Editor's Note:

In preparation for our all-options launch, we're warming up in The Options Pit blog.

• How's the beta testing going? You tell me.
• Expedia October 22.50 put: 178% in 24 trading days
• Coca Cola Enterprises November 20 put: 214% in 24 trading days
• Masco Corporation October 20 put: 75% in 21 trading days
• Lehman Brothers Holdings October 20 put: 150% in 21 trading days
• UBS AG September 2008 22.50 put: 165% in 15 trading days

...and we're just warming up for the all-options launch. Stay tuned for more.

Today's Wealth Daily: Why This Stock Should Be Ignored... or Shorted.

American Express (AXP) continues to be a favored short. And that's because they hold consumer debt, and fall prey to mounting delinquencies. So when I learned that UBS upgraded the stock Tuesday morning from Sell to Neutral, I had to laugh at the absurdity.

The argument remains the same, though.

If you want to own a credit card stock, buy Visa or MasterCard. They do not hold consumer debt. They simply process the cards.

American Express on the other hand deals directly with credit. It has to worry that as of November 2007, credit card debt "soared at an 11.3 percent annual rate in November following an 8.5 percent rate of increase in October" and is still on the rise."

 

 

They're the ones where share values are being beaten stilly because of charge-offs, payment delays, and higher delinquencies. Why do you think Discover Financial Services (DFS:NYSE) stock plunged from a $35 IPO price to $13? It's a card lender, and concerns itself directly with cardholder debt.

 

Same goes for American Express, who's CEO said, "Business conditions continue to weaken in the U.S. and so far this month [June 2008] we have seen credit indicators deteriorate beyond our expectations."

 

It was January when AXP's CFO Daniel Henry predicted that the company's U.S. write off rate would peak between 5.1% and 5.3% in 2008. Unfortunately, a 5.3% write off rate was reached in March. It's now July and delinquencies and default rates are growing worse.

The United States of Cash-Strapped America

With homeowners struggling to stay above water, American Express has to worry about further delinquency problems, as credit card debt balloons. You're better off longing MasterCard stock and Visa, than naively risking bets on American Express stock.

Instead of just using credit cards for big ticket items (TVs, furniture), some are now charging gas, food, and even paying other bills with them. And some are only making minimum payments... if they can afford even that.

It's far more difficult these days for many consumers to dig their way out of debt, since other relied upon options, such as home equity lines of credit, are no longer readily available.

National revolving debt just hit a record $957 billion in April, from $800 billion four years ago. Total credit card debt was up by 0.4% in April, according to the Fed. And Moody's is reporting that the charge-off rate, which measures credit accounts considered uncollectible, hit 6.27% in April.

Q1 consumer borrowing skyrocketed to $34 billion, the biggest amount since 2001 when the U.S. was diving into a recession. And not all of that may be paid back. Credit card investors are becoming increasingly concerned that a weaker U.S. economy will hurt borrowers' ability to pay back debt.

But as long as there are naïve investors, and foolish upgrading banks, it's hard to get that reality to the investing masses. Still, downside risks remain at American Express... even Discover and Capital One. They'll slide long-term as subprime fiascos are replaced with Option ARM reset fiascos.

High Gas Prices, Housing Slump, and Rising Unemployment... Oh My.

Credit card issuers will face more losses than initially expected.

Hit by cash-strapped consumer reliance on plastic amid rising gas prices, a housing slump, and rising employment, credit issuers could see earnings thwacked by defaults.

"The deterioration in credit cards is accelerating faster than many had expected," said Christopher Wolfe, an analyst at Fitch, according to CNN Money. "The message we are trying to deliver is that things are going to get worse before they get better. Thus far, credit card businesses have been profitable but that could change."

Worse, according to the CNN Money article, "Fitch analysts are expecting an increase in prime charge-off rates - or losses from defaults on card payments as a percentage of loans outstanding - to at least 7% by the end of the year from 6.4% in May."

Vulnerable are credit issuers like American Express, Washington Mutual, Capital One and Discover, not the Visa or MasterCard-like companies.

Ignore or short American Express... and hold long-term.

Good Investing, and Happy 4th if you celebrate it,

Ian L. Cooper
http://www.wealthdaily.com

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In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of June 30, 2008.

BIS: Global Economy Near a "Tipping Point": The Unsustainable has Run its Course
According to a report released today by the Bank for International Settlements (BIS) the global economy has reached a "tipping point". The result says the group may be a far deeper crisis than is expected and a bout of deflation in the world's biggest economies.

Dear President Obama: Signed, William H. Gross, Ordinary Citizen
"You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans."

Oil Speculators Are Not to Blame: But a "dearth" of new supplies are...
For weeks, oil speculators have been blamed for skyrocketing oil prices... but it's not their fault. It's a supply and demand issue.

Caution: High Risk Trade
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The 2008 Oil Forecast
The stock was recently upgraded from "speculative buy" to "buy" with a $10 near-term price target on news that the company successfully drilled its Costayaco-4 well in the Costayaco discovery in southern Colombia.

Uranium Mining Stock: Buy and Hold American Uranium
In just two decades the world's demand for electricity is projected to nearly double! To meet this rising demand, the worldwide power sector will need to add an estimated 4,800 gigawatts of new electrical capacity to the global grid. To put that into perspective, a city the size of San Francisco requires about 1 gigawatt of electricity to function.

Investing in Algae Biofuel: The Only Biofuel that Can Take on Oil
When the price of oil rises just one dollar, the Pentagon's fuel expenses climb an astounding $130 million. So the $50 rise in oil prices over the past six months has taken over a half billion dollar toll on the U.S. government. And that's on your dime.

ANWR Drilling: Will ANWR Oil Production Come Too Late?
There's a new game being played in the media. From what I understand, the rules are easy. Simply pick somebody (other than yourself, of course) to blame for oil prices. Then, you can watch as the blame is bounced around. Unfortunately, there's no way to win the game since the blame goes back and forth repeatedly.

Investing in China: Warren Buffett's New Friend in China
The stock markets in Shanghai, Shenzhen, and even the technically-foreign Hong Kong exchange are hurting since global credit worries yanked down buoyant investor confidence last fall.

Jim Rogers on Oil and the US Dollar: What Jim Rogers Is Advising Now
Also not helping our oil woes, OPEC President Chakib Khelil is out predicting $170 a barrel before the end of 2008. According to Bloomberg, Khelil said, "Oil prices are expected to reach $170 as demand for fuel is growing in the U.S. during the summer period and the dollar continues to weaken against the euro.''