AmEx Misses: The Bear Trap Thickens

Monday evening American Express (AXP) reported a 37% drop in profits for the second quarter, the third consecutive quarter in which profits fell for the supreme credit card issuer. The second course at this summer’s secular bear market feast is now served. Enjoy.

The consensus of $.86 a share was missed – by a lot. The actual number was $.58 a share, a stunning $385 million dollars off, or $.28 cents a share. Furthermore, Bloomberg reported, Kenneth Chenault, Chief Executive Office said on yesterday’s conference call, American Express is “no longer tracking” a prior forecast of 4% and until the U.S. economy improves, the company will not meet longer term targets.

I believe this is significant because American Express exemplifies the best-of-breed of American credit card issuers. If defaults are rising in this luxurious consumer area, then any remaining doubters or non-believers of this crisis' intensity should perform a financial autopsy on one of America’s signature haute cove for the affluent for confirmation.

This secular bear market is moving slowly across the land, destroying all in its path. The insidious part about this grizzly is that it’s part of an even larger menace. We’re now in the throes of a global downturn of unknown dimensions and ramifications. As the federal government rashly insures $5 trillion dollars of mortgages and refusing to raise interest rates, hoping to achieve a soft landing, the rest of the world is hiking short–term rates, while in a knife fight with inflation, hoping to avoid economic ruin.

Our decision to focus on recession, which is a natural part of the business cycle, versus inflation, a more discretionary and destructive economic occurrence, is a less valuable target to annihilate. Fighting recession will make inflation worse. Will we have the strength, wherewithal, and resolve, in 2009 and 2010, to seriously fight hat-size inflation of 7% or 8%?

Fed Chairman Ben Bernanke testified before congress last Tuesday. In his opening remarks, the following passage is most salient and succinct:

“Moreover, the currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation. If that were to occur, and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term. A critical responsibility of monetary policy makers is to prevent that process from taking hold.”

Bloomberg reported that a private survey conducted by the National Association of Business Economics found that more companies will increase prices and limit hiring because of surging raw material costs are reducing profits. Seventy-one percent of the companies responding stated last quarter their costs rose. That was up from 65% of companies reporting experiencing higher costs the previous three months.

Also, the Labor Department last week reported that wages, adjusted for inflation, were down 2.4 percent for the past 12 months ending in June. Wage inflation is the final crucial element missing from current economic data that guarantees full blown inflation. The total number of new jobs created year-to-date in this economy is a negative 600,000 plus, and rising.

The rationale behind the $1.2 trillion in tax cuts, approved by Congress in 2001 for the wealthy, was that they could invest those dollars wisely and create jobs for the economy. Now would be an excellent moment for the upper crust of society to wave their magic wand and produce 200,000 jobs each month.

Our anemic domestic growth rate of 0.6% in the 4th quarter 2007 and 1.0% in the 1st quarter of 2008 faces formidable challenges in the 3rd and 4th quarters of 2008. Economies in Europe, Asia, and Latin America are in the process of reexamining both their monetary and fiscal policies. Going forward, if they are successful in lowering their respective growth rates will exacerbate our weakening economic condition. Likewise, if trade subsides between partners, some of the inflation embedded in the costs of raw materials that’s exported in finished products, before it evaporates in due course, will remain here long enough adding to our higher inflation figures.The bears can’t wait until the third course is served. Bon appetite!

Disclosure: None

Comments

[buyitcheap]

If AXP is the gold standard, that bodes poorly for COF,MA and V.

[CLH]

American express holds debt while the other card companies dont (the banks hold the debt). Therefore there is no comparison.

I believe the bears are bleeding and badly wounded as the market heads up. The breakdown of oil was the kiss of death for the bears. As food and energy go down in price, the bears back is broken.

You are wrong about everything as most lefties are.

[lounge707]

I think American Express probably represents the responsible class more than the upper class. I knew a girl who made less than 24,000 a year, but was impeccable with paying off her American express card EVERY month. Come to think of it...I should get an Amex card myself. At least I make 27,000 a year.

[Marvin Clark]

buyitcheap - It bodes poorly for this consumer driven economy. AXP represent consumers with greater disposable income.

[Marvin Clark]

CLH - I'm addressing their future revenue. I have not seen any data on falling food prices. We should all be concerned if the advance or decline in equities is controlled by a $25 price change in a barrel of oil.

[Marvin Clark]

lounge707 - AXP represents both type of consumer. Noted.

[iThinkBig]

1) Author is definite liberal tax and spend Democrat. Tax cuts work, didn't you get the memo?!? Outrageous spending by Dems and Republicans is mutually shared disaster, but tax cuts probably brightest economy salient point for Republicans.
2) Check my comments for the last year. Compare them with your own comments people such as CLH. This economic mess is a doozie. America will recover but I am not expecting the next sustained bull market (more then a year) until 2013 or after. Wish to place a friendly wager CHL? Your stock market knowledge vs. fundamentals. It would be interesting.

[Marvin Clark]

iThinkBig - After 30 years of trickle-down economics destroying sound and successful post WWII American capitalism, going back to a more balanced Keynesian/Monetarism approach may save the day; again.

[bearfund]

Marvin, oh my. Keynesianism and Monetarism, you say. Yes, that's the ticket. Hang on a sec while I increase the size of my short position in Treasuries even farther... done. Now, what were you saying again?

America is broke. Get it through your head. All that's left is to decide whether to inflate away the remaining wealth of the few solvent citizens for the sake of the profligate many or to watch asset prices collapse as the market gets its head out and returns valuations to reasonable levels. In neither case will the nation's total wealth or economic capacity increase. Doesn't matter to me; I'm going to profit either way. How about you?

[Marvin Clark]

bearfund - I agree America is technically broke. It took dozens of poor choices over many years for us to sink to this level. But, how do we fix it? I don't endorse inflating our way out of this problem. Cutting taxes isn't a solution either.

De-leveraging this economy will return asset valuations to reasonable levels. That is currently underway. And, that will inflict major pain; so be it. But, unless you know of a different economic model to employ to return long-term stability to our financial system, what worked in the great depression is a good place to start. It's not perfect but what is?

Whether economies are expanding or crashing, profits can be made. Chasing profits to the point of killing the goose laying the golden eggs is reckless.