Thursday, May 15, 2008

10% Defaults Coming

Again, I'd like to distinguish the difference between Mastercard and Visa and the banks who carry the credit card loans on their books at revolving rates and make money on fee structures. V and MC simply charge the vendor a transaction fee. BAC, COF, WM and Chase (JPM) all have increased loan loss provisions on defaulting/delinquent cards and expect those numbers to increase as unemployment and foreclosures continue to rise. In her article, Laurie Kulikowski estimates that delinquencies on WM loans could go over 10%. Furthermore, remember that these are unsecured loans. You default on your credit card and it effects your score, but they can't remove a tangible asset from you. You default on your home loan, and they put a lien on your house!

"Moody's Investor Services on Tuesday issued a negative outlook for the next 12 months for the entire consumer finance industry, which includes credit cards, auto finance, education finance and other consumer lending areas, as recession fears ring true, according to a report." Also, as we well know, these banks haven't been exactly forthcoming with their balance sheet information and have forecast most inaccurately about consumer trending. Shame on you Karen Finerman who recommended shorting COF in the 40s then advised dumping the position when it went over $55. Does she manage her firm's money with the same kind of conviction less decision making?

Continuing with our glowing theme, April year-over-year foreclosures rose 65%, the highest number in the history of the world. Greenspan says we'll be done by 09', really? I keep thinking of contrarians Bill Fleckenstein and Nassim Taleb in attempting to put a date on this bottomless pit. How can we draw comparisons with this housing bust when the underlying credit mess beneath it is unprecedented? Another 6K jobs lost last month as well.

A side note on the Cavs for TC. James is easily the best player ever, they should've won last night aside from awful FT shooting. Jordan never played in "the zone" era...

Update: Mental math champion indeed. Except when I forget to read the fine print and don't include the transaction costs on selling and the .1o/contract expiry fee on winning contracts. Thus, throw out the 8% brother, here is the new math:

500 Obama/450 Mccain nets $338.50 O, -154 M
520 Obama/500M nets $231 O, $34 M or 4.6% O
350 O/400M nets -$82 O, $409.50 M or 11%
500 O/475 M nets $244 O, -$6 M or 5.1% O
375 O/400M nets $18 O, $260 M or 6.96%

Sorry, always a catch. Again, if Hillary wins you'd be screwed. Waiting to hear from intrade because if you cash in pre-election, you might be able to avoid expiry fee which would increase returns.

No comments: