Credit Card Charge Off Rate Highest in 20 Years - Moody's

Hi-fi quants are like pigs in a trough today, driving the market on horrible new home sales numbers just as State Street (STT) is back to its usual antics and (or as a result of which) Fidelity (FNF) disclosing no IWM borrow available. In the meantime, Moody's has released its Credit Card Index update: charge off rates for May have now surpassed 10%. From the report:

These trajectories are both consistent with our revised expectation for the charge-off rate index to peak in the second quarter of 2010 at about 12 percent, assuming an unemployment rate peak close to 10 percent in the first half of 2010.

The charge-off rate for accounts assumed to be bad debts increased to a new high in April for the fifth consecutive month, settling at 9.97 percent.

After tacking on another 60-plus basis points in April, the index charge-off rate is now almost 60 percent higher than a year ago.

This pace of rising charge-offs is unprecedented as year-over-year changes continue to surpass the magnitude of either increases or decreases experienced during any previous period.

We anticipate that by mid-year delinquency rates will again be on the rise in concert with a deteriorating employment picture into 2010.

And speaking of credit cards, JPM has just imposed a 5% credit card balance fee (higher than even that at nationalized in all but name bank BofA (BAC), which only went as high as 4%). This is sure to "facilitate" the willingness of consumer to borrow the nearly $1 trillion in excess cash held in assorted bank basements. Also, it might put a damper on future iPhone sales: every iPhone purchase is roughly equivalent to 0.0001% increase in charge off rates.

So when a few SPARCstations are buying every dip simply because they expect other SPARCs to join in the fray, with slow retail investors hoping this mini rally is for real and lapping up Liesman's optimism as justification to part with their increasingly harder earned cash, who cares about fundamentals.

Comments

[RiskReturnOptimizer]

Short XLF, XLY and long XLE, XLP until consumer deleverage process ends. Consumer appetite for new credit will be low, decreasing the denominator (good loan balances), thus bringing charge-off rates (numerator will remain high) high for next few years.

XLY suffers when new credit is low, XLF will be bad as too few good loans (generating great margins) are available to offset existing loan charge-offs.

XLP will do fine as consumers continue to shop at WMT. XLE is good as long as crude stays above $55.

2009 Jun 24 01:01 PM

[Big Al45]

Wahoo - more green shoots. Credit card chargeoffs were "less bad" than expected.

2009 Jun 24 01:43 PM

[User 274492]

Wow, I feel so much better, now that everything is "less worse"

2009 Jun 24 03:21 PM

[conceptwizard]

The “product” that the banking “industry” sells is debt – loans which, under today’s financial circumstances and tax favoritism for Wall Street, are extended in a way whose main effect is to inflate asset prices, not fund tangible capital formation. Rising prices for housing and commercial property, stocks and bonds, are taken as justification for yet more lending, backed by collateral being bid up in price. By loading the economy down with debt, this seeming “wealth creation” becomes a vicious circle increasing the economy’s financial carrying charge.

Mr. Obama’s “reform” plan is that it seeks to sustain this dynamic, not reverse it. The plan does not acknowledge the symbiotic relationship between fiscal and financial policy. Cutting property taxes leaves more real estate rent, monopoly rent and asset-price gains “free” to be pledged to the banks for yet larger loans – pledged to pay more interest on the rising debt taken on to buy assets being inflated by the credit bubble.

The resulting financial “enterprise” is different from industrial innovation. It consists largely of capturing congressional tax legislators so as to write small-print tax “loopholes” and more glaring tax breaks that shift the fiscal burden onto productive labor and industry. That is the essence of today’s “pay to play” democracy. Financializing the economy in this way has gone hand in hand with de-industrialization.

2009 Jun 24 10:20 PM

[optionsgirl]

I agreed with everything you said, until the last line. I do not understand what you mean, here. Would you please explain what you mean by de-industrialization? Are you saying we are no longer technical innovators?


On Jun 24 10:20 PM conceptwizard wrote:

> The “product” that the banking “industry” sells is debt – loans which,
> under today’s financial circumstances and tax favoritism for Wall
> Street, are extended in a way whose main effect is to inflate asset
> prices, not fund tangible capital formation. Rising prices for housing
> and commercial property, stocks and bonds, are taken as justification
> for yet more lending, backed by collateral being bid up in price.
> By loading the economy down with debt, this seeming “wealth creation”
> becomes a vicious circle increasing the economy’s financial carrying
> charge.
>
> Mr. Obama’s “reform” plan is that it seeks to sustain this dynamic,
> not reverse it. The plan does not acknowledge the symbiotic relationship
> between fiscal and financial policy. Cutting property taxes leaves
> more real estate rent, monopoly rent and asset-price gains “free”
> to be pledged to the banks for yet larger loans – pledged to pay
> more interest on the rising debt taken on to buy assets being inflated
> by the credit bubble.
>
> The resulting financial “enterprise” is different from industrial
> innovation. It consists largely of capturing congressional tax legislators
> so as to write small-print tax “loopholes” and more glaring tax breaks
> that shift the fiscal burden onto productive labor and industry.
> That is the essence of today’s “pay to play” democracy. Financializing
> the economy in this way has gone hand in hand with de-industrialization.
>

2009 Jun 25 07:50 AM

[Graham and Dodd Investor]

Dear Optionsgirl:

"Industrialization" in this context is relative. Compared to most countries, we are highly industrialized. Compared to our former selves (70% of our 1970 peak) or our financial sector, we're not.


On Jun 25 07:50 AM optionsgirl wrote:

> I agreed with everything you said, until the last line. I do not
> understand what you mean, here. Would you please explain what you
> mean by de-industrialization? Are you saying we are no longer technical
> innovators?

2009 Jun 25 01:36 PM

[punditobserver]

Conceptwizard: what do you do when your car runs out of gas? Declare that gas is what got you into this mess, leave it by the side of the road and buy a horse?

2009 Jul 03 09:13 PM