Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

American Express Confirms Credit Contagion


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

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. 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.

< Previous
  • 1
Next >
Position in COF, COH

The information on this website solely reflects the analysis of or opin= =3D =3D3D ion about the performance of securities and financial markets by = the wr=3D iter=3D3D s whose articles appear on the site. The views expresse= d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi= a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web= site is intended to con=3D stitute a recom=3D3D mendation or advice address= ed to an individual investor =3D or category of inve=3D3D stors to purchase= , sell or hold any security, or to =3D take any action with re=3D3D spect t= o the prospective movement of the securit=3D ies markets or to solicit t=3D= 3D he purchase or sale of any security. Any inv=3D estment decisions must b= e made =3D3D by the reader either individually or in =3D consultation with = his or her invest=3D3D ment professional. Minyanville write=3D rs and staff= may trade or hold position=3D3D s in securities that are discuss=3D ed in = articles appearing on the website. Wr=3D3D iters of articles are requir=3D = ed to disclose whether they have a position in =3D3D any stock or fund disc= us=3D sed in an article, but are not permitted to disclos=3D3D e the size o= r direct=3D ion of the position. Nothing on this website is intende=3D3D d = to solicit bus=3D iness of any kind for a writer's business or fund. Mi= ny=3D3D anville mana=3D gement and staff as well as contributing writers wi= ll not respo=3D3D nd to em=3D ails or other communications requesting inves= tment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos