This Billionaire Is Betting on America’s Auto-Debt Addiction

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America’s fascination with cars and debt does not appear to be slowing down anytime soon. Due to either affordability issues or rising confidence, recent reports reveal that drivers are filling up on auto loans at a record pace. While some investors may doubt how much longer this trend will continue, at least one hedge-fund billionaire placed a major bet on the financing industry.

Daniel Loeb, founder and chief executive officer of Third Point, took a new position in Ally Financial during the second quarter, according a new 13-F filing with the U.S. Securities and Exchange Commission. Founded in 1919, Ally is one of the largest providers of automotive financing in the United States, serving the financial needs of approximately 16,000 dealers and 4 million retail customers. The company funded one out of every 18 new vehicles financed last year.

13-F filings certainly come with their fair share of caveats. They are required by managers that oversee more than $100 million in qualifying assets, but they are filed within 45 days of the end of each quarter, so the information can be outdated. The 13-F also provides a glance at what firms did in the previous quarter, but hedging and trading strategies of each fund are unknown to retail investors. Nonetheless, Third Point’s stake in Ally totaled $1.1 billion at the end of June, making it the second-largest equity position on the 13-F.

The large stake in Ally should pique the interests of investors. Loeb could very easily be betting on long-term trends in the financing industry. The Federal Reserve recently reported that American households drove total auto loan debt to $905 billion in the second quarter, up $30 billion from the prior quarter and $91 billion from a year earlier. In fact, auto loan balances have increased for 13 consecutive quarters.

Some analysts worry that the subprime market may be fueling too many auto loans, but the industry appears to be stable for now. The Federal Reserve reports that delinquency rates for auto loans improved from 3.7 percent to 3.4 percent quarter over quarter. As the chart below shows, investors following Loeb’s lead should keep an eye on the subprime market. Last year, borrowers with credit scores below 620 accounted for 23 percent of total auto loan originations.

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