Consumer confidence keeps heading lower as gasoline keeps heading higher and property values plummet. This double whammy has the potential to put the consumer into a long tail-spin. In such an environment, as disposable income declines, credit card use goes up. Visa (V) would benefit from such credit card use as it has been. The stock has recently pulled off its high of $90 and sits a good 12% lower. Meanwhile, credit card issuers will not fare so well. Companies like Capital One, which issue unsecured debt will see increasing amount of delinquencies and loan defaults. Capital One (COF) is sitting a mere 10% above its 52-week low and has collapsed from $53 to $39 within 5 weeks.

Despite being in the consumer credit business, these two companies have very different business models. Visa does not issue any debt. They process transactions and make money with each transaction. Capital One issues credit to the consumer and make money off the interest collected. With homes being foreclosed, and cars being reposessed, credit card debt and loans are a natural contender for defaults too.

In such an environment, I recommend a pair trade. Go long Visa and short Capital One.

– Faisal Laljee
Full Disclosure: I am long Visa but my position can change anytime without notice.

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