Flashback to 2008 when consumers, who were delinquent on their mortgages, were able to stay in their house for a few years … Then once their credit was cleaned up they would go out to buy another house …

 

Well, today a similar thing is happening in the car market … When used car prices spiked during the Covid pandemic consumers had to take out huge loans … 

 

As prices drop, they have negative equity in their car and will turn the keys over to the banks …

 

 

We are talking about $1trn in auto loans and Wells Fargo attributed higher loss rates for car loans as a contributor to the increase in their write-offs last quarter. 

 

Prices may come down much further as the Repo Man comes after delinquent borrowers and they just hand them the keys …

 

Today, we’ll look at who will get hurt the most and trade to consider capitalizing on it …

 

Charge-offs for Auto Loans Quadruple

 

Ally Financial, a top auto loan originator with 6% of the market share, said their loan losses quadrupled in Q3 … 

Now with prices already down 7% with a lot further to go banks are pulling back their production of loans … We are talking about losses on loans that originated last year …

 

You can be sure this will get much worse as unemployment rises into next year … Hiring plans as only 22% of businesses survey plan to increase headcount over the next 3 months … That is down from 50% last quarter. 

 

Guaranteed Recession Signaled This Week

 

Jerome Powell’s number one signal for the recession was confirmed this week as the 3-month T-Bill rates went above the 10 year rate. 

 

Notice the 4.05% yield on the 3 month Bill versus the 3.95% 10 year yield. The spread has inverted this week and signals a recession in the following 6-9 months …

 

 

Powell has said in the past that this is the spread the Fed uses as a signal for a recession. So, he will have some cover next week if he wants to shift the policy to be more dovish. 

 

Recession brings layoffs, delinquencies, and defaults, which is not good for banks … Especially regional banks that will have no shot at a bailout when times get tough …

 

What’s the Trade?

 

I have had some great success this year shorting the SPDR S&P Regional Banking ETF (KRE) … 

 

I believe many of the banks held within this ETF will struggle and a few may fail as loan defaults build into the second half of next year … 

KRE Chart Set-up

 

KRE has enjoyed a relief rally from the lows reached earlier in the month… It may get a boost from Powell next week on any step-back from tightening but it will be short lived. 

 

I am looking to execute a bearish options strategy either near the $64 level or on a break below $62 …

 

Notice how much lower the regional banks trade during Covid and even more so during the 2008 housing crisis … 

 

 

The issue is with the consumer as inflation remains stubbornly high and wages stagnant as unemployment rises … 

 

Banks will have to sell billions of dollars worth of cars at much lower prices … And at a minimum, I expect KRE will ultimately trade towards the low of Covid… However, for this trade, I am playing for a test of the lows.

 

Bring It Home

 

There will be crashes around the world for years due to many developed nations dealing with:

• Inflation 
• Being buried under massive debt
• Dealing with an energy crisis with no solution in sight
• De-Globalization which hurts trade and supply chains

 

Due to a high probability of global recession in 2023 just about every area in banks will get hit … 

 

HOT OFF THE PRESSES

 

And right on queue Capital One reported Q3 earnings …  

 

The first paragraph of the announcement …

 

Capital One Financial (NYSE: COF) stock dipped 4.5% in Thursday after-hours trading after the lender’s third-quarter earnings missed estimates as it continues to increase its provision for credit losses, adding pressure to potential losses that it could see in the wake of credit risk.

There will be so many twists and turns that will make this crisis unique to those in the past … 

 

However, a couple of issues they all have in common are high leverage and credit risk … That is a lethal combination that ultimately becomes a daisy chain of failures …

 

Being on the outside looking in is huge edge traders have on the banks … Banks is the equivalent of selling premium in the options market …

 

80% of the time they do very well but it’s the 20% that can take you down. 

 

Focus on the 20% and you can beat the banks at their own game … Subscribe to Power Income Trader and you will receive insights into how to recognize when banks are offside and how you can take advantage of their misfortune … 

 

Call 888-872-3301 to speak to our Option Pit customer care team … You will be glad you did …

 

I look forward to working together … Until then …

 

Live and Trade With passion My Friend, 

 

Griff