Why is the Market Ignoring American Express's Bad Report?

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Includes: AXP, MA, V
by: Greg Feirman

Okay, I admit it: this market is now officially annoying me.

American Express (NYSE:AXP) reported 1st quarter earnings after the close Thursday and from the behavior of the stock, you’d think it suggested a major turnaround and economic recovery. The stock was up 20% on very strong volume. The stock is now up 150% from its March 9th low - from $10 to $25.

But in fact the report clearly shows continuing economic deterioration. Even though earnings beat analyst estimates, the quality of earnings is very low. The company's core US Card Services business actually posted a loss of $25 million - compared to $523M in net income in the year ago period. The quarter also benefited from a $136 million after-tax profit related to Mastercard (NYSE:MA) and Visa (NYSE:V) settlements compared to $43 million related to Visa in the year ago period. That right there represents more than 30% of AMEX's $437 million in net income. Not a repeatable event and not high quality.

Most importantly, the credit card portfolio continues to show massive credit quality deterioration. The charge off rate on the $56.5 billion US Card portfolio leaped to 8.5% and the press release says AXP expects a 200 to 250 basis point increase in the 2nd quarter! That’s up from 6.7% in the 4th quarter, 5.9% in the 3rd, 5.3% in the 2nd and 4.3% in the 1st quarter of 2008. That is not a good trend!

Further, spending by card members is dropping precipitously. US Card billed business dropped 15% from $114.6 billion to $97.4 billion. Average basic US cardmember spending dropped 15.8% from $2,838 to $2,391 for the quarter. This suggests worldwide consumer spending is in freefall.

This is really getting ridiculous now and I’m annoyed.

Disclosure: Top Gun has no position in American Express shares.