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The Fed, Markets, and MasterCard
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: January 16th, 2008 at 10:35 am EST
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2008 has swooned to levels not seen since August 2007 and March 2007 prior to that. Much blame is placed at the door of the consumer, with a forced belt-tightening after the home ATM and credit cards have dried up. Retail sales for December turned in an awful performance after such high expectations for a great xmas shopping season.
The Fed has not made things any easier, taking the more sanguine approach (which flies in the face of their aggressive talk). As a result, the Fed has made themselves impotent and without much firepower remaining. Sure, they can slam the markets with a blunt strike of multiple rate cuts, but it’s probably too little too late. Banks all over have started to crater and the worst may be in front of them. The disconnect between the Fed and the bond market is stunning, to say the least.
Markets
A warning shot that has nearly pierced the bull, or was there contact? It’s clear the economy is slowing down, perhaps recession…perhaps not. Whatever the case, the markets have told us this was coming for months. Look no further than last summer’s drop and steady rise in volatility. In a year, volatility has doubled from roughly 12% to where it is today at 24%, while the markets are modestly lower. The reaction so far is cloudy and will like take some kind of miracle to change the bearish sentiment.
Future Trouble for Mastercard
Mastercard has been one of our favorite names to play. It offers a great deal of momentum and rich rewards if you get the direction and timing right. One statistic caught my eye that may foretell trouble for Mastercard and the upcoming Visa IPO.
Let’s understand, these companies have virtually NO credit risk. Banks issue credit to consumers and businesses and absorb the risk. Mastercard and Visa make money on transactions. With the internet becoming a highly-used vehicle for transactions, more is great for the card issuers, and web spending is not slowing down.
What can stop these giants from becoming behemoths? CONTRACTION. What do we mean? A trend in banking has begun: cancelling accounts with zero balances, closing accounts and reducing limits. Fewer cards mean fewer transactions, lower limits mean less runup. The banks are right to do this, of course…to protect their interests with tough times on the horizon. They don’t want to get stuck paying the bill. Some issuers such as Capital One, JP Morgan and Wells Fargo have already warned about this and may take severe writedowns.
Bottom line, watch for this trend to continue if the prospects for the economy get worse, and the impact on Mastercard (along with AXP and DFS) going forward.
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Bob Lang, Economics, Stock Market
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