December 4, 2008
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News: Rising Unemployment Cuts Credit-Card Stocks
Analysts are coming down hard on the credit card industry lately. The reason why? Ominous forecasts for the job market. As consumer loses are expected to soar, credit card defaults and business losses are expected to build on that momentum. Fox-Pitt Kelton analyst Howard Shapiro announced that the recession we're now in is expected to be "among the longest ever, but not among the deepest." As a result, he whacked major credit card providers pretty hard on Wall Street. Among those named were Capital One Financial Corp.; American Express Co.; and Discover Financial Services. Already, stock prices of those three companies have down between 2% and 3% in the market.
Prospects of the U.S. job market are dismal and continue to look worse all the while. The U.S. Labor Department reports to us that job losses for November were more sharp in depth than they had anticipated. Economic consulting firm Moody's Economy.com predicts the unemployment rate not to peak until the first quarter of 2010, when it will reach 8.7%. September's peak was 6.5%. Fox-Pitt's Shapiro builds on that prediction by stating that GDP growth and the unemployment rate are the two key factors for predicting future losses for credit-card companies. Credit card giant, Capital One has been hammered with the prediction that their unrecoverable defaults (charge-offs) will reach the very high ratio of 9.5% by the end of next year.
Bank of America Corp. got hammered as well by Dick Bove, analyst for Ladenburg Thalmann. He estimated that, if the unemployment rate ever got as high as 10%, than BoA's stock could drop 9 points, down to $20 a share. His rule of thumb is that the loss rate of the credit-card industry should equal the unemployment rate. So the deadweight that's going to pull everything else down is the job market. Maybe the day will come when people are slapped for saying that de-regulation and trickle-down are good for the economy. We're going to have a long time to think about it.