The housing debacle… The credit fiasco… The auto industry meltdown… And now the Credit Card Crisis?
Yep, just when you thought things couldn’t get any worse, credit card companies are ready to take the plunge, too, as unemployment rises, and the housing and banking fiascos intensify.
But things aren’t all that bad… there’s always a way to profit, even in this market.
Consumers are building up massive amounts of debt. And many of them can’t afford to pay it back.
It’s far more difficult for consumers to dig their way out of debt now that other relied-upon options, such as home equity lines of credit, are no longer readily available.
It’s so bad that revolving debt just hit a record $970 billion in September, with the average household owing more than $10,678 in credit card debt. That’s up 29% from 2000.
Why do you think Discover Financial Services (DFS:NYSE) stock plunged from a $35 IPO price to $7.52? It’s a card lender, and concerns itself directly with cardholder debt just like American Express.
Why Credit Cards are Next to fall…
Credit card debt is just beginning to resemble the mortgage debt problems at the core of our financial meltdown. And the last thing the financial sector needs to feel is further squeeze, as Americans have accumulated some $970 billion in revolving consumer debt since the end of September 2008, up 3.4% from the close of 2007.
Sure, the credit card industry is typically resilient during our economic slowdown, thanks to pricing flexibility. And the thinking was, that as the economy sours, and consumers become late on payments, credit companies can boost earnings through late fees and higher interest rates.
But that’s no longer the case.
That’s because consumers are tapped dry. Defaults are growing. Charge-offs have been pushed well beyond expectations. And losses are far outpacing what companies were hoping to account for with extra card fees and higher interest rates.
Oh, and if you think this spillover-effect from subprime has been bad… just wait until 2009 when Option ARMs begin resetting.
It’s why we’ve been pounding the table for you to short American Express… and amass some serious wealth.
Falling under the weight of consumer debt and defaults, American Express converted itself to a bank holding company, proof that the once-resilient credit card industry is feeling pressure.
It also means they’re now allowed access to the $700 billion bailout fund.
But, through conversion, AXP now faces the same fate that befell Goldman Sachs and Morgan Stanley… further downside.
Even now, at $20, American Express continues to be a favored short.
And that’s because they hold consumer debt, and continue to fall prey to mounting delinquencies.
But this is nothing new.
We’ve been saying the same thing for months: Ignore American Express (AXP) stock because of its exposure to consumer debt.
Others, however, disagree…
"AXP will be fine," one reader said. "You’re blowing the consumer issue out of proportion."
"Ian Cooper has no brain." "I think Ian Cooper is an idiot," said another reader.
We prefer to let the scoreboard do the talking…
Options Trading Pit readers enjoyed up to 70% gains on AXP put options in less than a day.
"Ian, I’m currently paper trading options and am specifically making a point to trade your recommendations. Here’s how I did with your last two trades: AXPMQ, bought 11/12 for $2.50, sold 11/13 for $4.20 for a 68% one day gain. XJZMM, bought 11/11 for $1.56, sold 11/13 for $2.43 for a 56% gain in two days."
"Sold 1/2 of XJZMM and 1/2 of AXPMQ, as recommended… Was up 67.55% in XJZMM and up 59.12% in AXPMQ before sales… We need more like that! Thanks…"
Even to this day, American Express and any credit company dealing with consumer debt remains a short.
Ian L. Cooper
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