The looming November employment report will likely seal the deal as far as the Fed's decision on interest rates later this month.
And with the inevitable first interest rate increase since the Great Recession, investors better be well prepared in advance to avoid bubbles bursting in certain markets. One of the first bubbles that stands to lose some serious air is the surging auto market, which has been fueled by the Fed's easy-money policies and banks of all kinds assuming more subprime loan risk. The worrying numbers surrounding the auto market are plenty, and should cause one to view shares of Ford (F), General Motors (GM), Toyota (TM) and even Tesla (TSLA) in an extra-skeptical manner heading into 2016. (Ford is part of TheStreet's Dividend Stock Advisor portfolio.)
Auto sales have gone absolutely berserk in 2015 due to a combination of rising employment, cheap gas, rock-bottom interest rates and loosened lending policies.
According to a recent New York Fed survey, auto originations hit $151 billion in the third quarter, the highest level in a decade. Loans to borrowers with credit scores below 620 reached about $33 billion, near the 10-year high.
"The growth in auto loan balances and originations has been very robust," said Donghoon Lee, research officer at the New York Fed. He added, "Credit conditions have remained attractive for auto purchasers with both prime and subprime credit."
According to credit score agency Experian, a whopping 19.3% of the auto loans taken out by people in the third quarter were those with subprime and deep subprime ratings. Even those with prime credit scores have gotten in on the cash grab offered by the Fed to buy a car, not fearing job losses or pay squeezes from tepid U.S. economic growth in 2015. Experian estimates that 61.3% of the money borrowed by folks to buy an automobile during the third quarter was by drivers with prime or superprime credit ratings, or those who have some of the best histories for repaying their debts.
Meantime, the study notes, auto loan delinquencies have started to tick up. Nothing to set off alarm bells yet, but enough to make one wonder how delinquencies will trend in 2016 as rates climb.
Source: New York Fed
Despite the pockets of concern, investors have remained reluctant to drop shares of the automakers -- General Motors, Toyota and Tesla have mostly traded sideways this year. Ford's stock is down about 6%. In large part, the hesitation by investors is due to the allure of the dizzying sales numbers continuing to be reported by automakers. Investors generally think the good times will continue to roll.
WardsAuto forecasts an 18.4-million-unit seasonally adjusted annual sales rate for November, the highest pace since July 2005's 20.6 million. Sales for Fiat (FCAU) rose 3% in November, with Jeep sales booming 20% -- sales of the Cherokee, Compass, Patriot and Wrangler each hit peaks for the month. In a sign of true largess, sales of the extra-speedy, impractical daily driver the Dodge Challenger notched a record month (before the winter weather, no less). Kudos, old white guys, in levering up to recapture a bit of your youth.
Sales at General Motors rose 1.5%, supported by strong interest in trucks (which is being driven by the housing market's own low-interest-rate-driven recovery). Ford's sales gained 1%, with the F-Series truck line booming 16%. Toyota clocked in with a 3.4% sales improvement.
The bubble in the auto market is still expanding, and it's being fed by low rates. Once that gasoline is no longer tossed on the fire, the flame is likely to die down ... and take several stocks with it in the process.