Thursday, April 23, 2009

Credit cards

American Express (AXP) reported its earnings today after hours (up 6.7% AH, on top of 8% gain during regular hours). The White House is meeting with credit card industry people, and there's a talk of freezing the rates on the credit cards. A lot of market bears, whether they are retail traders or prominent analysts, say defaults and subsequent write-downs/-offs of credit card debts will be enormous (yet another shoe to drop). Hence the pressure on the share prices of big credit card issuers that includes large national banks (BAC, C, WFC, JPM, COF, AXP, etc.).

I've heard horror stories of people whose credit limit was lowered significantly without notice, APR jacked up, again without notice, or card outright cancelled. My personal experience somewhat differs from these stories.

I have a WFC credit card as an overdraft backup for my checking account. In December, WFC sent me a notice that my credit limit had been INCREASED, and they were offering promotional rate of 2.9% on purchase and balance transfers. I have a JPM credit card that earns UA mileage. In the middle of the market crash last October, they sent me a notice saying my APR will be CUT to prime rate + 2.75%. About the same time, C's offer was a card with APR at prime or prime plus 1% (or some outrageous number like that).

I suppose I could interpret it as desperation to get any business, and say no wonder they are in trouble. Or I could say it's moral hazard. The government has publicly announced that these large banks will not be allowed to go under. So the large banks may think they can count on the government backstop even if these unsecured debts go bust.

The trade I thought about  today and didn't do (as usual) was to play AXP for the AH earnings report. I would have gone long, because that would have been the less crowded trade. Just about everyone was predicting a disasterous quarter for AXP therefore it was more likely that bad news was priced in. COF, which reported on Tuesday, didn't go down much despite bad results (and it went up 17% today). Unlike last week when good earnings results got sold, this week's sentiment seems a bit more positive. Bad news is bought. It will be interesting tomorrow, if any information of the stress test briefings gets leaked.

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