The Big Short 2: European banks and auto loans?

What is a bear market?
What is a bear market?

"The Big Short" -- about investors who made a bundle predicting the financial collapse in 2008 -- is a top contender for this year's Oscar for Best Picture.

Its sequel ("The Big Short 2: Electric Boogaloo?") may be unfolding in the financial markets right now.

It has been a gruesome year for stocks.

And one investor is profiting by doing what "Mark Baum" -- aka Steve Eisman in real life -- did. He's betting against the market.

Brad Lamensdorf is co-manager of the AdvisorShares Ranger Equity Bear ETF (HDGE) -- a fund that shorts stocks. The fund is up nearly 18% this year while the S&P 500 is down 9%.

Related: The Dow has fallen more than 1,450 points this year

First, a quick explanation on short selling.

Short sellers borrow a security (for Eisman it was bonds backed by suprime mortgages) and sell them. The hope is that the price goes down. If so, the short seller then buys back the stock or bond and returns it to the lender.

The short seller profits from the difference between the original sale price and the repurchase price. Say you short sell a stock at $100 and it goes down to $80. If you buy it back at $80, your profit is $20 -- minus any fees.

And Lamensdorf is making a killing this year because lots of stocks he has bet against have gone down. He doesn't think the worst is over, either.

"We need more fear before we get a bottom," Lamensdorf said, adding that his target for the S&P 500 is between 1,500 and 1,600. That's a 14% to 20% drop from current levels.

So what is he shorting now?

European banks worse off than 2008? Lamensdorf is concerned about the exposure to bad loans (especially energy company debt) held by big banks such as Royal Bank of Scotland (RBS), Credit Suisse (CS) and Deutsche Bank (DB). He's shorting all three.

Lamensdorf said negative interest rates in Europe will further hurt these banks. And even though all three have already plunged sharply this year, he thinks they could go down even more.

"These banks have all broken below their 2008 lows. The market is telling you they're in trouble," he said.

The new subprime threat: Autos. While European banks are struggling, Lamensdorf said most big American banks are in much better shape than they were eight years ago. So he is not shorting them. There doesn't seem to be a new housing bubble.

But Lamensdorf is nervous about one area of the U.S. credit market ... auto loans. He thinks some companies are extending too much easy money to buyers in order to improve sales.

The two companies he's targeting in this sector are used car dealer CarMax (KMX) and motorcycle king Harley-Davidson (HOG). He said both have been very aggressive.

Related: Global stocks sink into bear market

The auto finance units for both CarMax and Harley-Davidson increased their provisions for loan losses in their most recent quarters as loan volumes grew.

"Auto finance is kind of a joke right now," Lamensdorf said.

Look what the CAT dragged in. One of Lamensndorf's biggest short positions is in construction and mining equipment giant Caterpillar.

Lamensdorf said that the commodities bust and slowdown in China could be bad news for Caterpillar for awhile. He notes that profits and cash flow have tumbled lately, and he's not sure when that trend will end.

Wall Street agrees with him. Analysts are forecasting that earnings per share will fall again this year and in 2017.

"The mining boom pulled forward a lot of equipment sales for Caterpillar. It is going to have a difficult time creating new business for years to come," Lamensdorf said.

Miscellaneous shorts. Lamensdorf is also betting against Japanese printer and camera giant Canon (CAJ) since he believes the company still hasn't figured out a way to compete with smartphones.

He's shorting Generac (GNRC), a maker of backup generators that has often surged ahead of blizzards and other big storms on the hopes that massive power outages will lead to a big spike in sales.

The stock rallied earlier this year before a big East Coast snowstorm. But the company has rarely seen a lasting boost from bad weather.

Related: These bulls aren't giving up on tech stocks

Lamensdorf is shorting restaurant takeout app GrubHub (GRUB), too.

He thinks the company, which also owns Seamless, is way overvalued given that it could face significant competition from Amazon (AMZN) and Uber as they bulk up their local delivery businesses.

But how much longer can his fund keep climbing? Even though Lamensdorf and other market bears are having their moment in the sun now, it's notoriously difficult to make money from shorting over the long haul. The market usually goes up.

Lamensdorf's ETF began trading in January 2011. It's lost nearly half its value since then -- and that includes this year's big spike.

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