Dear mainstream financial media: are you trying to make Citi’s Mary Kane lose her fucking mind? Because that’s what it seems like.
Regular readers know Mary.
Mary has been on a one-woman crusade to dispel the notion that subprime auto is the next “big short” for years.
In fact, Mary is so frustrated with the suggestion that subprime auto is the next “big short” that she even took her exasperation out on the film The Big Short when, early last year, she said this in a note to clients:
It seems like too many people have seen the movie “The Big Short” and are starting to think the movie heroes’ short strategy would translate to the ABS market. By the way, the ABS conference did NOT take place at Caesar’s Palace that year as per the film, it was at The Venetian. So, it’s not wise to believe everything you see in a movie and hit films are not the best source for trade ideas.
As we’ve quipped more than a half-dozen times:
Because the movie confused Caesar’s Palace with The Venetian, you shouldn’t short subprime auto. Makes sense, right?
Mary calmed down for approximately six months, but starting earlier this year she went back on the offensive once it started to look like America’s auto bubble (which she’ll tell you isn’t a bubble at all) was bursting.
Once again, she took aim at The Big Short, whose tortured protagonist Steve Eisman had the nerve to tell Bloomberg in a March interview that he was worried about subprime auto.
Or at least Mary meant to take aim at Eisman. But what she ended up doing was taking aim at an unwitting saxophonist named “Steve Eisen” who probably wasn’t aware that he was supposed to “know something the market didn’t” about ABS:
A couple of weeks after reminding “Steve Eisen” that he didn’t know shit about something he didn’t know shit about, Mary came (back) out swinging, this time accusing investors and the media of perpetuating an urban legend about a mythological dragon in a lake. To wit:
That brings us to Friday which finds Mary one step closer to insanity.
In her latest, she’s going full-Trump, calling “recent financial news articles” about auto lending “FAKE News” (all caps) and insisting that there’s a lot of “unappreciated good car-ma” here.
Here are some highlights from Kane’s latest attempt to disabuse you of what she quite clearly believes is a dangerous take on the US auto market (and yes, anything that’s in all caps was written as such in the original).
FAKE News — We believe recent financial news articles comparing growth in auto lending to the housing bubble are inaccurate and irresponsible. We discuss why in this note. Our May 11 investor poll reveals that 89% of participants are not seriously concerned; of which 39% believe the media is blowing the issue out of proportion.
Transportation NEED — The amount of mortgage debt outstanding measures $8.6 trillion versus $1.2 trillion of auto debt, rendering mortgage debt roughly 7–12 times greater than auto debt since 2003 (peaking in Q1 2010). Moreover, car ownership is a NEED whereas home ownership is a WANT: the Census Bureau documents that fully 86.1% of Americans drive to work (including only 10.0% of them that carpool).
No Big Short
Over the past few years we have entertained calls with various market constituents about auto lending in the United States and whether easy financing terms are driving robust auto sales. We continue to think this line of thinking is groundless; however, scrutiny has intensified recently with the market’s focus on off-lease vehicles, off-rental values and residual value pressure. A groundswell of questions have materialized anew in recent weeks, with a majority of the queries coming from non-ABS investors that are fearful of missing the next ‘big short’. In our view, there is no “big short” story behind the persistently robust level of vehicle sales and we decided to pull together some facts about auto lending, how the ABS market functions and why we are not worried about the auto ABS market.
Finance Model for OEMs
New US vehicle sales touched nearly 17 million units during 2014 and topped 17 million units in 2015 and 2016, triggering a hailstorm of questions from the many parties that had incorrectly forecast auto sales. There are many reasons for this error, but mainly that most forecasters failed to consider all the factors influencing vehicle density: 1) vehicles per household, 2) miles driven and 3) vehicle replacement rate. More durable, longer-lasting vehicles and fewer miles driven pushed out the US replacement cycle by years, and fueled the vehicle sales machine. Nonetheless, most experts agree that the vehicle replacement cycle should be drawing to a close during 2017. Indeed, the Automotive Lease Group, whom we recently hosted on a call, sees some headwinds ahead1 : 1) plateauing demand for new cars, 2) elevated new car incentives and 3) elevated used car supply. They project 17.4mm units for 2017 followed by 17.5mm in 2018–2019, 17.2mm in 2020 and 17.1mm in 2021.
Vehicle ownership represents the most widely held nonfinancial investment of US consumers, as the vehicle ownership rate was 86.3% as of 2013, according to the US Survey of the Consumer versus 65.2% for primary residence ownership (Figure 1). Meanwhile, the US economy is nearing 10 years since the financial crisis and vehicle sales have been one of the few bright spots in the economy since then. In our view, US consumers did not feel sufficiently secure in their jobs or optimistic about the future and decided to fix the old car and keep driving it, which delayed the sales recovery and then sustained it. NADA data appears to corroborate that view, in that there are 264 million vehicles in operation in the United States; the average vehicle age continues to rise and is currently 11.6 years (Figure 2).
[Heisenberg aside: don’t you love how they put the car clipart in there, as if you had already forgotten they were talking about cars?]
Six Times more Auto Lending than Securitization
Because vehicles are such an expensive capital purchase and have a long useful life, many consumers finance the purchase of a new vehicle and virtually all OEMs offer financing, subject to the consumer’s eligibility. According to Experian’s Q4 2016 “State of the Automotive Finance Market”, consumers financed some 85.2% of new vehicle purchases in Q4 2016 and 53.5% of used vehicle purchases. Some 28.94% of the new vehicle sales were leased. Banks hold the largest market share of total vehicle financing (new & used, loan & lease), accounting for 32.9% in Q4 2016, while credit unions register another 19.1%. The captives accounted for 28.4% and finance companies round out the market, with 13.5% (Figure 3).
Auto ABS Market Share of Outstanding Auto Loans Dropped by 50% since Pre-Crisis
Banks and credit unions are the largest US auto lenders, yet are NOT large users of securitization financing. In fact, securitization provides financing for a MINORITY of the auto lending in the United States, as Figure 4 shows. Moreover, the share of auto lending financed in the securitization market has dropped 50% since pre-crisis. The securitization share of total US auto loans outstanding peaked at 24% in 2002 and amounted to only 12% in Q1 2017. Figure 5 shows the growth of outstanding auto loans since the financial crisis, reaching $1.2 trillion in Q1 2017 while auto ABS outstanding reached $142bb in Q1 2017.
Auto Lending by Credit Score Reveals Subprime Proportionate to Population
The amount of auto loan origination of consumers with a risk score of 660-or-less (defined as subprime) amounted to $42 billion for Q1 2017, representing 31% of total Q1 2017 lending (Figure 7) As the prior figure showed, subprime auto ABS as a proportion of all outstanding auto ABS is 25%. If one were to segregate only auto loan and auto lease ABS, subprime auto constitutes 34% of total, which is also proportionate to overall US lending.
And that’s not even a fourth of it.
This note (if you can find it) is Mary’s “don’t panic” magnum opus.
Here’s the conclusion:
Summary: Seat Belts On but Crash Helmets Unnecessary
The auto ABS market is the largest of the high quality ABS sectors and has a long and relatively unblemished history. Yet, the market has come under elevated scrutiny in recent years by various parties looking for the next “Big Short”. Auto sales are maturing and the OEMs are beginning to report earnings pressure brought on by residual value stress and this has brought extra attention to the sector. We discussed various sectors of the auto ABS market, including prime auto loan, prime auto lease, subprime auto loan and rental car ABS. Each has its own unique characteristics, structures and risks. Nonetheless, we would make 3 overall points: 1) securitization represents only 12% of all auto loans in the United States, thus the market is clearly NOT driving auto sales, 2) subprime auto lending represents only 31% of all auto lending in Q1 2017, only 3 percentage points above the crisis trough; and 3) ABS market structures have largely built in future residual value pressures, but the robust credit enhancement also offsets residual variability.
Or, summed up:
(note: that’s not actually Mary)