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Two Ways To Play: Credit Card Crunch


Strengthen your portfolio in good times and bad.


We're in the late stages of the financial disaster of 2008, but another crisis looms: The consumer recession. According to the Wall Street Journal, more and more credit-card holders are falling behind on their payments and, eventually, defaulting.

The industry calls these defaults "roll rates," and the trend is increasing, for the most part, across all credit card companies. Among borrowers between 60 to 89 days late on payments, nearly a fifth of balances are being dimissed as uncollectible.

The problem can be even worse for credit card companies that securitize the balances.American Express (AXP) has seen its roll rate increase to 47% in the third quarter from 35% a year earlier. Capital One's (COF) roll rate jumped from 28% in the third quarter of 2007 to 34% in 2008.

But credit card companies are responding to the problem by cutting credit lines to select customers and contacting others before they become delinquent. Oppenheimer analyst Meredith Whitney forecasts that issuers will cut lines of credit by over $2 trillion within the next 18 months.

From the Bull Pen: The picture is bleak, but technically stocks are ready for a move higher. Consider Visa (V) for a tactical play. Sell stops can be set 2 points from entry. American Express is also an option sitting on $20 support.

From the Bear Cave: As Professor Jeff Macke said today on the Buzz, "If you're still shorting, what kind of catalyst are you looking for?" Bears can step aside and wait until a stock like Toyota (TM) approaches $70 for a better opportunity.

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No positions in stocks mentioned.

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