Mish's Global Economic Trend Analysis

Auto Originations Hit 10-Year High, Subprime Loans Fuel Growth; Party About Over?
Terrorist Mastermind Killed in Raid; France Blames Belgium; Criticized Belgium Locks Barn Door Read
Philly Fed Slightly Positive After Two Months of Contraction, but New Orders and Shipments Negative, Workweek Collapsed
Nifty-Fifty Becomes Fab-Five; Return of the "Four Horseman"; Ozone Layer

Auto Originations Hit 10-Year High, Subprime Loans Fuel Growth; Party About Over?

Posted: 19 Nov 2015 01:01 PM PST

A New York Fed study notes a huge surge in subprime auto loans after taking into account a newer, more accurate methodology.

The new approach takes into consideration new originations as opposed to new accounts. The result was an upward shift in the volume of newly originated auto loans by 25 to 30 percent.

Newly Originated Loans

A credit score of 660 is the generally acknowledged line between good and poor credit. Scores below 620 are outright awful.

With those numbers in mind, let's see how things stack up.

Originations by Credit Score

Originations hit $156.8 billion in the third quarter, the highest level in a decade. Loans to borrowers with scores below 620 jumped to nearly $40 billion in the second quarter.

Loans to borrowers with credit scores below 660 are the highest since 2005.

The reports notes "With the surge in the second quarter, the total number of subprime originations has since reached a ten-year, pre-crisis high, only surpassed by the unique periods in 2005 that were associated with 'employee pricing' promotions and record sales for the auto manufacturers."

Will "employee pricing" once again mark the last hurrah?

Auto Finance Companies vs. Banks and Credit Unions

Note the jump in truly awful credit score originations

Delinquencies Tick Up

The uptick in delinquencies is modest so far. Nonetheless, some banks have become concerned.

For example, the New York Times reported in March Wells Fargo Puts a Ceiling on Subprime Auto Loans.

Wells Fargo, one of the largest subprime car lenders, is pulling back from that roaring market, a move that is being felt throughout the broader auto industry.
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The giant San Francisco bank, known for its stagecoach logo and its steady profits, has been at the center of the boom in making loans to people with tarnished credit scores. Wall Street, meanwhile, has been bundling and selling such loans as securities to investors, reaping big profits while allowing millions of financially troubled borrowers to buy cars.

But now, amid signs that the market is overheating, Wells Fargo has imposed a cap for the first time on the amount of loans it will extend to subprime borrowers.

The bank is limiting the dollar volume of its subprime auto originations to 10 percent of its overall auto loan originations, which last year totaled $29.9 billion, bank executives said.

Party About Over?

Typically banks react too late, after most of the damage has been done. It's the same every cycle. By the time credit is available to those on the bottom rung, the party is about over.

Regardless, and as I have pointed out numerous times, the surge in autos is one of the few things holding up consumer spending and is also the only bright spot at all of manufacturing.

What cannot go on forever won't. And it's nearly the end of the line for autos. Repercussions will be deeper than economists expect.

Mike "Mish" Shedlock

Terrorist Mastermind Killed in Raid; France Blames Belgium; Criticized Belgium Locks Barn Door Read

Posted: 19 Nov 2015 12:00 PM PST

Terrorist Mastermind Killed

The Financial Times reports Terrorist Ringleader Killed in Raid

Abdelhamid Abaaoud, the Belgian described as the ringleader of the group behind the attacks in the French capital that killed at least 129 people, died during the seven-hour siege in Saint-Denis.

Confirmation that Abaaoud, 27, was in Paris will prompt fresh questions about intelligence leading up to the attacks. The Belgian national had been presumed to be in Syria, where he had joined the Islamist militant group Isis.

"We have to be extremely careful," Laurent Fabius, France's foreign minister told France Info radio before the confirmation. "If Abaaoud has been able to travel from Syria to France, it means that there are failings in the whole European system."

Failings in Whole European System

That there could be "failings in the whole European system" is shocking news. Just look at the massive number of controls in place that should have prevented this tragedy.

Chancellor Merkel and EU President Jean-Claude Juncker welcome refugees from war-torn countries with open arms.
Millions of refugees allowed entry.
Fake passports not detected.
Belgium, France and other countries allow citizens to go to Syria and fight alongside ISIS and return as if nothing meaningful transpired.
France receives multiple terrorist warnings from Turkey but ignores them.
Germany intercepts massive weapons cache headed for Paris but essentially does nothing.

Surely, at least one of those strong controls should have worked. Alas, things slipped through the cracks, and we are now faced with the shocking revelation by Laurent Fabius that there may be "failings in the whole European system."

Mish readers are undoubtedly as shocked by this revelation as I am.

France Blames Belgium

In the wake of unforeseen and unknowable in advance security failings, Belgium Cries Foul Over French blame Game.

The Belgian government issued a private diplomatic protest to France this week over what it perceives as the French leadership's unfair blaming of Belgium for Friday's terrorist attacks in Paris, saying that homegrown jihadism is as much a problem for France as it is for Belgium.

The protest, made by Prime Minister Charles Michel's chief diplomatic adviser to the French ambassador to Belgium on Tuesday, comes after international scrutiny has focused on the Brussels neighbourhood of Molenbeek, home to at least three of the attackers and the militant believed to be the plot's architect.

Belgian officials said only one of the three teams that carried out the Paris attack was linked to Molenbeek, and that France was attempting to point the finger at Belgian failings to cover up its own domestic lapses in countering Islamic extremism.

In a speech to parliament on Thursday morning, Mr Michel came to the defence of his security services, saying they were not to blame for what happened in Paris. "I do not accept the criticism which are aimed at denigrating the work of our security services," he said.

One official said Brussels was particularly irked at the claim by Bernard Cazeneuve, French interior minister, that the attacks had been organised in Belgium.

Criticized Belgium Locks Barn Door

Although Belgium security or lack thereof had little to do with the problem, Belgium Strengthens Counter-Terrorism Measures.

Belgians who return from fighting in Syria face jail as part of a host of measures unveiled by the country's government aimed at stemming criticism of its handling of counter-terrorism.

Prime Minister Charles Michel announced an extra €400m for Belgium's security services, which have been slammed for a series of blunders in the run-up to last week's attacks in Paris.

Belgium has more foreign fighters per capita than any other EU country, with the bulk of these coming from just a handful of communities in cities such as Brussels and Antwerp.

At the moment, few of the suspected 500 Belgian citizens who have traveled to fight in Syria are in jail. Mr Michel said: "The rule must be clear. For jihadis returning, their place is in prison."

Reflections on Barn Door Locking

Gee, who coulda possibly thunk letting jihadis go to Syria and return unabated was a bad idea?

This is yet another one of those unforeseeable things you have to find out for yourself after problems occur.

However, we can take comfort that some of the 500 Belgian citizens who traveled to Syria to fight alongside ISIS are in jail.

How many of the 500 are in jail? Answer "a few". And the rest? I suspect they have fled the country or soon will.

Meanwhile, neither Angela Merkel nor Jean-Claude Juncker have rescinded their open arms policy.

After all, massive security measures are in place. And those existing security measures coupled with new security measures like barn door locking provide assurances that no one will again sneak in from Syria, through Greece, on a fake passport and make their way to Paris.

Mike "Mish" Shedlock

Philly Fed Slightly Positive After Two Months of Contraction, but New Orders and Shipments Negative, Workweek Collapsed

Posted: 19 Nov 2015 10:38 AM PST

In what likely amounts to a bit of economic noise, the Philadelphia Fed regional manufacturing report posted a rise of 1.9, slightly beating the economic consensus of 0.

Unlike Monday's Empire State report which is pointing to out-and-out weakness for the November factory sector, the Philly Fed's November report is no worse than flat and points to little month-to-month change for a sector, however, that continues to struggle. The Philly Fed index ended two months of contraction with a small gain of 1.9 which is near enough to the Econoday consensus for no change. But new orders are not in the plus column, at minus 3.7 for a second straight negative score. Shipments are also in the wrong column, at minus 2.5 for what is also a second straight negative month. The average workweek is down very sharply in the Mid-Atlantic factory sector, at minus 16.2 which doesn't point to strength ahead for employment.

But employment is one of the positives in the November report, at plus 2.6 and up from minus 1.7 in October. Still, this is a small gain. But one indication pointing to employment strength ahead is the first upturn in backlogs since June, at plus 2.4. Also pointing to employment strength is a strong 6.7 point gain for the six-month outlook to 43.4 where the future employment component is very strong, up more than 14 points to 28.2.

There's good news and bad news in this report but compared to the report's own trend, the news is mostly good and underscores Tuesday's strong bounce in the manufacturing component of the industrial production report. Not strong at all, however, have been some other regional Fed reports with Kansas City to give its November update tomorrow.

Philly Fed General Activity Indexes

The above graph and table below from the Philly Fed November 2015 Manufacturing Business Outlook Survey.

Philly Fed November Stats

The positive number in unfilled orders likely reflects the huge decline in the average workweek.

The positive general activity is not consistent with a hugely declining workweek, contracting shipments, or contracting new orders.

Most likely, the positive general activity number is random noise or a meaningless improvement. The best one can say is "things are getting worse at a decreasing pace, except of course for the workweek collapse."

Mike "Mish" Shedlock

Nifty-Fifty Becomes Fab-Five; Return of the "Four Horseman"; Ozone Layer

Posted: 19 Nov 2015 12:59 AM PST

Anyone recall the logic in the 1960s and 1970s that suggested there were only 50 stocks one needed to look at, and those 50 stocks could never go wrong?

That theory was labeled the "Nifty-Fifty".

Nonetheless, the long bear market of the 1970s that lasted until 1982 caused valuations of the nifty fifty to fall to low levels along with the rest of the market, with most of the Nifty-Fifty under-performing the broader market averages.

The "Nifty-Fifty" of the 1960s gave way to the "Four Horseman" of the tech era: Microsoft, Dell, Cisco and Intel.

Microsoft

Microsoft opened the year 2000 at $41.19.
It is now $53.85.
Congratulations, you are ahead, but it did take 14 years. Counting dividends, you are now well ahead.

Dell

Historically Dell last traded at $13.73 on 10/29/2013. It opened the year 2000 at $50.40. You are seriously underwater and will never catch up. Dell is now private.

Intel

Intel opened the year 2000 at $29.65. It is now $33.16.
Congratulations, you went ahead in 2014.
Does it feel like it?

Cicso

Cisco opened the year 2000 at $47.43. It is now $27.12.
You are seriously underwater still.

If you bought the hype-of-the-day "Four Horseman" in 2000 and held on, you are still underwater fifteen years later.

Recall that EMC, Oracle, Sun Microsystems, and Juniper Networks were all regarded as must own for the long haul "gorillas".

New Four Horseman

On January 6 2012, GeekWire proclaimed Meet the new 'four horsemen' of tech: Sorry, Microsoft, Dell, Cisco and Intel.

Oh, how the technology landscape has changed. Ten years ago, the industry was dominated by names such as Microsoft, Intel, Dell and Cisco.

Fast forward to 2012, and the makeup looks quite different. CNN recently surveyed 30 technology experts and thousands of readers to come up with what it dubbed the Four Horsemen of tech.

Respondents were asked to choose only from publicly-traded companies, so Facebook didn't make an appearance.

Apple easily was the top vote getter, followed by Google, Amazon.com and — an oldie, but a goodie — IBM.

IBM, Apple and Amazon certainly could qualify as comeback stories, while Google has yet to really be tested in terms of its market dominance in Internet search. (Possibly signaling a fall).

Nonetheless, what's fascinating is how Microsoft no longer makes the cut. (In reader polling, IBM edged out Microsoft with 67 percent of the vote). Microsoft is still a juggernaut, but as CNN's editors point out "the PC is no longer driving technology growth."

Final Four, Elite Eight, Sweet Sixteen

Amazon, Google, Apple, and IBM were billed as the new four horsemen in 2012.

Oracle, Salesforce, Microsoft, and Cisco were in the "elite eight" with Qualcomm, Verizon, VMware, Samsung, Nuance, eBay, ARM, and Dell rounding out the "sweet sixteen".

Really? Yes, really.

Giddy Up!

In July of 2015, CNN Money proclaimed Why you need to own the Four Horsemen of Tech.

Move aside IBM, you were replaced by Facebook as a "need to own".

Fab-Five

On November 16, Yahoo Finance reported How A Monster Year For Amazon, Google And Facebook Is Carrying The Stock Market.

There are 500 companies* in the S&P 500, but 2015 has been a year for the top 1%. Five companies -- Amazon.com, Alphabet/Google, Microsoft, Facebook and General Electric -- have collective returns that account for more than the entire return of the index year-to-date, according to a note from Goldman Sachs.

Excluding the aforementioned quintet, the S&P 500 would be down 2.2% this year, instead of being virtually flat, up 0.1%. Goldman's chief U.S. equity strategist and the firm's portfolio strategy research team note that narrow market breadth, with just a handful of strong performers carrying the load for a slew of weaker performers, tends to favor high-quality stocks with strong balance sheets and lower volatility.

Netflix also warrants mention, as the S&P 500's top performer for the year. But even with its stock up 120% in 2015, Netflix is far smaller than the companies above and its $46 billion market cap dims its influence on the cap-weighted S&P.

Notably absent from the list is Apple, which has returned just 3.7% in 2015, and Wal-Mart, down 33% and suffering through its worst year in stock performance terms since 1973.

Fab-Five Drive S&P

Warnings Signs

Breadth is a huge warning sign. That fewer and fewer stocks participate in rallies is synonymous with topping action.

Netflix Key Stats

Check out the Netflix Key Stats.

Trailing PE: 319
Forward PE: 462
Market Cap: $51.53 billion
Book Value: $5.07 per share
Share Price: $120
Price/Book: 23.09

Amazon Key Stats

Trailing PE: 950.63
Forward PE: 117.65
Market Cap: $311.04 billion
Book Value: $26.50 per share
Share Price: $663.54
Price/Book: 24.27

Facebook Key Stats

Trailing PE: 108.20
Forward PE: 37.68
Market Cap: $304.77 billion
Book Value: $14.72 per share
Share Price: $107.77
Price/Book: 7.14

Hey, no problems there!

After all, Facebook and Amazon are "need to own" stocks according to CNN Money.

Ozone Layer

Momentum players ignored the PE warts, thereby pushing the market higher and higher so that it's now well into the ozone layer.

GMO Forecast

In contrast to mainstream media "must own" analysis, GMO just came out with its Seven Year Forecast.

GMO's Disclaimer

"The chart represents real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward‐looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forwardlooking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years."

Real Returns

GMO depicts "real" inflation adjusted returns. If one assumes 2% inflation and the forecast holds true, then seven years from now, the stock market will be where it is today.

But the stock market will not be flat for seven years. It is far more likely to look like this.

Greater Fools Game

I actually believe GMO is overly optimistic.

Only those playing the greater fools game (whether they realize it or not) are investing in stocks at these prices.

Nifty-Fifty Becomes Fab-Five

A friend of mine pinged me with this comment in regards to the "Fab Five":

I think this is another one of those instances where the extreme nature of the topping process (and the market advance has thinned out to an incredible extent) probably hints at the significance of the top being formed. The only other time a topping process took this long was during the last stage of the tech bubble.

If the future rhymes with the handful of previous cycles we have to guide us, the "real" stock prices we see today may not be seen again for another 20-30 years.

Valuations Matter

There is never a point in which a handful of stocks or even a basket of 50 stocks are "must own" and you can put them away and forget about them. Valuations must be taken into consideration along with changing times and changing technology.

Yet, here we go again, with the same theories telling people they can do precisely that. Today's version of the "Nifty-Fifty" is now called the "Fab-Five".

And another set of "Four Horsemen" are galloping again .... for now.

Mike "Mish" Shedlock

Economy News

19.11.15

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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