A House of Credit Cards
...shoes are dropping so fast and those shoes are so interrelated that it's going to be difficult to say precisely which shoe hits the ground first.
Prof. Depew was writing about credit cards in Monday's Five Things You Need To Know, Point Two (Former Homeowners Desperately Working to Save House of Credit Cards). Here's a recap in case you missed it:
While foreclosures have spiked, the number of credit card loans in delinquency has been running steady, but why?
- Credit card delinquencies fell to 4.41% in the first quarter of 2007, from 4.56% at the end of 2006, according to the American Bankers Association.
- Meanwhile, foreclosures have soared, up.
- Conventional wisdom has always held that a person would lose his or her credit cards long before risking losing the home.
- Of course, that old saw is probably grounded in the olden days, back before zero down payments for a house.
- Merrill Lynch's David Rosenberg recently noted that balances on credit cards surged at an 11% annual rate in May and June, the highest rate since 2000-2001.
- Why the jump?
- Simple. You can still spend your credit card, but you no longer can spend your home.
- Last week in Permabears! we looked at a Federal Reserve paper by Vice-Chairman Donald Kohn, with Fed economist Karen Dynan, arguing that the rise in home prices was the primary reason consumer borrowing has soared since 2001.
- With median home prices now poised for what could be the first yearly decline since federal housing agencies began tracking them, it's back to the credit cards.
Take Two on the House of Credit Cards
Just released data shows credit-card defaults on rise in US:
Credit-card companies were forced to write off 4.58% of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders' willingness and ability to repay their debt – fell for the first time in more than four years.
But Moody's said the rate of losses remained well below the 6.29 per cent average seen in 2004, a year before the US enacted a new law that made filing for personal bankruptcy more onerous.
Recent increases in credit card losses can in part be ascribed to a steady rise in personal bankruptcy filings since 2005. According to the Administrative Office of the US Courts, quarterly non-business bankruptcy filings have been rising since the first quarter of 2006.
It was good while it lasted but it's now time to kiss those steady delinquency rates goodbye.
And the spike high in bankruptcies and credit card writeoffs after the bankruptcy reform act was enacted will be taken out in due time. That law, which attempts to make consumers debt slaves forever, is simply going to backfire in additional ways still not seen as consumers find ways around the means test.
Let's consider the charts of MasterCard (MA) and American Express (AXP).
MasterCard Daily Chart
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If the 200 EMA does not hold, look for the gap near 110 to close, with additional support at 100. That's a significant decline from here if it plays out that way.
American Express Daily Chart
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American Express is struggling to hold the 200 EMA and there is also a potential bearish cross under of the 50 EMA with the 200 EMA to be watching.
The Next Shoe to Drop
Now that steady delinquency rates are a thing of the past, inquiring minds just might be asking "What's the next shoe to drop?" Following are three possible answers:
- In Rising Reliance On Credit Cards David Rosenberg at Merrill Lynch was quoted as saying "The next shoe to drop from this subprime mortgage fiasco, which has already fed into the asset-backed market, is probably going to be the credit card business."
- Prof. Zucchi in Time to Watch Homebuilders' Debt is looking at corporate bonds.
- Previously I took a stab at commercial real estate in Foolish Concerns, Foolish Optimism, Foolish Logic.
Perhaps the next shoe has already hit the ground as subprime woes infect the commercial paper market.
"The turbulence in subprime mortgages has now spread to the commercial paper market -- a $2.2 trln market in the US that is the working capital lifeblood for the corporate sector," David Rosenberg, North American economist at Merrill Lynch wrote in a note to clients on [August 15]. "This is looking worse than just another credit cycle."
Rosenberg noted that more than half of the commercial paper market is backed by residential mortgages, credit card receivables, car loans and other bonds. "Now the rating agencies have warned that they might downgrade several issuers of commercial paper," he wrote.
It's Raining Shoes
Actually shoes are dropping so fast and those shoes are so interrelated that it's going to be difficult to say precisely which shoe hits the ground first.
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