Credit Card Defaults To Increase Losses For Banks
The Dynamic Wealth Report
June 6, 2008
The Next Big Credit Failure Is . . . .
The credit crisis in the financial community continues. Despite the
markets rallying off of mid-March lows, we’ve been hit by a string of
bad news. Starting it off was Wachovia (WB). The board of this $43
billion bank ousted their senior management. The shares promptly fell to
a new 52 week low.
Then came Webster Financial (WBS).
This regional bank announced a capital raising plan to improve their
liquidity. Investors read between the lines and realized if they’re
raising capital they probably have a problem. This sent shareholders
rushing for the door and the stock fell to a new 52-week low.
Don’t forget Lehman.
Not to be outdone, Lehman Brothers (LEH) also had their moment in the
spotlight. Despite more than $30 billion of cash on the balance sheet
and presumed access to the Fed Funds Window rumors swirled.
Concerns over liquidity took a bite out of the stock. This was followed
by rumors that they’re looking for a big investor overseas. The
stock fell to a new 52-week low.
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OSo why rehash old news?
To point out a simple pattern. The recession we’re in hasn’t shown up in
the traditional sense. Our GDP is still growing . . . but make no
mistake . . . our economy is struggling.
This means more pain is yet to come. Here’s the key question: “What’s
Next?”
Let me tell you, it’s not that hard to figure out. Over the past 10
years home equity loans were very popular. Everyone used them. Money was
extracted from rising home prices and used for remodeling kitchens and
bathrooms. People bought big screen TVs, boats, and cars. The list goes
on and on.
But all of that’s changed.
With real estate values heading lower, the days of easy money are over.
Everyone who viewed their home as a giant ATM suddenly found it “Out of
Order.”
This couldn’t happen at a worse time.
Inflation is setting in and every day costs are going up. Food prices
are up. Gas prices are up. The cost of everyday living is accelerating,
and it’s starting to hurt. With more and more disposable income going to
buy everyday essentials, consumers are finding themselves in a quandary.
How to finance their lifestyle?
The answer is simple . . . credit cards. Over the last few years credit
card companies passed out their products like candy to hungry kids on
Halloween. They might soon come to regret that move.
Credit cards are easy to use, and most people have more than one – I
know people with more than ten! But here’s the problem. With the cost of
everything going up eventually consumers are going to need to make a
decision. Do they make payments on their debt, or do they buy food and
gas?
Credit card companies are going to get hit with higher default rates. This will undoubtedly hurt their profits. We’re not far from major
problems in the consumer debt industry.
The trend’s already starting.
According to the Federal Reserve, in the first quarter credit card
delinquencies were over 4.8% . . . a rate not seen since 2002. Just give
it time. . . .it’ll get much worse.
So, who’s going to suffer?
Capital One Financial (COF) is facing the biggest risk. Over the last
year the stock’s fallen from $80 to $50. I can’t help but think this is
just the beginning. If you own a big slug of this stock, I’d seriously
rethink that position.
With every dark cloud there’s a silver lining.
Two companies are already benefiting from increased credit card usage. .
. Mastercard (MA) and Visa (V). Both companies take a small fee every
time a card is used. The more the better. The best part is they don’t
take on any credit risk. They get paid even if you don’t make good on
your credit card bill.
• Webster Financial (WBS) received an upgrade to “buy” from Sandler
O’Neil. The company recently diluted shareholders with a $225 million
preferred stock offering. The stock has fallen more than 5 points
since this offering was announced.
• Brookfield Asset Management (BAM) was downgraded by BMO Capital. With
the volatility in the markets, it’s no surprise some asset managers are
struggling.
• American Water Works (AWK) received a number of initiating coverage reports. Firms
rolling out coverage include: Boenning & Scattergood, Wachovia, Janney
Montgomery Scott, Stanford Research, and JP Morgan.
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