Credit Cards: a Huge Bubble in the US Credit Market(Short COF)

Discussion in 'Stocks' started by Daal, Dec 18, 2008.

  1. Daal

    Daal

    I'm going to short Capital One Financial NYSE:COF today and you should too

    Credit card debt seem to work quite similarly to Pay Option Arm(pick a pay mortgages) that has blown up so badly. People can choose to keep increasing their debt by making minimum payments and sometimes they get hit with a 'reset' when the credit card issuer raises the interest rate. The debt is unsecured

    Banks and holders of credit card debt end up holding the debt of the worst, least likely to pay customers as they are the ones that keep making minimum payments. the good credits endup owning very little. The Credit Cards business model has NOT BEEN HISTORICALLY TESTED, its been around for 30 or so years and this cycle is worst than the others in the past, so anybody who claims to knows what will happen in this cycle its just nuts.
    That business model worked well while you had a credit bubble(even then charge offs increased at every cycle), asset bubble and income prosterity but once the music stops forget history, its all uncharted territory

    Its like the Investment Bank business model, it had big flaws, people just didn't know about it. credit card issuers dont really care about peoples ability to pay(as they keep sending applications to tons of people and they get in easly), I dont think their arrogance and faith in a new business model will change the history on how good lending works

    COF earnings estimates for 2009 90 days ago were $4.89 now they are $3.10, once the market realizes they will be lucky to have a yearly profit the stock should tank
    There are 3 strong buy recommendations, 3 buys and 11 holds on the stock so there is a good supply of analyst downgrades down the road
     
  2. Chase closed one of my cards because of inactivity (2 years inactive), that's a first. In the past when I called to close accounts cos encouraged me to keep them open to help my credit score (length of accounts open) even if I didn't use them.

    As a side note, the letter is not on normal co stationary. Nowhere on the letter is any identifiers except the last four digits of the card. I had to check the return address on the envelope.
     
  3. Been short COF for awile (posted it on the fin'l shorts thread). The position is marginally profitable, which I am thrilled about - given that the S&P is up nearly 20% since I shorted the stock.

    COF is a "dead man walking". However, it is one of the "chosen ones" by Treasury. Expect all kinds of measures over the coming months to try and squeeze the shorts.
     
  4. i too feel that credit card companies are in trouble. i know of 2 people who owe over 30k each and have'nt made a payment in 6 months. they just can't afford it. they want to pay but can't. they opt to pay their mortgage and utility bills.
    this is an extreme case but i bet millions owe over 5k and cannot make one payment.
     
  5. COF is a regional member of the Federal Reserve. Technically, they have near unlimited funds to tap into. Worst case scenario, they merge or get taken over.

    No reason for the stock to appreciate however.
     
  6. Your too late to the party. COF is going to $34 and pulling back, then gonna rip a hole in your ass to $40.
     
  7. m22au

    m22au

    Daal,

    Thanks for your analysis - a lot of what you write makes sense.

    Looks like the market thought the DFS earnings report was a good one today, with the stock up about 13%.

    Are you also bearish on AXP?

    I can't remember the exact details (will need to do some digging), but I think AXP has lowered its guidance in recent months, and may have converted to a bank in order to get TARP money.


     
  8. Daal

    Daal

    The DFS thing had more to do with they saying they will seek TARP funds and the lawsuit gains. AXP will probably be hurt but since buffett backs it and the stock is down a lot I'm sticking with COF. DFS ceo said
    “It’s not surprising that credit continues to deteriorate,” Stilmar said. "Industry loss rates may top 10 percent next year", he said.

    I can assure you that when permabulls CEOs say charge-offs will hit 10%(all time high is 8%) its going to be A LOT worse than that, if the stock market have been too bullish, CEOs have been even worse
    A 11-15% charge off rate in COF entire book wipes out their tangible equity(goodwill and intangibles doesnt count for bank capital) at that point the WM/WB effect could kick in. Perhaps the credit card lenders are the smartest guys in the room by making awful loans and getting people to negative amortize forever but I'm betting they will be in trouble
     
  9. S2007S

    S2007S

    Over a year ago I mentioned this was the next problem, Im sure by now the 9?? Billion in Credit card debt has ballooned to $1 TRILLION++++


    S2007S


    Registered: Aug 2006
    Posts: 7785


    06-03-08 04:22 PM

    This is a post I wrote in Nov 2007, I just want to bring it back for discussion since many do not believe that the next problem is massive amount of credit card debt, many are ignoring it, remember it can only be ignored for so long. Today I came across an article that should be bookmarked and printed out for daily reading since the next major economical problem will be skyrocketing debt.

    S2007S


    Registered: Aug 2006
    Posts: 6473


    11-23-07 10:02 AM

    I know many dont want to agree with this or even bother to acknowlege it, but the truth is credit card debt is at record highs. This is going to be as big or even bigger than the subprime meltdown. There is a record $915 Billion worth of credit card debt here in the US. Many will continue to ignore it until it gets to the point where it can no longer be ignored.

    Just like other asset backed securities, credit card debt is sold off as packages of securities.....now the question is what happens when there is a rise in delinquencies????

    The banks feel it along with the securities backed by the credit card receivables. As consumers default on their payments this would lead to bank losses and portfolio losses in the institutions, pensions and those big hedge funds.

    This is the next major economic problem that should be mentioned but is being completely ignored. Those 1500 SQ foot Piggy banks arent providing for the economy anymore, so what else better to use then the worthless dollar, plastic..............



    Article from June 3rd 2008..........

    Credit-Card Use Is Surging, Risking Another Debt Crisis
    Tuesday June 3, 1:56 pm ET

    Cash-strapped Americans are ringing up more and more purchases on their credit and debit cards, but there could be a steep price to pay ahead.

    Though the trend is a boon for the companies that issue the cards, analysts worry that there could be long-term problems not only for consumers but for the anemic economy and the already-troubled banks that will be underwriting all that risky debt.


    "Right now what we're seeing is the US consumer losing their disposable income as they have to spend more and more on necessities because of higher prices for gas and food," says Ron Ianieri, a market strategist and co-founder of the Options University investor education center. "Normally when you have a certain budget and you can't keep up with the budget one of the easy steps is to extend that budget using credit."

    One of the main problems with that is US consumers--and their counterparts in Europe as well--already are delinquent on their credit card payments in numbers not seen in six years. The Federal Reserve last week said credit card delinquencies hit 4.86 percent in the first quarter in 2008, while revolving debt--or the type used in credit purchases--hit $957.2 billion in March, a 7.9 percent increase.

    As all that risky, high-interest debt keeps accumulating, consumers will find themselves deeper in a hole that threatens to keep the economy in its sluggish state. Economists worry that the problems are being exacerbated by consumers using credit not only to buy big-screen TVs and patio furniture, but also to pay their mortgages and shop for groceries.

    "There's a significant risk to people who are using credit cards to help them try to bridge the gaps that they're facing," says Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness. "The reality is the economic picture isn't going to clear up instantaneously."

    Meanwhile, the banks that underwrite the credit card debt stand to lose as the delinquencies continue to rise. Standard & Poor's on Monday issued a dour forecast for banks in 2008, in part because of their exposure to bad debt.

    Ianieri ranks his "starting five" in terms of exposure to risky debt: Lehman Brothers (NYSE:LEH - News), Citigroup (NYSE:C - News), Bank of America (NYSE:BAC - News), UBS (NYSE:UBS - News) and Merrill Lynch (NYSE:MER - News).

    "It's a disaster, it's a time bomb," Ianieri says. "The credit crisis is a lot more severe than it's being made out to be. I think the government is doing everything it can to keep the severity of this situation under wraps from the general population. I think they're just trying to bide time for these banks."

    For the credit card companies, though, it's a different story.

    Little to Lose

    Visa and Mastercard back comparatively little of the credit actually issued through their cards, meaning they have a low level of risk for defaults and other payment issues. They get paid a fee each time someone uses their cards, and the banks that issue the cards assume responsibility for the debt.

    As such, investors and analysts are fawning over the two companies in the face of consumer cash issues and the growth of emerging markets, where credit cards are only beginning to find popularity.

    "The reality is probably some of it is hype, but some is based on fact," Snaith says. "'Check or cash' has been replaced by 'debit or credit' and that's going to be a continuing trend not just in the US but spreading worldwide."

    In a note issued last Thursday, Lehman Brothers raised its outlook on Mastercard, escalating its price target to $335 from $300. Other analysts have joined in the enthusiasm, with Stifel Nicolaus on Tuesday jacking up its price target from $312 to $367.

    Visa has gained from the enthusiasm for Mastercard. As of noontime trade Tuesday, both Visa (NYSE:V - News) and Mastercard (NYSE:MA - News) were up more than 12 percent since May 23.

    "They have no risk. It's per transaction," says Nadav Baum, managing director of investments at BPU Investment Management. "That's why Visa and Mastercard are bucking the trend when it comes to the other financial companies. Even though they group them as a financial company, they're really not."

    Lehman analyst Bruce Harting, in his research note on Mastercard, pointed out that the company believes it can duplicate its US business model in countries including Brazil, Hungary, Poland, Russia, India and China, nations where it projects 39 percent revenue growth.

    Similarly, Americans shopping abroad might be more inclined to use their plastic as the dollar begins to gain ground against other currencies. A purchase in euros now could cost fewer dollars by the time the next monthly bill rolls around if the US currency continues to appreciate.

    "That's another reason why Mastercard and Visa will continue to do well," Baum says. "It's all hand-in-hand."

    Finally, there are the responsible consumers who pay their bills in full every month and are joining the legions of people who no longer want to carry cash. They enjoy taking advantage of the rapid growth of retailers and restaurants offering debit options, plus using points they can accumulate by utilizing their cards.

    "The danger is in painting with a broad brush and casting all consumers as reluctant or unable to spend," says Greg McBride, senior analyst at Bankrate.com. "There are a lot of consumers that are not in the state of distress and can continue to spend in a manner that's not very different than a year or two ago when the economy was stronger. The card-holders that pay their balance in full every month, the incentive is for them to use the cards as much as possible."

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    #10     Dec 18, 2008