Sharpest Drop in Consumer Credit in 15 Years

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U.S. Consumer Credit Down by Most Since April 1992 [MarketWatch.com]

Summary: September's outstanding consumer credit, which excludes mortgage debt, fell by $1.20 billion in September, to $2.366 trillion, at a seasonally adjusted annual rate of 0.61%. These results were the sharpest drop since April 1992, when outstanding consumer credit fell by $1.78 billion. Wall Street economists were not expecting these results; most were expecting a growth of about $5 billion in outstanding credit. Much of the decline is pinned on nonrevolving credit such as car and boat loans- an indication of a slowdown in car sales. Nonrevolving credit fell by $4.05 billion or 3.21% to $1.50 billion. However, credit card balances or so-called revolving debt, rose at a rate of 4%. It can be surmised that as housing prices fall, it has become harder for Americans to borrow against their homes in order to raise cash for other expenses. Instead, people have been relying more heavily on credit cards.
Related links: Additional coverage: WSJ• Forbes
Potentially impacted stocks and ETFs: American Express (AXP), Bank of America Corp (BAC), Citigroup (C), Mastercard (MA) • ETFs: iShares Dow Jones U.S. Financial Services Index (IYG), Vanguard Financials ETF (VFH)

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Comments

[David Jackson:]

"However, credit card balances or so-called revolving debt, rose at a rate of 4%. It can be surmised that as housing prices fall, it has become harder for Americans to borrow against their homes in order to raise cash for other expenses. Instead, people have been relying more heavily on credit cards."

I guess the argument here would be that people can't get home equity loans to replace higher-interest-rate credit card debt. But an alternative explanation would be that this is the beginning of a consumer spending slow-down: first there's a slow-down in big ticket items that require specific loans, such as cars, and then it will spread to smaller items that are paid by credit card.

If the latter is correct, this is a negative lead indicator for AXP and MA.

Would love to hear some input from some people who know the consumer credit market better than I do...

2006 Nov 09 08:25 AM

[FIG trader_:]

As far as I know, nobody has ever been able to make money trying to figure out aggregate credit statistics and how they play into stock-specific plays. A safe bet will be to short all of them when the fun starts. Higher interest rates will push many over the edge, but it could be two years away. One man's growth vehicle is another man's waste product. Credit is still being aggressivgely put onto off balance sheet structures, partly deflecting largest problems. Smart and stupid credit underwriters (consumer) have all been able to print money for years (ROEs in the 20%-plus range for over ten years for top three or four players. That is license to steal.)Smart ones have been shrinking loan book (domesticallly, or at least sharp deceleration) for some time COF, JPM (under Jamie) preparing for the credit deterioration which has yet to show its ugly face; Jamie Dimon insists its on the way; and I have no reason top doubt him. He emphasizes that they expect it to get worse (less worse for them of course). But it doesn't take a Phd to see the signs; At best ROEs will fall from the low 20s (for pure credit card buinsess) to the low teens by 2008. At worst, we go into single digits. AXP is high-end and somewhat more insulated, but is also the most expensive financial stock (except SLM and mo money-maker FMD) Think old KRB (now part of BAC) and C will get into trouble. Watch HSBC, expanding by leaps and bounds on the low end. But these are smart globakl investors Think they have something up their sleeves.

2006 Nov 09 12:48 PM

[FIG trader_:]

I would add; With this group you sell strength, buy weakness as long as whole Treasury curve is near or below 5%; the problems won't start in earnest until we move 150 basis points higher (a shift upwards in the whole curve). For now be content with mid to high single digit total return in 2008 (anyway you can get it, divd plus appreciation). If you buy at the high end of the range you won't get it. If you buy at the low end of trading range you MAY get it (operative word MAY)

2006 Nov 09 02:48 PM