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We're in an auto bubble: Here's how to play it

Nicole Goodkind
·Nicole Goodkind

Uber is reportedly facilitating subprime auto loans to its drivers. According to a report by tech blog Valleywag, the car share company is hooking up drivers with loans through Santander Consumer USA that can be paid off through Uber paychecks. The company is specifically marketing these loans to drivers with bad credit saying, "Even if you have bad credit or no credit at all, we can help you get behind the wheel in a week." Uber contends that these loans are low-risk, but others think that this is indicative of a larger auto-loan bubble in the U.S.

Brad Lamensdorf, portfolio manager at Ranger Alternative Management, tells Yahoo Finance that we’re absolutely in another bubble. He points to low quality loan exposure and artificially high auto sales because of easy credit. Auto loan balances have reached a new record of $900 billion, exceeding the previous 2005-2006 balance by 10%-- deep subprime loans in general have increased 13% alone in Q2 2014.

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Lamensdorf already sees the first signs of deterioration in the market, as delinquencies and repossessions are on the rise. Experian has reported that repossessions by finance companies have doubled to 2.75% in Q2 from 1.13% last year. According to TransUnion the rate of auto loans that are more than 60 days late has risen to 0.95% from 0.87%. There are currently $6.0 billion in 30-day delinquent loans, up from $4.6 billion in Q2 2013.

So how can you play this trend?

“We feel like the auto industry through very aggressive financing and in very different ways [has] pulled through a lot of revenue that normally would not have gotten pulled through if the standards weren’t so easy,” says Lamensdorf. But, “going forward it’s going to be a lot more difficult for these companies to do business in the auto industry…it’s going to be harder to sell and create new auto loans.”

Lamensdorf points to Santander (SC), one of his company’s largest shorts as an example. “They just came out with a very poor quarter and they’re loaded up with this kind of stuff. They’re the epitome of what’s occurred this year-- they have been moving up the lower quality ladder and eventually they’re going to have to write it off or the government is going to come in and slow the growth down.”

Auto sales have been a bright spot for the economy, but if Lamensdorf’s thesis plays out, he expects sales to decline sharply. “For example, General Motors (GM) is $10 off its high yet the S&P is hitting all-time highs,” he says.