The Financial Light at the End of the Tunnel?

Most people think the light at the end of the tunnel is a good sign, however if you are going to be run over by the light...it is time to run the other way!

The Financial Freight Train

It is hard to believe, but for weeks some of the network pundits (with a straight face) have been calling the bottom in the stock market financials. Analysts for Cashin' In on Fox have gone as far as recommending XLF. CNBC has done the same by pounding the table on a basket of financials. At the end of the day, it is important to remember the guests on those shows are salesmen who are selling their wares to a weary public.

Cash Call

While some were calling a short-lived dollar bottom, it only takes companies like AIG (AIG) to report cash problem and off sells the market. (1) This only comes on the heels of the previous quarter's losses. And for investors, the light at the end of the tunnel starts looking more and more like a train that is going to run stock holders into financial ruin! The tremors of AIG will continue to be felt through out the financial world as C was singing a similar tune today! Readers are reminded that Bear Stearns (BSC) and National City (NCC) found themselves in a similar situation, and look what happened to investors who were left holding the bag! ABC reported the grief counselors were needed at BSC to help employees cope with the dramatic losses suffered during its recent financial meltdown. (2) Is Wachovia (WB) or Capital One (COF) heading down the same path?

Credit Crunch

Interestingly enough consumer saw unleaded gasoline hit $3.75. While the U.S. Gasoline Fund (UGA) appears to be a safe play here, the only question becomes "How much higher can it go?" According to an analyst on CNBC gas could hit $6.00 a gallon next year at this time. The analyst went on to say that Americans will pay it, after all it is all about supply and demand. No doubt he is long on oil. While the analyst is correct, it became apparent that he is ignoring the economic impact on entire segments of the US economy. If gas drags the economy to a slow-down status, then it is light out for any type of recovery in the housing market.

Yet Cindy Perman of CNBC believes the consumer will make it through this "rough patch." (3) Most of the people who fill up their own gas tanks may beg to differ! We are reminded that consumer spending is responsible for 2/3 of the U.S. economy. When that money is spent on necessities such as fuel and food, it does not allow a lot of wiggle room for growth areas. Stimulus checks be darned!

Credit Card Companies Clipped

If Europe has been the trend-setter for regulations that eventually hit U.S. shores. Visa (V), MasterCard (MA) and Discover Financial Services (DFS) may have reason to be concerned. In January, European commission ruled that MA's interchange rates are illegal. (4) Now HR5546 Bill a.k.a. the Credit Card Fair Fee Act appears to be headed to the Senate where it should meet little resistance. (5) There is no doubt that anti-trust fears impacted the volatility of the sector this week. Please see Clayton Act.

Last week's article Big Ben's Credit Card Moves: The Good, The Bad, and The Ugly cited www.creditmall.org (6) as an excellent source for credit cards deals. Some of the best rates included 0% APR for 15 months. While the good credit risks justifiably receive the best credit cards, there is now some suggestion that underwriting standards are now tightening on other lines. Furthermore banks are being vilified by some of the "loan shark" type practices which guaranteed that people who were in debt almost certainly stayed in debt. (7) This could well be a case of too little too late, as the government may be poised for additional actions to protect consumers. This would mean a fundamental change in credit card business models. Revenue sources for a number of financials will be tested once again: BAC, COF, AXP, DFS, JPM, C, ADVNA.

Talkin Tribe!

Congratulations to Cliff Lee the first Cleveland Indians pitcher to hit the 6-0 mark since Greg Swindell in 1988. However, I am certain that Swindell had better run support in his starts. More amazing is Lee's .82 ERA! That's just amazing! I am liking Jason Michaels' move to Pittsburgh for cash and a player to be named later. Awesome come from behind win last night against Toronto!

Sources Cited:

1. http://biz.yahoo.com/ap/080509/wall_street.html

2. http://abcnews.go.com/Business/story?id=4476286&page=1

3. http://www.cnbc.com/id/24543379

4. http://www.creditslips.org/creditslips/2008/01/european-commis.html

5. http://www.opencongress.org/bill/110-h5546/show

6. http://www.creditmall.org

7. http://seattlepi.nwsource.com/money/362550_singletary10.html

Comments

[TKTK53:]

Bad press like you write don't help, it hurts
Yes we are at the bottom, so why tell everybody something else

2008 May 12 08:43 AM

[gardengnome:]

I disagree with TKTK53. We are beyond the bottom when retail gas prices start coming down.

2008 May 12 01:10 PM

[poet1:]

HOW DOES THIS FIGURE- JPM WAS INVOLVED IN THE VISA IPO & NOW THEY SAY THEY WILL LOSE MONEY ON CREDIT CARDS.....

JPMorgan Expects Banking, Cards to Post Lower Profit (Update2)
By Elizabeth Hester

May 12 (Bloomberg) -- JPMorgan Chase & Co., the third- biggest U.S. bank, will post lower earnings from investment banking and credit cards this quarter as the U.S. recession gets under way, Chief Executive Officer Jamie Dimon said.

JPMorgan is seeing lower revenue growth in its credit-card business and will probably have to set aside more money to cover bad loans in that unit, as well as in retail and investment banking, Dimon said today at a conference in New York sponsored by UBS AG.

``The recession is just starting,'' Dimon said. ``I don't know if it will be mild or severe.'' The chances of it being ``pretty bad'' are about one in three, the 52-year-old CEO said.

JPMorgan has posted about $10 billion of writedowns and losses since the beginning of last year, compared with more than $40 billion at bigger rival Citigroup Inc. Dimon said the capital markets crisis sparked by last year's collapse of the subprime mortgage market is about 75 percent over.

In home lending, New York-based JPMorgan expects to lose $200 million to $250 million in the second quarter related to subprime mortgages. Losses in prime mortgages, those made to people with the highest credit rating, could increase to about $100 million for the quarter, the bank said.

Dimon also said the integration of Bear Stearns Cos. was ``proceeding well,'' though he urged analysts to wait a year before judging whether the deal was a success. Once the fifth- biggest U.S. securities firm, Bear Stearns was forced to agree to the takeover on March 16 after customers and lenders fled because of speculation that the company faced a cash shortage.

JPMorgan has found jobs for about 40 percent of Bear Stearns's more than 14,000 employees, Dimon said today. All employment decisions are expected by June 1.

JPMorgan, up 8.2 percent on the New York Stock Exchange this year, rose 67 cents to $47.24 at 4:18 p.m.

To contact the reporter on this story: Elizabeth Hester in New York at [e-mail].

Last Updated: May 12, 2008 16:19 EDT

2008 May 12 05:46 PM

[James Cullen:]

I don't think you should lump American Express in with the credit card "loan sharks" - they cater to the affluent, and aren't like a Capital One...

2008 May 12 11:52 PM