roll over these vehicles and will simply walk away when they can no longer afford to pay for the repairs.
Buying used is the way to go anyway.
Not sure I would short the cars or the Fed. The plan is likely to be to increase lending until every HUD project parking space in the nation is adorned with a brand new $35000 SUV.
Then, the taxpayer will be called on to step up to the plate and pay for it all, under the auspices of “giving back” to the community.
After that runs it’s course, local and federal .gov will buy new cars for all their employees. By the time that has reached saturation, well, the cars in the HUD spaces will be older, so a cash for clunkers program will need to be launched.
Or, after purchasing all that Junk auto paper, will the Fed just buy all the cars and put them in it’s portfolio, causing a boom in the construction of parking garages to put them all in?
Brave New World we have here. Coupled with Brave New Economic Policies. Fight the Fed if you want, but remember, it holds all the aces. And though parking in ever depreciating cash is an option, in a sense, you are fighting a Fed hell bent on depreciating it to it’s intrinsic value of what ever paper and ink are worth.
But, hey, who could disagree with mish on the gold insurance policy. Might be better than buying insurance from a major insurance outfit, backed by subprime auto paper?
Professor: I think you figured it out.
Thomas Malthus said:
Here are some other non-MSM blogs worth following:
And best of all – because it goes beyond the discussion of the symptoms to the disease… which is the fact that we are running out of cheap to extract oil
“Our Finite World” is written by a global warmer. Globull Warming is a scam, hoax and power grab. I do not read “Our finite world” because if Gail is either too scientifically unable OR lying ( or a combination of both ).
Would you read a blog which included repeated proclamations that gravity is in your imagination? I would not. I am a scientist and an engineer. I won’t tolerate incapable practitioners of science and you should not either as it’s not a good use of your time.
Thomas Malthus said:
Actually I have followed Finite World for 3 years now and the author is on record as stating that she is not convinced the global warming is caused by man’s activities.
If you followed the site you would observe that on many occasions ‘greenies’ attacking her for this stance.
I understand Gail Tverberg shares my stance on global warming – namely that the entire subject is moot — because GDP is virtually 1:1 correlated with the burning of fossil fuels.
If we were to reduce the burning of fossil fuels – without having a viable alternative (which we do not) – then growth would turn negative.
And if unchecked – the global economy would collapse.
Zero Hedge comes off as too much perma-bear apocalyptic to me. I also don’t like it when blogs get too political, I like more straight unbiased economic data and insight. Some of these blogs have also been claiming the “great crash” has been “right around the corner” now for about 7 straight years. If anything their timing is horrible.
Thomas Malthus said:
With Zero Hedge you definitely need to sift through the rubbish … yet it is still a very valuable site because it does shine light on a lot of dark places.
What I find particularly useful is how it takes MSM articles — then shreds them exposing the lies and half-truths.
The comments section is utter rubbish and to be avoided.
I am very pleased with the quality of comments here.
Much better than I had with Disqus or Echo
@Thomas Malthus – I tend to agree, but I’ve found that every once in a while you can find some real gem commenters on ZH. Yes, many are racist, or repeat some incredibly worn out phrase about gold, but if you skim down and look for the longer more well written comments then more times than not they’re interesting.
For example, I found this interesting doc there today. I’ve only watched a few minutes of it but so far so good: https://www.youtube.com/watch?v=p5Ac7ap_MAY
Thomas Malthus said:
No doubt there are some needles in the hay stack…. but there are such massive volumes of rubbish in there it’s tedious to find the good stuff….
Credit Acceptance Corp (ticker CACC) deals exclusively with sub-prime auto loans. The Elliott wave technical analysis indicates a new al-time high cant be ruled out since the chart looks likes a triangle for the past 10 months. If the price breaks below $155, then CACC is in full crash mode.
CarMax is a dealership with lots all across the nation. (ticker KMX). The Elliott wave technical analysis indicates KMX has already started its crash; however, the recent consolidation may not be complete.
AutoNation (ticker AN) is another nation-wide dealership. It’s Elliott wave analysis is the same as for KMX.
A couple more warnings about shorting the market.
The first warning is the rules can be changed arbitrarily. In 2008 I bought a double inverse banking ETF with margin. My position was gaining value by leaps and bounds until the rules were changed overnight that bank and financial stocks could not be shorted for the next xxx days. This quickly reduced my profits as shorts covered their positions. I thought I had everything figure out, except the part where the rule of law gets tossed out the window when there is a crisis. This makes formulating a strategy extremely difficult.
The second thing is, and it’s something that WILL happen during this bear market, brokers will go out of business overnight, leaving many traders’ positions frozen or “cash” bailed-in.
So how do you come up with a strategy incorpating two catastrophic risks unrelated to the underlying company?
Thomas Malthus said:
Buy gold. Physical only.
Robinhood is an app based broker and really has no services outside of required statements, but charges no trade commissions
Steve Adams said:
My fancy truck , hold boring cash wait for big sales in new and newish cars in the next twelve months and replace my 14yr old vehicle with a great deal. Hard to invest 100k in that bet though. 🙂
Thomas Malthus said:
I visited a BMW dealer in Canada last month and rates on a lease were something like 1.9%. In New Zealand where I live they are over 10%
I asked him why the rates were so absurdly low (even though I already knew the answer)…
His response was ‘if rates were not so low the entire auto market would implode — he also filled me in on how huge amounts of lending across the border for autos was going to subprime borrowers….
This is just one of many ticking time bombs