The Next Subprime 'Time Bomb' Is Ticking (Here's How You Could Profit from It)

dollar is a time bomb!!
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By David Goodboy

We all remember the subprime mortgage crisis. The financial system was thrown into chaos, and many homeowners lost their homes during these dark days.

Fortunately, the vast powers of the Federal Reserve were summoned to help stabilize the housing market, and along with it, the entire economy. The Fed worked its monetary magic, and the housing market is finally returning to normal.

However, there is another crisis brewing just under the economy's surface.

The sector this potential crisis is in isn't as large as the subprime mortgage sector, but it's still a $27 billion sector, according to Forbes magazine. In fact, Forbes reports that 1 in 4 Americans may be participants in this potential crisis.

Driving Toward a New Economic Cliff

I became aware of this potential time bomb last year. A close friend was financially destroyed by the subprime mortgage crisis. He is an investor and was overleveraged on more than a dozen investment properties. He was finally forced to declare bankruptcy to get out from under the mountain of debt.

Within a week of the bankruptcy filing, he started getting letters from companies like Wells Fargo (WFC) and General Motors (GM). While my friend was used to getting nasty letters from banks and finance companies, these letters were very different. These were not demand letters challenging his bankruptcy, threatening lawsuits or anything the least bit negative. Believe it or not, these letters were pre-approval letters for auto credit!

In fact, one financial company actually sent my bankrupt friend a check for $30,000 to be used at any participating auto dealer for the car of his choice. He took the check and bought a used BMW.

I couldn't believe it. Here's a bankrupt guy with a credit score in the low 400s, working a menial labor job, with automobile credit being thrown at him by several large and reputable lenders. These were not the "buy here, pay here" sharks at the corner used-car lot.

While I was happy for my friend, I was reminded strongly of the subprime mortgage crisis. Folks with really bad credit and sketchy employment were able to get mortgages that they really couldn't afford during the subprime mortgage crisis.

Now the same thing is happening with auto loans.

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The Numbers Behind the Looming Bust

I have started to see more and more advertising for this type of lending, raising the question of whether the subprime auto loan market will explode like the subprime mortgage market. I wondered, if this situation is truly a financial bubble, when will it burst -- and how can I best position myself to profit?

After asking these questions, I thought of John Paulson making $3.7 billion during the collapse of the subprime mortgage market. The thought of replicating just a tiny fraction of Paulson's success motivated me to find the answer. Here's what I discovered.

Bloomberg has reported the average loan to value, or LTV, for subprime auto loans has increased to 114.5 percent this year from 112 percent in 2010. Loan to value is a measure of the money lent as a percentage of the market value of the asset. A 114.5 percent LTV means that the auto loan is for 14.5 percent more than the actual value of the car. For comparison, the average LTV of subprime auto loans in 2008 maxed out at 121 percent.

This increase in LTV is signaling greater competition and a decrease in underwriting guidelines in the subprime auto sector. In other words, more and riskier loans are being made.

Subprime auto lender Exeter Finance, recently acquired by the Blackstone Group (BX), has reported an increase in late payments from 5 percent in 2012 to 7.8 percent this year. However, it's important to note that subprime lenders Banco Santander's (SAN) U.S. consumer unit and GM Financial have reported lower loan losses from 2010 loans than losses from loans originated in 2007 and 2008.

How to Profit If the Bubble Bursts

GM, which is heavily involved in subprime lending, has improved dramatically since its pre-bailout days. The company has posted more than $1 billion in net income in each of the past four quarters.

However, 88 percent of GM's North American consumer finance receivables are firmly in the subprime category. In fact, GM listed consumer receivables 31 or more days late at $1.1 billion, a 34 percent increase from last year. Making matters worse, auto dealers with weak financials currently owe GM nearly $1.6 billion, per Bloomberg. This is up from just $12 million, indicating a radical increase.

The question is, can GM remain profitable after the U.S. Treasury pulls completely out? Remember, the Treasury Department filed its final plan to close out its GM holdings in September.

I think GM made the mistake of placing short-term profits before long-term goals with its aggressive pursuit of highly risky subprime loans. As more and more subprime borrowers default, GM's bottom line will be hurt substantially. No company can withstand massive defaults of loans.

The technical picture shows a double top in the $41.50 range on the daily chart. I would not be surprised to see General Motors trading at $28 within the next 15 months.


Risks To Consider: Shorting any stock can be very risky due to the theoretical unlimited upside. Be sure to always use stop-loss orders and diversify when investing.

Action to Take: I like General Motors as a short if price drops below $40 on a daily close. Placing initial stops at $42 and a target price of $28 makes solid investing sense.

P.S. Are you terrible at knowing when to sell? You're not the only one. Fortunately, a former trust fund manager created a two-part blueprint that reveals when to sell... and when to buy. It's been 85 percent accurate for over four years -- and just closed out a 70 percent gain. Click here to access it now.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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Timothy Hedrick

"David Goodboy does not personally hold positions in any securities mentioned in this article." However on January 3rd..... Please...

January 03 2014 at 10:10 PM Report abuse +1 rate up rate down Reply
fakeconomics1

drbuckles---Then why our consumers (voters) are not waking up and say enough is enough? Why are we allowing these bank, oil industry, airlines, insurance, and wall street mergers? You have raised a great question

January 03 2014 at 8:33 PM Report abuse rate up rate down Reply
drbuckles

And where did the cheap money come from, the FED. Essentially the Fed and its QE bailing the corproations and bankers out of their debt run businesses, and then lobbying to the Congress to have the tax payers pay for it by an austerity program. Bubbles are created by free money and out of control banking derivative use. The big one is still coming and the recession we just had was just a warning.

The money changers will create another war to distract us from their debt seeking crony capitalist businesses, and they'll make even more money off of the war, until the public decides enough, similarly to the last depression.

January 03 2014 at 8:14 PM Report abuse +2 rate up rate down Reply
1 reply to drbuckles's comment
fakeconomics1

Great post and I like it ---Thanks

January 03 2014 at 8:28 PM Report abuse rate up rate down Reply
alfredschrader

Anybody on here discover this on their hard drive: INSTICQ ? ICQ is a chat software owned by
Digital Sky Technologies, a firm bank rolled by Alisher Usmanov and acting as a front for the KGB (FSB).

January 03 2014 at 8:00 PM Report abuse +1 rate up rate down Reply
2 replies to alfredschrader's comment
fakeconomics1

Thanks for the info.

January 03 2014 at 8:29 PM Report abuse rate up rate down Reply
fakeconomics1

Is Puffington Host also belong to KGB?

January 03 2014 at 8:39 PM Report abuse rate up rate down Reply
fakeconomics1

My generic belief---God created Heaven and Congress (The Hell)

January 03 2014 at 7:39 PM Report abuse +1 rate up rate down Reply
fakeconomics1

Some of you might wonder why I support Auto Bail Out? It saved millions of jobs in mid-west and we got our money back and more. About ACA!! I like the fact that no body has to die because of not having insurance and we don't have to become hostage to insurance industry because of pre-existing conditions and I don't see any alternative plans to ACA

January 03 2014 at 7:38 PM Report abuse +1 rate up rate down Reply
fakeconomics1

You too Brutus!! (Obama) and you have been pumping $80 billions a year into wall street banks and you are no friend of ordinary Americans! But two things I liked from your administration is bailing out auto industry and half ass job on ACA.

January 03 2014 at 7:33 PM Report abuse +1 rate up rate down Reply
fakeconomics1

Show me a member of congress who do not take bribes from Wall Street?

January 03 2014 at 7:21 PM Report abuse +1 rate up rate down Reply
fakeconomics1

Did you ever watch CNBC and FOX Business? It is sad how they speculate, manipulate and mislead.

January 03 2014 at 7:19 PM Report abuse +1 rate up rate down Reply
fakeconomics1

Congress is full of Wall Street Puppets and Remember McCain wanted to cancel his campaign debate in order to help wall street with TARP.

January 03 2014 at 7:17 PM Report abuse +1 rate up rate down Reply