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American Express Confirms Credit Contagion

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The concern is that pressure may just be starting to mount on wealthier consumers.

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The credit crunch began as something confined to people with bad credit, and we were promised it would not spread its way up the credit spectrum. American Express' (AXP) results yesterday confirm that those were empty promises.

  • 4Q Net Income was $831 million or $0.71 per share, in line with analysts expectations but down 9.9% from 4Q '06
  • Revenue excluding interest expense came in at $6.4 billion, below analysts expectations but up 10% from a year ago
  • FY '07 net income was $4.0 billion, up 8% from a year ago; revenue came in at $24.1 billion, up from $22.1 billion in 2006
  • Loan writeoffs increased to 4.3% from 3.7% in 3Q and took a $438 million charge for bad loans


When American Express issued a profit warning earlier this month, investors dumped its shares and sold Capital One (COF) and Discover Financial (DFS) in sympathy ahead of earnings. The details released last night confirmed analysts' fears that delinquencies among Amex's high-end clientele are indeed on the rise. Specifically, the company said credit conditions have deteriorated most significantly in areas where the housing markets are fairing the poorest, namely California and Florida.

The concern is not simply that consumer spending is now 'slowing at every level,' but rather that just as we saw the subprime mortgage situation go from bad to worse, pressure may just be starting to mount on wealthier consumers. As evidence of this concern, luxury retailers such as Coach (COH) and Tiffany and Co. (TIF) are off almost 50% from their highs earlier this year.

While it should not be surprising that Amex cited regions with housing difficulties as areas of concern, that the housing market is getting worse each month should be cause for alarm. Moodys.com Chief Economist Mark Zandi, one of the few housing economists who doesn't mince words, said in non-recession scenario home prices would need to fall 13% to reach a bottom. If the U.S. economy does fall into recession, home prices will need to drop 20% to see a bottom, according to Zandi. With the S&P Case Shiller Home Price Index registering 7.7% year over year drop, it is likely we have seen just the beginning problems with high-end consumer debt.

Position in COF, COH

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