Any one that didn’t know that credit card companies would be slapped around wasn’t paying attention.
In October 2007, I recommended that my former Agora-readers buy put options on Capital One (COF), as the underlying traded above $70. Today, those options are up more than 300%, as the underlying stock falls sub-$50.
Was I lucky with my call? No. I was paying attention.
Subprime lenders began their rapid descent in February 2007. Alt-A and prime lenders, and banking institutions followed suit. Yet, no one wanted to talk about the credit defaults, bankruptcies and asset write-offs that’ll impact credit-card companies for years to come.
While tighter lending standards discourage excessive mortgage lending, banks and consumers alike were turning to aggressive credit card use. Banks were raising credit limits and lowering lending standards to any Joe that needs credit. And now that consumers can’t readily borrow against homes, they’re borrowing more against plastic.
This’ll end the way subprime lending ended — the hard way. The only question is just how painful and economically debilitating will the crash be. This was a known.
As home equity balances dwindled, credit card balances were up 17% over the last six months. Defaults were up. The average American held seven credit cards at once. Americans owed more than $500 billion in credit card debt. Household debt levels were at a staggering 5.9%. Home debt payments were nearing all-time highs. And, oh yeah, there’s that pesky subrprime debt.
What’s worse, when homeowners become delinquent in housing payments, the lender can foreclose on the property. But when a credit card borrower becomes delinquent in monthly payments, one of the things the bank can do is give that borrower more credit or market credit availability to those with poor credit. That would explain why companies like Capital One (COF) have tanked from $80 to under $50… and are likely to continue tanking.
So when I see a headline that reads, “Mortgage meltdown seen spreading to credit cards”, I have to laugh. This isn’t the birth of a new trend. It’s been occurring since the credit crunch began.
Truth is, there’s still further downside for housing and for credit card companies. Your best bet is to short the lenders on further sell-offs.
But then they say the housing crisis could spread to autos. And I say they’re not paying attention… again.
The Associated Press is just now reporting that housing weakness could spill into the auto business. Huh? It was June 2007 when AutoNation CEO Mike Jackson reported, “A weak housing market will likely hurt new vehicle sales in the U.S. auto industry through the rest of the year.”
Listen, if you want to make money in this market, just pay attention. It looks like the press is a little late to the party.
