This $1 Trillion Market Is Cracking…Here’s How to Profit From Its Collapse

By Justin Spittler

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.  

Companies are hiring at the slowest pace in six years. Corporate earnings are drying up. And major retailers are warning of big sales declines for this year.

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.

Regards,
Justin Spittler

The article This $1 Trillion Market Is Cracking…Here’s How to Profit From Its Collapse was originally published at caseyresearch.com.

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J.W. Jones: The SP 500 and the Dollar Ahead of the Fed Meeting

The Federal Reserve is holding a two day meeting Tuesday and Wednesday of this week. Market participants are expecting the Federal Reserve to prop up financial markets yet again with some grand new plan. The fact is the Federal Reserve is running out of bullets.

Interest rates cannot move much lower in terms of the Federal Funds rate, additional quantitative easing seems redundant since Treasury yields are close to all time lows, and finally a twisting of maturities will do little to alter the current economic conditions. The Federal Reserve is just repeating practices which have proven over a long term do little to create jobs or get the economy moving in the right direction. A stock market rally does not help a person looking for a job!

It is possible that even if the Federal Reserve proposes additional stimulus the market could sell off. I have been trading less in this environment and have been focusing on looking for trade setups that could work regardless of price action. For now I am sitting predominantly in cash waiting to see how price action reacts to the news flow tomorrow.

S&P 500
If I had to guess, I continue to believe that the S&P 500 will get back to test the key 1,250 – 1,280 price level. While this resistance level is apparent, Mr. Market will be able to tear up traders if price jams into that resistance zone. Mr. Market loves nothing more than to shake people out of positions. If price works higher I would expect the 1,250 – 1,280 price range to offer just enough risk / reward to get investors and traders involved in a choppy trading environment. The key upside levels on the S&P 500 are shown below on the daily chart of the S&P 500 Index ($SPX):



The flip side of that argument would see the S&P 500 jamming into recent resistance around the 1,230 price level. If prices rolled over and momentum picked up, a test of the recent August lows would likely transpire and could produce a breakdown and a lower low.

When looking at recent price action, the S&P 500 Index has put in a series of higher lows which is a bullish signal, however the S&P 500 has a long road ahead to break out above the 2011 highs. If the S&P 500 carves out a lower high on the S&P 500 Index at 1,230, 1,250, or even 1,280 and subsequently takes out the August lows then the secular bear will be back. The weekly chart of the S&P 500 Index ($SPX) shown below illustrates key support levels:



For now I am just going to sit in cash and wait for Mr. Market to provide me with some better clues. The trading range is pretty wide going from around 1,100 to 1,280. What I will be watching for is a strong move supported with volume that pushes price out of this range. As of the close today, price action was trading around the middle of this range but depending on how price action reacts to the news that comes out Wednesday it is possible that in coming days we could see a breakout in either direction.

Dow Jones Industrial Average
It will likely surprise long time readers that I am actually going to comment on the Dow. I will keep this brief, but I wanted to point it out to readers as I have not heard much mention of this pattern in the main stream financial media.

Over the weekend I was looking at some longer term charts and I accidentally stumbled across this head and shoulders pattern on a weekly chart of the Dow Jones Industrial Average. I rarely pay much attention to the Dow as I monitor the S&P 500 closely. However, I could not ignore what I was seeing. I also noted that a similar pattern also exists on the S&P 500.

I am generally not the kind of trader who tries to predict where price action will arrive in the distant future. However, I am not going to ignore clear chart patterns that I recognize regardless of the time frame I am looking at.

For those not familiar with a head and shoulders pattern, it is a very ominous signal. Head and shoulders patterns are generally topping formations that if triggered result in violent selloffs. On this chart the pattern is obvious and if the pattern were triggered the forthcoming price action would be decisively negative for domestic equities. The long term monthly chart of the Dow is shown below:



If the pattern is triggered on an undercut of the March 2009 lows, the head and shoulders formation would produce selling pressure that would target the 3,800 – 4,000 level on the Dow. Yes, you read that right! I want readers to recognize that this pattern is not a given and it could play out over a long period of time. The pattern would suggest that a test of the 2009 lows is possible, but I will leave the likelihood of that test up to Mr. Market.

I view this pattern as a potential warning signal for long term equity positions. Consequently, it is far too early to jump into a plethora of short positions or sell every equity position owned simply because of this pattern. While I do not know where price goes from here or if this pattern will ever trigger, I think market participants should be aware of its existence.

It would take the perfect concatenation of events to push prices down to the March 2009 lows, but unfortunately the condition of social mood paired with all of the risks facing financial markets is notable. The recent selloff in August came on the heels of a head and shoulders pattern that was triggered. We all know how August played out, but this pattern on the Dow Jones Industrial Average has a long way to go before it can even trigger. Time will tell, but readers should at the very least put this chart pattern on your radar!

U.S. Dollar Index
The U.S. Dollar Index has ripped higher by more than 5% since August 29th. The strength in the Dollar has likely been precipitated by fear based on the European sovereign debt and banking crisis. While the Dollar certainly has long term flaws, it may simply be the best of the worst.

If the situation in Europe begins to break down further based on any number of events it could likely push the U.S. Dollar Index considerably higher. My trading partner Chris Vermeulen has been riding this strong impulse wave with his subscribers Swing trading the UUP etf and thinks there is big potential still if  Euro Land fears continue to rise.

The daily chart of the Dollar Index futures is shown below:



Mid-Week Market Trend Conclusion
Wednesday will be filled with a variety of news and headlines. The Greek government is meeting and a news release regarding the conference will likely come out around the time domestic markets in the United States open. The news has the potential to move markets considerably.

In addition, the Federal Reserve is set to end its September meeting and market participants will be sitting on the edge of their seats waiting to hear from the Federal Reserve about any stimulus the central bank may provide.

Overall, the news and headlines on Wednesday will certainly impact the current conditions of financial markets. Right now I am pleased to be sitting primarily in cash. I have a few positions open, but for the most part the trades are not directional and are profitable based on time decay.

The one directional trade I have on presently is a remaining sliver of a position I have already taken profits from and stops are in place. While I have been risk averse the past few trading sessions, I am flush with cash and ready to accept new risk if high probability setups emerge.

However, the best trade can sometimes be no trade at all and I intend to remain patient. Risk is extremely high!

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Debt Issues in the Eurozone Pushing Prices of the U.S. Dollar Index Higher

The U.S. Dollar Index pushed above recent highs on Monday but is experiencing selling pressure today. The selling pressure is being largely dismissed by the S&P 500 but other risk assets such as gold, silver, and oil are benefitting. Members of our service at Options Trading Signals.com understand that I have been focusing on the U.S. Dollar for weeks.

Right now risk assets are trading primarily in the opposite direction of the Dollar. Obviously there are exceptions to the rule, but a strong Dollar has meant lower equity and oil prices specifically. Gold and silver have been holding up well as fearful investors are using gold and silver as safe havens against the potential for a European debt default or a Euro currency crisis.
The U.S. Dollar may have put in a key pivot low on the daily chart back in the early part of May. In addition, the key 200 period moving average is overhead and the U.S. Dollar may be poised to test the key price level in the future. The daily chart of the U.S. Dollar can be seen below:

While the Dollar could roll over and probe lower, the fact that it has put in a higher low and broken out above recent highs is bullish. Similar to the S&P 500, the next few daily closes are going to be critical as it relates to risk assets. I will be monitoring the U.S. Dollar’s price action quite closely as a clue where equities may be headed.