By Jonathan Yates

Contributor, Stock Traders Daily -  Rule-Based Trading Strategies

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(La Jolla CA)  As if financial companies did not have enough woes, the new credit card law will further cut into profits.  Signed into law by President Obama on May 22, it forces upon credit card issuers sweeping changes that prohibit sudden interest rate increases, penalty fees and universal default.  These practices such as universal default, when a late payment on an unrelated account such as a utility company resulted in a higher interest rate even if the credit card bill was current, netted issuers billions. 

US credit card delinquencies of at least 60 days hit a record high of 3.75%.  This will increase as the economic situation exacerbates.  Securities backed by credit card loans and leveraged highly that plunge in value will worsen the situation; much like mortgage-backed instruments compounding the problems of the real estate market when home loans went unpaid, expanding to other assets that became a global recession.  “Today, all asset classes are declining,” observed Tom Kee, President and Founder of Stock Traders Daily.

Legendary investor Jim Rogers went short on JP Morgan Chase (NYSE: JPM) due to its credit card problems.  JP Morgan Chase CEO, Jamie Dimon, lamented in an interview with Financial Times that, “The worst of the economic situation is not behind us.  It looks like it will continue to deteriorate for most of 2009.  In terms of our sector, we expect consumer loans and credit cards to get worse.  When we look back at industry excesses in areas such as highly leveraged lending and securitization, it is clear that some of these markets will never come back.”

Capital One (NYSE:COF) is acutely vulnerable, deriving 75% of earnings from credit cards.   Delinquencies and charge offs for Capital One have all increased in recent months.   Problems are manifesting at American Express (NYSE: AXP) and Discovery Financial Services (NYSE: DSF).  Payment volume growth has fallen over 75% at Mastercard (NYSE: MA), almost 50% off its year high.   No discussion on troubles in the financial sector would be complete without mention of Citigroup (NYSE: C) and Bank of America (NYSE: BAC).  Credit card lending has historically accounted for between 15 and 25% of pre-tax income at Citigroup, Bank of America and JP Morgan.   Losses in income at these banks, coupled with rising default rates and reserves needed to be set aside, will further limit earnings.

These travails will deepen the recession.  Uber banking analyst Meredith Whitney expects issuers to reduce available credit by $2 trillion in 2009, reducing consumer purchasing power.  With less goods being bought, there will be less workers needed to produce, increasing unemployment.  More layoffs will only add to the depth of the recession in the US and around the globe.  Billions more will be needed from Congress to offset credit card losses that will mount as the recession endures, pushing the budget deficit ever higher and dragging the value of the dollar down even lower.

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