Economic Recession – Credit Card Defaults

| February 8, 2008 | 0 Comments

It was mid-morning in San Francisco when my office phone started ringing.  Our new client was on the line.  They were raising $100 million in capital, and wanted us to work on the deal.  My heart was pounding as the CFO outlined the details of the transaction.  Then he dropped a bombshell.

We were starting tomorrow morning . . . in New York City.

I had about 55 minutes before the next flight left.  If I missed it, I would be on the red-eye, and late for the meeting.  With Mario Andretti speed the cabbie got me to my apartment for a change of clothes and then to the airport.  I ran through the terminal.  The last one to board, the door shut behind me as I stepped on the plane.  Then the real fun began.

The cab to the airport emptied my wallet, and New York City cabs don’t take credit cards.  After explaining my predicament to the hotel doorman he chuckled under his breath.  I was turning red with embarrassment as he paid the cab fare for me.  A few minutes later, after finding an ATM, I repaid the doorman and included a huge tip.

Ever since that experience I always try to carry cash.  However, I prefer to pay most expenses with a credit card.  It’s easier to track and more convenient at tax time.

I’m not alone.

Millions of consumers in America have abandoned cash and debit cards and rely entirely on credit.  These days you can charge almost anything you want.  Happy meals at McDonalds, gas for the car, groceries, coffee from Starbucks . . . who needs cash when you have a credit card.

But things are starting to change.  Many Americans are receiving nasty surprises in the mail this month.  Credit card companies are cutting credit limits and doubling interest rates.  And many people have no idea why.

Here's why and how you may be able to profit from it.

Credit card companies have watched the subprime market implode and foreclosure rates skyrocket.  Consumer credit is risky in times of a recession and companies are starting to feel the pinch.  This December credit balances more than 60 days overdue increased a whopping 18%.

This obviously isn't good for the economy or the credit card companies.

If consumers are having problems paying home loans, credit cards are sure to be next.  Capital One, with more than 50 million card holders, already announced a drop in profits last quarter.  The reason?  Losses on credit cards.  The stock has fallen 39% from a high of over $83 to around $50.

Clearly these companies are square in the sights of this problem.

American Express (AXP), Discover Card (DFS), Bank of America (BAC), and Capital One (COF) are all major issuers of consumer credit.  I think some credit card stocks are headed lower.  The bad news will show up over the next 3 to 4 months as problems with consumer credit will be highlighted.

One way to profit from this expected bad news is buying puts on Capital One as a short term trade.

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Category: Bonds

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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