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Five Things You Need to Know: American Express Tastes New Water

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Why this matters on Main Street.

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Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. American Express Tastes New Water

"You never know what water you will drink."
- Ancient Chibchan aphorism

Indeed. Remember that. You never know. Only a fool would tromp recklessly on Chibchan wisdom. Or an ignoramus. These days it's hard to tell the difference. I am not sure which of those two camps, if any, American Express (AXP) CEO Ken Chenault falls into, but I do know that executives in that humbled company are even now tasting a type of water which they clearly never conceived.

Yes, you never know what water you will drink. This strange aphorism originated sometime around 10,000 BC near the "sabana" of Colombia, high on a plateau attached to the Andes. It was very likely used to warn idle traders, pausing from their descent down those mountains, not to trifle with the dangerous Magdalena River Valley tribes. But that's sheer speculation.

Today it's being engraved on the back of American Express charge plates and printed on outgoing cardmember statements informing hapless business owners and vacationers from Traverse City, MI to Ocala, FL that their credit lines have been slashed, their markers called in.

Yesterday afternoon American Express was forced to detail the grim and ugly truth about the economy in their quarterly conference call. As observers of the game, American Express usually sits high up in the stadium, protected by glass-enclosed luxury boxes that are ordinarily filled to overflowing with shrimp cocktails, cheese plates and boxes of wine and liquor. Ordinarily. These are different times.

According to Chenault, cardmember spending, particularly among consumers, slowed sharply during the latter part of the quarter. "Credit indicators, as we signaled a few weeks ago, deteriorated beyond our expectations," Chenault glumly intoned, adding that "by almost any measure" the U.S. economy and business environment are much weaker than the assumptions made back in January and as recently as early June.

The awful kicker, especially for the luxury box set, is that the fallout was evident across all consumer segments. "Even our longer-term superprime Cardmembers," Chenault said. Consequently,given the environment, "we'll continue to scale back some card acquisition efforts and reduce credit lines selectively in the U.S.," he added.

Now, for regular people, this news might seem to have the potential fold into a blender with a bag of ice and get whirled into some kind of frozen Schadenfreude cocktail. "Et tu, Centurion cardholder? Welcome to the real world." But that's the kind of herding mentality that devolves into angry riots and common theft. You never know what water you will drink.

The reason this matters at all to regular folks, and make no mistake, matter it does, is because of the following warning from CFO Dan Henry: "In light of our desire to maximize our ability to invest in the business, we are further intensifying our reengineering efforts with an eye toward reducing cost structure and staffing levels." And there it is. American Express is just like every other company: When the going gets tough, the employees are made to get gone. As it has always been, so shall it always be. That's why this matters on Main Street.


2. Fifth Third Prepares for Doom

Although both Bank of America (BAC) and Fifth Third Bank (FITB) shares are up more than 5% as I write, there is little similarity in their outlook. Bank of America yesterday insisted they're "not in denial," and are far from "pollyannish" in their outlook, but Fifth Third actually walked the walk.

Fifth Third, to model their capital planning strategy, is preparing for a 25% national devaluation in home prices through the end of 2009, with the exception of Florida, which they are modeling at 27%.

That's good. That's one more year-and-a-half and we're done with this mess. Right? No. Keep in mind these banks are all focused inward. That's why they are missing how their collective actions are going to directly impair a recovery and ultimately drag out and grind this economic slowdown into a fine powdery dust. Consider this action list:

  • FITB eliminated all brokered home equity production last year.
  • FITB suspended new lending to home builders and developers.
  • FITB suspended "for the near term" new lending for non-owner occupied commercial real estate.

Moreover, as Chief Financial Officer Daniel Poston noted, on the consumer loans side (excluding acquisitions) average loans were down 4% sequentially and 5% year-over-year.

This economy is built for speed. Credit speed. It's all about the velocity, and companies from Apple (AAPL) to American Express to Fifth Third to Texas Instruments (TXN) to UPS (UPS) to Wachovia (WB) are inadvertently conspiring at every angle to slow that velocity down. Understand that and you will understand what the future holds.


3. Bottom Line for Apple: Deflation

Speaking of Apple, the company disappointed traders last night, saying its profits and sales for the fourth quarter will come in below expectations, but that's not important.

What is important is that the company said it is going to be forced to be more aggressive in discounting its products going forward, cutting prices to move products. Going beyond the irony of people lining up to buy iPhones and withdraw their money from IndyMac (IMB) on the same day, this deflationary mindset, relatively new for Apple, is beginning to take hold there even as investors ponder a possible Steve Jobs-less future.


4. Big Brown Trade Down

Listening in on the UPS call this morning, we heard Kurt Kuehn, Chief Financial Officer, Senior Vice President and Treasurer note that the 1.3% decline in total U.S. domestic volume was a larger shortfall than the company had expected. It wasn't isolated. In fact, all products posted declines.

But here's the part that caught our attention: "[W]e have retained customers and kept them in the portfolio, however some of them shifted away from our premium products in an effort to control their own costs."

This is what Main Street faces going forward: lower profit margins forcing companies to cut costs and reduce staffing.


5. But the Indicators Say Bad News is Good News for Stocks

So why is the stock market going up?

Over the past two weeks we've outlined the deep oversold conditions in many of the technical indicators we follow through Investors Intelligence data. Slowly but surely those negative indicators are reversing up to positive from very low levels.

The Nasdaq-100 Bullish Percent and S&P 500 Bullish Percents have both reversed up. As well, the Nasdaq High-Low Index has reversed up to Xs:


Meanwhile, Investors Intelligence tracks something else indicative of a short-term low - "selling climaxes." According to Investor's Intelligence, a weekly "selling climax" occurs when a stock makes a 52-week low but closes higher for the week. In other words, stock XYZ opens on Monday at, say, $20.25, declines during the week to $20, which is a new 52-week low, but finishes the week at, say, $20.35. That marks a selling climax.

Investor's Intelligence tracks these selling climaxes and has noted that during important lows the expand significantly, marking at least short-term exhaustion points. Last week there were 959 selling climaxes, the second highest reading since they have been tracking them. The record was set during the week of January 25 of year. (Remember, these selling climaxes coincide with short-term lows, not necessarily long-term bottoms.)

Below is the chart, courtesy of Investor's Intelligence, showing the selling climaxes set against the S&P 500.

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No positions in stocks mentioned.

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