by John Rubino
Long credit cycles like the current one always end with a crash. But first they deteriorate. The headline numbers remain positive while under the surface a growing list of sectors start to falter. It’s only when the latter reach a critical mass that market psychology turns dark.
How far along is this process today? Pretty far, it seems, as some high-profile industries roll over:
(Bloomberg) – Amid all the reflection on the 10-year anniversary of the start of the subprime loan crisis, here’s a throwback that investors could probably do without.
There’s a section of the auto-loan market — known in industry parlance as deep subprime — where delinquency rates have ticked up to levels last seen in 2007, according to data compiled by credit reporting bureau Equifax.
“Performance of recent deep subprime vintages is awful,” Equifax said in a slide show on second-quarter credit trends.
Analysts have been warning for years that subprime car loans pose a threat to lenders as delinquency rates have edged higher since reaching a post-recession low in 2012. But it wasn’t until last quarter that the least creditworthy borrowers started to show the kinds of late payment profiles that accompanied the start of the financial crisis.
“We’re seeing an increase in delinquencies across all credit scores, but in deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.”
(Zero Hedge) – The U.S. auto market is at an interesting crossroads with used car prices crashing to new lows every month while new car prices continue to defy gravity courtesy of a somewhat ‘frothy’, if not suicidal, lending market that has seemingly decided that anyone with a pulse is financially qualified for a $0 down, 0% interest, 80 month loan on a brand new $40,000 luxury vehicle of their choice.
As the Labor Department’s consumer-price index data showed last Friday, used car prices once again dropped in July to the lowest level since the ‘great recession’ of 2009. In fact, since the end of 2015, the cost of used vehicles has dropped in all but three months and are now roughly 10% off their 2013 high.
(Bloomberg) – It could be the beginning of the end for an 18-month rally in junk bonds.
A high-yield bond fund run by BlackRock Inc. slumped on Thursday to its lowest level since March, a day after Morgan Stanley warned a correction may already be underway. The cost of protecting speculative-grade bonds against default in the credit-default swap market climbed to its highest level since July 6. Investors demanded the most extra yield in almost a month to buy junk debt, according to a Bloomberg Barclays index fixed late Wednesday.
Morgan Stanley added its voice to a growing chorus of skepticism surrounding debt valuations, with Pacific Investment Management Co. writing in a report released Wednesday that investors should pare relatively expensive assets like corporate bonds in favor of safer investments like Treasuries. Echoing that view, T. Rowe Price Group Inc.’s Sebastien Page, head of asset allocation, said “everything is expensive.”
“This softness has a good chance of turning into a legitimate correction,” strategists led by Adam Richmond wrote in their note. “Complacency is too elevated.”
(CNBC) – Retail stocks are only going to get uglier, former department store executive Jan Kniffen said Monday.
“I said last year the fourth quarter is going to be the toughest quarter for retailing,” the CEO of consulting firm J. Rogers Kniffen Worldwide Enterprises told CNBC. “It’s not better this year.”
The S&P consumer discretionary sector has fallen about 2.6 percent from one month ago versus the S&P 500’s loss of less than half a percent.
Kniffen said on “Squawk on The Street” that many stores will post bad traffic and same-store sales comparisons this year. Even Black Friday won’t be enough to save many struggling companies, he said.
All of this is being driven by “things going online,” Kniffen added.
Kniffen said he expects many more bankruptcies, including Sears as early as next month, and said more strategic mergers are likely.
(Bloomberg) – U.S. stocks have been able to hit fresh highs this year despite a dearth of demand from a key source of buying.
Share repurchases by American companies this year are down 20 percent from this time a year ago, according to Societe Generale global head of quantitative strategy Andrew Lapthorne.
Ultra-low borrowing costs had encouraged large firms to issue debt to buy back their own stock, thereby providing a tailwind to earnings-per-share growth.
“Perhaps over-leveraged U.S. companies have finally reached a limit on being able to borrow simply to support their own shares,” writes Lapthorne.
Whether this is enough to break through the complacency won’t be known until after the fact. But it does fit the historical peak-cycle pattern of sub-sectors faltering before the broader economy. Stay tuned.