Americans are falling behind on their credit card debt.
As you’re about to see, credit card “defaults” are rising for the first time in six years.
This is a serious problem for credit card companies. It’s also a big problem for retailers, car makers, and any other company that depends on consumer credit.
If this keeps up, shares of America’s biggest consumer companies could plunge.
You could even lose a lot of money without having a single penny invested in this sector.
That’s because consumer spending makes up about 70% of the economy. When the “consumer” hurts, the entire economy feels it. So, if you have any money at all in stocks, please read this Dispatch closely.
• Credit card company Synchrony Financial (SYF) issued a serious warning last week…
Synchrony issues more retail-store credit cards than any other company. Its performance can say a lot about the credit card and retail industries.
Right now, Synchrony’s customers are struggling to pay their bills. The Wall Street Journal reported last week:
“We expected to see some softening,” Brian Doubles, Synchrony’s chief financial officer, said at an investor conference Tuesday. “We weren’t sure when it was going to come and I think we’re starting to see some of that.”
Mr. Doubles added that the ability of card holders to get back on track with payments after falling behind has been “challenged all year.”
• The company said it could see a jump in “credit charge-offs”…
This is basically the default rate for the credit card industry. The company warned that its charge-off rate could spike from about 4.4% to as high as 4.8%.
For perspective, the industry charge-off rate was 3.1% during the first quarter. During the first quarter of 2015, it was 3%. This was the first time since 2010 that the industry charge-off rate has increased from the previous year.
Many investors are now worried other credit card companies could take big losses in the coming months.
Synchrony’s stock plunged 14% after it issued the warning.
• Shares of other major credit card companies also tanked on the news…
Capital One Financial (COF) closed Tuesday down 6.6%. Ally Financial (ALLY) sunk 5.6%.
These giant credit card companies are now trading as if there could be much bigger losses on the way. Synchrony’s stock has plunged 22% over the past year. Capital One is down 28%. Ally Financial is down 30%.
Other major credit card companies have also plummeted. American Express (AXP), the nation’s largest credit card company, has fallen 23% over the past year. Discover Financial Services (DFS) is down 10%.
For comparison, the S&P 500 is down 2% since last June.
• As of the first quarter, Americans had more than $950 billion in credit card debt…
That’s 6% higher than the first quarter of 2015. And it’s the highest level since 2009.
Folks have been racking up bigger debt despite falling behind on their payments. The Wall Street Journal reports:
Capital One, the nation’s fourth-largest credit card issuer, said credit card sales jumped 14% in the first quarter from a year earlier.
At Citigroup Inc., average credit card balances in the first quarter posted the first year-over-year increase since 2008. Such balances also grew at Discover Financial Services Inc. and J.P. Morgan Chase & Co., the nation’s largest lender.
U.S. credit card balances are on pace to hit $1 trillion by the end of the year. They could even top the all-time high of $1.02 trillion set in July 2008.
• The Federal Reserve made it cheap for folks to borrow money…
As you probably know, the Fed has held its key interest rate near zero since 2008. The Fed dropped rates to the floor to encourage folks to borrow and spend money.
In 2007, the average credit card holder paid 13.3% per year in interest. Today, the average annual interest rate is 12.3%.
Credit card companies and banks have also loosened their lending standards. The Wall Street Journal reports:
Because many creditworthy consumers are still cautious about spending, lenders are turning more aggressively to subprime borrowers. Lenders issued some 10.6 million general-purpose credit cards to subprime borrowers last year, up 25% from 2014 and the highest level since 2007, according to Equifax.
A “subprime” loan is a loan made to someone with poor credit. You may remember that the collapse of the subprime mortgage market sparked the 2008 financial crisis and worst economic downturn since the Great Depression.
• The Fed also made it cheaper to buy a car….
Last quarter, the amount of U.S. auto loans topped $1 trillion for the first time in history.
This is a sign of a very unhealthy economy. That’s because many folks buying cars these days could never afford them in “normal” times.
The Wall Street Journal explains:
Lenders gave out $109.4 billion in subprime auto loans last year, up 11% from 2014 and nearly three times the low of $38.3 billion in 2009, according to credit-reporting firm Equifax. Subprime auto loans account for a growing share of new auto loans, making up nearly 19% of auto loan balances given out last year, up from 13% in 2009.
• It’s only going to become more difficult for folks to pay their credit card bills and car loans…
That’s because the economy is barely growing. As regular readers know, it’s growing at the slowest pace since World War II. And it’s only getting worse.
Meanwhile, debt is growing at the fastest pace in years.
This can’t go on forever.
As the economy weakens, more Americans will fall behind on their debts. Credit card companies, banks, and other lenders will see huge losses. Many retailers will also see sales plummet.
• E.B. Tucker, editor of The Casey Report, just shorted a company that depends heavily on cheap credit…
Shorting is betting that a stock will fall. If it does, you make money.
Nearly 62% of this company’s customers pay with credit. A “spend now, pay later” business like this can work when the economy is growing. It doesn’t work well when the economy is shrinking. Folks buy less stuff once they realize they can’t really afford it. Some customers don’t pay back their loans.
E.B. says this is already happening at this company. He wrote in this month’s issue of The Casey Report:
From 2014 to fiscal 2016, the company’s annual bad debt expenses rose from $138 million to $190 million. That’s a 30% increase. Over the same period, credit sales grew by only 20%. That means bad debt expenses rose 50% faster than credit sales.
If this continues, the company could end up with huge piles of unsold inventory. To pay the bills, it may have to sell merchandise at deep discounts, even if it means losing money on every sale.
In less than two weeks, this short has made Casey Report readers 5%. But that could just be the start. According to E.B, there’s “more pain to come as credit financing dries up…sales continue to drop…and more loans go unpaid.”
You can learn more about this trade by signing up for The Casey Report. If you sign up today, you’ll get 50% off the regular price. You can learn how by watching this short presentation.
You will also learn why today’s “credit crunch” is the No. 1 early warning of the next big financial crisis. More importantly, you’ll learn how to turn the coming crisis into a moneymaking opportunity. Click here to watch this free video.
Chart of the Day
Airline stocks are breaking down…
Airline stocks have been one of the hottest investments since the end of the 2008 financial crisis. The Dow Jones U.S. Airlines Index, which tracks major airline stocks, surged an incredible 861% from March 2009 through December 2014. It’s since fallen 26%.
You can see in today’s chart that airline stocks are in a sharp downtrend. And if the economy gets as bad as we think it will, the sector could plunge.
In the February issue of The Casey Report, E.B. Tucker wrote that the good times were ending for the airline industry. He put his money behind this call by shorting one of America’s most vulnerable airlines. This short has returned 20% in four months.
And that’s just one of six holdings in E.B.’s portfolio that’s up 20% or more right now. To learn more about E.B.’s investing approach, watch this short video.
Delray Beach, Florida
June 21, 2016