The last major debt bubble, courtesy of subprime mortgages, wreaked absolute havoc on the U.S. and global economies when it flamboyantly burst in 2008.
Seven years later, a new bubble threatens our economy: the $934 billion auto loan bubble. Motor vehicle loans rose for the 14th straight quarter in Q4 2014, increasing by $29 billion from the quarter before and reaching a new record high.
Increasingly, people are defaulting on these loans: 3.5% of auto loans are in the 90+ day delinquency period, a sharp uptick from 3.1% in the third quarter.
Despite this, lenders continue issuing new auto loans at a blistering pace — $102 billion last quarter alone — in a desperate effort to grow business. It’s reached the point where, in order to grow their balance sheets, creditors are doing the only thing they can: loosening their lending standards.
Sound familiar? It should. The same thing happened with mortgages in the years leading up to the Great Recession.
We’re in another subprime lending bubble, folks, but instead of homes, it’s cars. Here are five stocks — currently benefiting from the auto lending boom — that will be the first to implode when the bubble bursts.
Auto Loan Bubble Stocks: Santander Consumer USA Holdings Inc (NYSE:SC)
As Mark Twain wisely said, “History doesn’t repeat itself, but it does rhyme.”
Twain and his sardonic wit would have reveled in, and perhaps been repulsed by, Santander Consumer USA Holdings Inc (NYSE:SC) which is doing its darndest to rhyme with “subprime mortgage crisis.”
Santander recently teamed up with Uber to offer auto loans to the ride-hailing company’s drivers. Bad credit? No credit? No problem! Uber and Santander are actually targeting those drivers for loans, bragging that you can be behind the wheel making money in a week.
(Except, you’ll actually be paying off your debt, which you can pay off with your Uber paychecks.)
When it’s not doing its part to bring sharecropping to the 21st century, Santander is bundling, securitizing, and selling the cruddy loans it originates.
Auto Loan Bubble Stocks: Ally Financial Inc (NYSE:ALLY)
While Santander is knee-deep in subprime auto loans, Ally Financial Inc (NYSE:ALLY) is knee-deep and willfully trudging further. The New York Post reports that the CEO of Ally Financial is keen on expanding the bank’s exposure to the area:
“Jeffrey Brown said Ally, the biggest player in the auto lending market, wants to boost the amount of subprime auto lending to as much as 15 percent of all loans, as US automakers reported a nearly 14 percent sales jump in January for new cars over last year’s levels.”
This focus on subprime lending should raise the eyebrows of ALLY stock investors, especially after the strategy has earned the attention of prosecutors. The U.S. attorney in Detroit issued a subpoena to Ally in December over its auto lending practices.
Auto Loan Bubble Stocks: General Motors Company (NYSE:GM)
Obviously, car companies themselves are going to be some of the worst-hit when the auto loan bubble pops. After all, the banks aren’t the only institutions supporting this unsustainable system, there’s often in-house financing available as well.
General Motors Company (NYSE:GM) is coming off a phenomenal end to 2014 in which December sales soared by 19% year-over-year as falling energy prices boosted auto sales across the entire industry. Unfortunately, we also know that auto sales were lifted by shaky lending standards and increasing amounts of debt.
With delinquent auto loans already starting to spike, Detroit’s rally is running on fumes. If gas prices rise, even modestly, from their recent lows, borrowers will have less money in their pockets to pay back current auto loans and/or buy future vehicles.
If gas prices rise dramatically, expect the demand curve for new vehicles to shift dramatically to the left as consumers think twice about how filling up their tanks will affect their wallets.
Auto Loan Bubble Stocks: Ford Motor Company (NYSE:F)
Although Ford Motor Company (NYSE:F) didn’t exactly blow investors out of the water in 2014 — the year was fraught with production delays related to its new-look aluminum F-150 — Wall Street expects more from Ford stock in 2015.
Analysts expect earnings per share to grow by 37% in 2015, from $1.16 per share to $1.59 per share.
Given Ford’s recent decision to hire another 1,550 workers and boost hourly wages of an additional 300 to 500 workers, Ford itself thinks it’s in an enviable position as well. Ford’s president of the Americas explained the hiring surge and pay increases in bullish fashion, saying the new workers were due to overwhelming demand for Ford F-150s.
“We sell every truck we can build, and we plan to build more,” he said.
While that makes a lot of economic sense, what happens when demand suddenly curtails as consumers rein in on spending and struggle to pay back existing debt? Suddenly, you’re not building so many trucks.
Auto Loan Bubble Stocks: Honda Motor Co Ltd (ADR) (NYSE:HMC)
Honda Motor Co Ltd (ADR) (NYSE:HMC), while proud owner of the land speed record for fastest lawnmower at 116 MPH, is primarily a car company.
But even before considering the debacles Honda will face when the subprime auto loan bubble pops, HMC stock has major problems. Honda stock, excluding dividends, has barely broken even for investors over the last five-year period, and HMC stock is off about 10% in the last year.
In 2014, five months after issuing massive airbag-related recalls alongside Nissan and Mazda, it admitted to the National Highway Traffic Safety Administration (NHTSA) that it had been under-reporting accidents and deaths to the federal regulator since 2003.
Safety and ethical concerns aside, Honda is a Japanese company, which means its business is accounted for in the yen. In less than three-and-a-half years, the yen has drastically weakened against the dollar. While that’s good for exports, American investors in the Honda ADR, who see their money denominated in dollars, have seen the ugly side of currency risk.
The auto industry is one of the most inherently cyclical in the entire U.S. economy. With the recent boom increasingly driven by the subprime auto loan bubble, the bust is just around the corner.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com
