Recessions 101

by WSB_Austist

Warning: This is the one rare post on this sub where I’m actually going to be serious and leverage my education and experience. Will return to full spectrum Monday.

Background: I’ve seen a lot of posts and talk about recessions and how to profit on them. I just want to point out every recession is different, the tech bubble burst was different from the 2007/8 financial crisis. While you can place bets on which companies will go up and down, there are a few facts that will remain true. People will lose their jobs, there will be foreclosures, repossessions, and debt balances that go unpaid. This is unfortunate but all you autists want to know how to profit. I will try to explain why my thesis is a less risky play than betting on one specific point of failure.

Thesis: While consumer confidence droops are in the headlines, it’s still at a pretty healthy level and doesn’t impact the thesis at all. We’ve been in an economic boom for almost a decade, people are spending money on things they do not need and over-extending on credit. While it might be harder to get a mortgage than it was pre-2008, car loans and credit cards have basically flooded the market. Spending on luxury goods for 2018 was $294B (Source). Take a look at this article for auto loans (article). The average credit card debt in the U.S is right around $6,000. Regardless of whatever industry collapses, there will be unemployment and wage cuts, credit balances don’t just vanish because you lost your job.

Investment Opportunity:

GO LONG ON DEBT COLLECTORS.

Encore Capital Group, an international specialty finance company, provides debt recovery solutions for consumers across a broad range of assets. Through its subsidiaries, the Company purchases portfolios of consumer receivables from major banks, credit unions, and utility providers, and partners with individuals as they repay their obligations and work toward financial recovery. Through its subsidiary in the United Kingdom, Cabot Credit Management, the Company is a market-leading acquirer and manager of consumer debt in the United Kingdom, Ireland and Spain. Encore’s success and future growth are driven by its sophisticated and widespread use of analytics, its broad investments in data and behavioral science, significant cost advantages provided by its highly efficient operating model and proven investment strategy, and the Company’s demonstrated commitment to conducting business ethically and in ways that support its consumers’ financial recovery.

PRA Group: Our business was created in 1996 as a U.S. consumer debt-buying and collections company. Over time and by design, PRA Group has expanded and diversified throughout its 20-year history. PRA returns capital to banks and other creditors to help expand financial services for consumers in the Americas and Europe and provides a broad range of additional revenue and recovery services to business clients.

Specific Tickers:

$PRAA

$ECPG

Scenario 1: Buy puts exp march 2020 since previous behavior for both has shown that when a recession occurs they bottom out. It might be due to the fact that people stopped taking on debt or that they were unable to collect since people claimed loss of job in court and differed payment. After puts profit by close to ITM call LEAPS since they will begin to collect as the economy rebounds.

Scenario 2: March 2020 calls. Both stocks went inverse $SPY this past month.

Disclosure: This post should be viewed as satire and is not investment advice. I assume no liability for any actions taken as a result of reading this post. Individuals should conduct their own due diligence or speak to a financial adviser before taking any action.

Side note: I don’t have positions in any of the aforementioned companies yet. Just got back into trading 2 weeks ago and won’t be depositing any money into my trading account for a month.

Additional Reading

Edit: Conclusion, they will go up. It’s just about timing and if they bottom or not. In 2008 they bottomed before climbing. Money made on puts and calls. Don’t know if that process will repeat again.

 

Disclaimer: Consult your financial professional before making any investment decision.