This week’s earning report from American Express (AXP) quite frankly substantiates much of what we’ve been warning about for a long time. It is just taking longer to hit the “upper middle/lower upper” class. [Jan 10: Credit Card Warnings Here, Credit Card Warnings There] Remember our thesis - credit cards are the last major lifeline many Americans are clinging too. The real defaults in this group have only just begun - many should be able to make the minimum payment for a while, maybe 9 months, maybe 15, maybe 21 - but eventually without their home ATM to use as a lifeline, they will be out of places to juggle debt. And that’s when the personal bankruptices begin to fly up the charts. So we use Capital One Financial (COF) for normal folk, and AXP for the upper 10-15%. Keep in mind this is in a time where rebate checks were being handed out by your grandchildren to stave off such data as we are starting to see below…

• American Express Co. said Monday its second-quarter profit tumbled 38 percent, well below Wall Street’s forecast, as consumer spending slowed and the number of loans that had to be written off as unpaid increased beyond the lender’s expectations.
• The company, known for catering to some of America’s wealthiest consumers, said the effects of the weakening economy were evident even among its more established members with excellent credit.
• The results include a $374 million addition to credit reserves, reflecting higher credit losses and the expectation for increased write-offs in the third and fourth quarter.
• Results were hurt by a $1.5 billion provision for loan losses, up from $640 million in the 2007 quarter.
• The net loan write-off rate, including both on-balance-sheet cardmember loans and off-balance-sheet securitized cardmember loans, was 5.3 percent, compared with 2.9 percent in the prior-year quarter.
• “Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations,” Chenault said. “The scope of the economic fallout was evident even among our longer term, superprime cardmembers.” (thats SUPERprime not SUBprime)
• American Express executives said the company has begun to notice problems even among cardholders with credit scores ranging from 650 to 750, and those who hold mortgages on multiple properties. As a general rule, those with a credit score above 650 receive the lowest interest rates.
• The pinch felt by American Express’ superprime cardholders mirrors a similar trend among borrowers at JPMorgan Chase & Co. The bank said last week that even its more creditworthy borrowers are now failing to make their mortgage payments — the charge-off rate for prime mortgages nearly doubled from the first quarter to the second.
• “We now believe the economic weakness in the US will likely worsen throughout the remainder of the year and negatively impact credit and business trends,” said Dan Henry, Chief Financial Officer. (2nd half recovery? not so much?)
• Revenue from its international card services division increased 20 percent to $1.3 billion, due to higher cardmember spending and borrowing. (again, thank god for non Americans)

Again folks - every 8-12 weeks we have these oversold rallies in the worst of breed - I have contended each time that these are simply times to rebuild shorts at much more attractive levels once the animal spirits peter out. I continue to advocate that position. How will these Americans already struggling - without rebate checks to help them this fall/winter be contending with the lagged effects of food inflation, and home heating - even if their gasoline drops to $3.40 or heck $3.00. There is no 2nd half 2008 economic recovery and when the pundits start to spin the 1st half 2009 economic recovery, that’s a bowl of Kool Aid too. Maybe with oil $75 (if/when) we can talk 2nd half 2009 recovery but only if home prices crash quickly and let the new cycle begin anew. I’m thinking it won’t be that early. We’ll revisit in 2010

No position

Last 5 posts by Trader Mark

• Boston Globe: What Would a 2009 Depression Look Like? - November 19th, 2008
• Perfectly Hedged - November 12th, 2008
• Earnings for Perfect World (PWRD) and Energy Conversion Devices (ENER) Both Solid - November 10th, 2008
• Sequenom (SQNM) "Misses" But We Really Don't Care - October 30th, 2008
• Thoratec (THOR) Smashes Earnings; Somehow Guides Up - October 30th, 2008