If the economy is getting better, you’d expect defaults and delinquencies on credit cards to be falling, right?
So are they? Is the credit card picture getting better or worse?
It’s an important question for the direction of the economy: You can’t expect consumers to pick u spending if 1) they don’t have jobs, and 2) their houses are worth less than they paid for them, and 3) they’re behind on their credit cards. And consumer spending is about two-thirds of all economic activity in the United States.
Well, the news on credit card debt is exactly the kind of mixed bag that you’d expect at this early stage of a recovery.
According to February credit card numbers from the nation’s biggest card issuers released on March 15, banks that did a bad job of figuring out who was credit worthy and who wasn’t continue to show rising charge offs. Bank of America (BAC), my nominee for the bank that never saw a borrower it wouldn’t lend to, saw charge offs climb in February to 13.5% from 13.25% in January. Bank of America has led the charge-off hit parade since last summer.
And banks that didn’t throw all lending standards out the window saw charge offs improve in February. At JPMorgan Chase (JPM) charge offs fell to 9.2% in February from 10.9% in January. (Horrendously high but still four percentage points better than at Bank of America.)
Capital One (COF), which many analysts think should be most vulnerable to charge offs since so many of its cards went out to less-credit worthy borrowers, still saw charge offs fall to 10.19% in February from 10.4% in January. (Goldman Sachs recently estimated that 30% of Capital One’s customers were what the investment bank called less-credit worthy borrowers. That compares to a mere 20% to 25% at other big card issuers.)
Almost all of the credit card issuers reported that delinquency rates were down in February from January. That argues for lower charge offs in the future since a credit card has to go delinquent before the bank will call it a bad loan and write it off as a loss.
Almost all.
Citigroup (C) deserves a special call out.
The bank reported that charge offs rose to 11.29% in February from 9.8% in January. That’s a huge move in the wrong direction. And if we’re to judge by delinquency rates, Citigroup hasn’t turned the corner on its credit card problems. Delinquencies in February rose to 5.94% from 5.75% in January. The stock which has rallied quite strongly recently, gave up 2% today.
STL,
I’m not really big on small pharma companies like MNKD (although my dad invests in a few of them).
What I find ironic is the difference between “small pharma” in the U.S., versus China. Over in China, they’re much more dog-eat-dog, left to compete in the marketplace. In the U.S., they can tap the equity markets for ages as long as they have something promising in the pipeline. I won’t say one system is better than the other, but I will say, from an investment perspective, the Chinese small pharma companies at least have better looking financials.
Matt and EdMcGon…
Thanks for the link and heads up on NVO. Did either of you catch the idea of inhaling the diabetic med (MNKD) as opposed to injections??
If unemployment is a lagging indicator, then what does this represent? I reason that the two are correlated with some sort of lag. Tough for the banks mentioned, but as far as the trend in the economy, it may be something to watch as a verification signal if and when unemployment drops.
BTW, I’m in big pharma, and health care reform would probably not be the big problem people like to present. That said, I would not put my money into pharma at this time. There is a huge transition going on exemplified by Astrazeneca, Pfizer, et al with patent expires, and transition from chemistry to biology, and trying to buy ideas from smaller companies. What you will see in the near future is the cost of buying these ideas [ needed because research is just too hard and expensive the way things are structured ] will be going up, effectively erasing any benefit.
Ed,
I hope everyone watches this — the true motivation of many “experts” is difficult to discern and I’d use lots of grains of salt…
You are correct though, Cramer can be entertaining… could he be short those equities for which he shouts “sell” – wouldn’t be surprised.
rolfer,
I saw that interview. That’s one of the reasons I take Cramer with a grain of salt. He is a person I listen to with a discerning ear, questioning his motives at every turn. He tends to say “buy” much more than he says “sell”, so when he does sell, it’s time to pay attention. Mind you, he can still be wrong.
EdMcGon and all: If anyone hasn’t seen this interview, especially minutes 1 to 2:30, treat yourselves and do watch this: http://www.thedailyshow.com/watch/thu-march-12-2009/jim-cramer-pt–2.
I don’t know what Jim Cramer is, but anyone who takes his or any talking head/hedge fund/mutual fund manager’s advice on TV deserves the ensuing results.
matt,
At this point, I can’t say the bill will pass or not. I think both sides of the issue have selfish political motives at this point to say it will or won’t. The Democrats have to make it seem like a slam dunk, so if it fails, they can blame the Republicans. On the other hand, the Republicans are trying to make it sound like it can’t pass, so if it does, they can blame the Democrats for forcing it through.
As for NVO, It’s a little over-priced now. I’d wait until after they pay their dividend this month before buying any. Their stock has dropped the last 2 years after they paid their dividend. Wait and get a bargain.
STL,
It’s an older article (October), but maybe it will give you some insight in how to approach the healthcare debate and investing.
https://jubakpicks.com/2009/10/13/losers-and-5-winners-from-health-care-reform-and-why-well-be-fighting-over-who-pays-for-a-decade/
Ed:
Good point. I hadn’t thought about the effect of that legislation, but it just so happens that NVO is based in Denmark.
As for the bill, like the Cramer link you posted, i too fear its passage is inevitable.
STL,
I wouldn’t touch any U.S.-based health care or pharma companies until after the health care bill is passed or dead, and it won’t be “officially” dead until closer to the November elections.
Matt Palmer…
Thank you…will go do some research now!
Seaturtlelady:
One pharmaceutical that i’ve been invested in for over a year now is Novo Nordisk (NVO). Their primary product is insulin and they are a key manufacturer of it. I don’t think there’s a better play for an aging population than diabetes (and my rising MCD stock says it’s a good play too).
Ed,
Foreclosing on real property has two facets: 1. the credit reporting aspect (30,60,90,120,charge-off) and 2. the “taking back” of property due to default which is a legal process. #2 may be delayed for various reasons such as legal processes, or working with a homeowner due to unusual circumstances. #1 is an industry standard…at least it was when I was in the business. This system is automated between the bank and the credit reporting agency. By the way, it’s possible for a bank to charge off a bankruptcy early, especially when the debtor is not going to reaffirm with them. Regulators are interested in bank procedures and following regulations.
EdMcGon…
Thanks for the link to Cramer’s article…I found it to be “disturbing” to say the least!
What are your thoughts on investing in health care and/or pharmaceuticals? I’ve not seen any articles on this site except for comments that have been made about the “aging” population growing.
Thanks a bunch!
I am not a fan of Jim Cramer, although I do find him entertaining, even if his stock picks tend to be poor (does he even understand what “debt” is?).
Having said that, because of his intense following of the markets, he does make a good “canary in the coal mine”, because he also tends to be overly optimistic about market prospects. That is why this editorial from him is worrisome:
http://www.thestreet.com/story/10703361/1/cramer-obamacare-will-topple-the-market.html?kval=dontmiss
I don’t disagree with him either.
Actually, Shorlantanzo has a valid point. We know many banks are delaying foreclosure on houses already. Why don’t the regulators insist on foreclosure? I would not be surprised if we’re seeing the same kind of thing with credit cards, where the account balances involved are much lower.
In addition, it’s easier to foreclose on a house than to collect a delinquent credit card balance.
Disclosure: I used to work for one of the banks Jim named, although not in the credit card area.
China, Japan Reduced Holdings of U.S. Treasury Debt in January
…….
““If this were to continue, if China were to stop recycling its dollars into U.S. Treasuries, it could have dire implications for Main Street America in that mortgage rates could move higher.””
http://www.bloomberg.com/apps/news?pid=20601087&sid=avsB.BdWGdIE&pos=4
If you want to really have fun with the numbers, compare c/o’s with 2 years ago (before recession), 1 yr ago and 6 months ago when the “official” end of the recession was marked. My point? I suspect we’re getting the same “not as bad” numbers as in unemployment, housing starts and foreclosures. I think all of this relates to investor sentiment…wanting more than “not as bad”, that is actual positive progress above the zero line before they really get in a buying mood…with lots of volume (more than we’re experiencing now).
So far as Shorlantanzo’s comment about pushing c/o’s to a later date…don’t think so…credit reporting prohibits (I think) and too much scrutiny by regulators.
Could a bank go so far as to try to push their charge offs to a later date so that things look okay in the current picture? Yes, they’ve taken a lot of flak for their sub-standards up till now, but people would start jumping ship if charge offs rose to huge amounts. Also, clarification, this is a completely separate pool from loans such as for cars and houses (of which “projections” are saying will get much worse well before they get any better)?