Credit Card Use

Again, as I always say "it matter when it matters" – all these "worries" that are cropping up here, there and everywhere have been out there for everyone to see, they’ve just been conveniently ignored for most of the past 2 months as we drank Kool Aid (and sang Kumbaya) much like we did in September and October 07 as the "damage was contained" and "the Federal Reserve will bail us out, they always do".

Two weeks ago it mattered, last week things didn’t matter, now this week (thus far) they matter again. Psychology is just about everything in the short term of a market or an individual stock. So away we go – more and more dominoes are falling as we predicted last summer/early fall. Again, we await the first whispers of "1st half 2009" recovery as the pundits realize "2nd half 2008" recovery is a mythology they created to make themselves feel better. Just send me a comment to one of these postings sometime in the next 60 days when we get the first pundit to start talking about the 1st half 09 recovery….

Remember our path – credit cards used up, 401ks drained, beg, borrow, steal (pawn), then bankruptcy in 09. (an ’10) Thats unfortunately going to be the fate for a growing subset of Americans. Still to this day, very little of this future fallout is priced into the market – they are still trying to decide if inflation is an issue for average Americans. And frankly it was one of my thesis for the Mastercard (MA) investment – while everyone was saying on TV a slowing economy will hurt Mastercard (this was before VISA came live) and you better "sell, sell, sell" I was saying ohh… not so much, cash strapped consumers will be piling more debt for every day needs onto credit; after all this is the American way. [October 16: Rebuilding Mastercard] I wrote

Mastercard (MA) got whacked in the summer credit swoon and seems to be thrown into the ‘financials’ bucket – granted its a financial company but it is basically a transaction company, simple as that. Further, half of its revenue is overseas and I expect that to continue to grow as we get the middle class of Brazil, China, India, et al up and running. They love all things American so credit is the next step (who needs savings in this world anyhow?!)

There are also worries in this name that the stretched consumer is going to slow down but I’d argue that "could" be a positive or at worst neutral as a stretched consumer uses what when he/she doesn’t have cash? Credit! I’ve already been reading how the worst off in the US are paying off their credit cards ahead of their mortgages (and Mastercard does not even have that risk which is another misconception – the banks offering their branded cards are the ones who carry the risk)

And in December 2007 [Mastercard to Benefit from Visa IPO Hype] I wrote

And unlike some commentators, I don’t think VISA coming public will hurt Mastercard. You essentially have a duopoly – the only 2 ways to play the increasing plastic based society (cash is trash!), without the credit risk. Further, the more I think about the cash strapped US consumer, and how he/she is turning to plastic to fund gas and groceries (as their discretionary budget evaporates and inflation rips into them), the more I see credit card usage and hence each transactions is just more money for these companies.

So far so good; frankly even the well off are going to put those $70-$80 gas bills onto their card…. let’s see how the lower and middle class are doing (and oh yes you on the lower rungs of upper class – I see you too); readying themselves for the 2nd half 2008 recovery I am sure.

• Cash-strapped Americans are ringing up more and more purchases on their credit and debit cards, but there could be a steep price to pay ahead.
• Though the trend is a boon for the companies that issue the cards, analysts worry that there could be long-term problems not only for consumers but for the anemic economy and the already-troubled banks that will be underwriting all that risky debt.
• "Right now what we’re seeing is the US consumer losing their disposable income as they have to spend more and more on necessities because of higher prices for gas and food," says Ron Ianieri. (Obviously Mr Ianieri speaks the obvious truth, and therefore does not work on Wall Street)
• One of the main problems with that is US consumers–and their counterparts in Europe as well–already are delinquent on their credit card payments in numbers not seen in six years. The Federal Reserve last week said credit card delinquencies hit 4.86 percent in the first quarter in 2008, while revolving debt–or the type used in credit purchases–hit $957.2 billion in March, a 7.9 percent increase. (again, as I love to ask – these figures are when we are not even in a (cough) "recession" – what dare we ask happens when we get into one?)
• As all that risky, high-interest debt keeps accumulating, consumers will find themselves deeper in a hole that threatens to keep the economy in its sluggish state. Economists worry that the problems are being exacerbated by consumers using credit not only to buy big-screen TVs and patio furniture, but also to pay their mortgages and shop for groceries.
• Meanwhile, the banks that underwrite the credit card debt stand to lose as the delinquencies continue to rise. Standard & Poor’s on Monday issued a dour forecast for banks in 2008, in part because of their exposure to bad debt. (no no no, credit crisis is over – CNBC told me – mid March – Federal Reserve puts on super hero cape and fixes all problems – didn’t you see that episode?)
• "It’s a disaster, it’s a time bomb," Ianieri says. "The credit crisis is a lot more severe than it’s being made out to be. I think the government is doing everything it can to keep the severity of this situation under wraps from the general population. I think they’re just trying to bide time for these banks." (shhhh!! 2nd half recovery – stick to the script; otherwise we scare the sheep. Government would never do anything like that, shhhhh!!!)
• Visa and Mastercard back comparatively little of the credit actually issued through their cards, meaning they have a low level of risk for defaults and other payment issues. They get paid a fee each time someone uses their cards, and the banks that issue the cards assume responsibility for the debt.
• Lehman analyst Bruce Harting, in his research note on Mastercard, pointed out that the company believes it can duplicate its US business model in countries including Brazil, Hungary, Poland, Russia, India and China, nations where it projects 39 percent revenue growth. (mmmm…. credit…. good)
• "The danger is in painting with a broad brush and casting all consumers as reluctant or unable to spend," says Greg McBride, senior analyst at Bankrate.com. "There are a lot of consumers that are not in the state of distress and can continue to spend in a manner that’s not very different than a year or two ago when the economy was stronger. (yes, my blog readers/future investors fall into this category of course) 🙂 

Now folks let me just ask you what happens to these people in the first part of the story when banks start pulling back their HELOC loans, starts cutting the maximum credit limit on their credit cards, stops giving new loans entirely to them, etc etc etc. Oh I know – 2nd half recovery. Coming in 4 weeks to the United State of Subprime….

Long Mastercard in fund; no personal position