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David White
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David White is a software/firmware/marketing professional and a long time investor. He has worked in the networking field, the semiconductor equipment field, the mainframe computer field, and the pharmaceutical/scientific instrumentation field. He has bachelor's degrees in bioresource sciences... More
  • COF Up On Lower Than Expected April Charge Off Rate 2 comments
    May 15, 2009 9:07 AM | about stocks: COF

    This morning COF is up in the pre-market by about $1. This appears to be in response to COF's announcement that the April charge off rate was only 8.56%. Since the March charge off rate was 9.3%, most people had expected the April charge off rate to be above 9%, especially with unemployment still rising. There is no arguing, this is a great result for this economic time for COF. However, you shouldn't bite on this bait to buy in. COF has still risen from a low of $7.80 on Mar. 9. It has risen from a more recent low of $12.51 on April 21, 2009. It has recently fallen from its stress test boom high of $31.80 on May 8. It is currently at $25.44.

    COF is still slated to lose a lot of money for the rest of this year and probably most if not all of next year. These losses could be huge (billions). This is not the stock you want to own for the near future. It's credit card business is still souring. No less an authority than Ken Lewis (BofA CEO) has told us that this whole industry is souring quickly. The recent market move upward may have helped decrease the charge off rate temporarily. However, the charge off rate will climb. This is almost an invariant rule with high unemployment. Unemployment is now 8.9%. The most recent weekly figures indicate that it is still rising rapidly. The current predictions are for about 10.5% unemployment by the end of this year. The actual results could be even worse, since I don't think the 10.5% prediction really took into account Chrysler and GM bankruptcies. The current predictions are for an implosion in the commercial real estate market. The current predictions are for continued foreclosure problems in residential real estate throught out  2009 and 2010. COF has been losing lots of money. It seems more likely that this situation will worsen measurably in the very near future. Yes, COF has a TCE of 4.8% (== well capitalized), but it has just about everything else going wrong for it. Chrysler is starting to close a large percentage of its dealerships. GM is following suit. GM is likely following Chrysler into bankruptcy. The unemployment rate seems likely to jump dramatically. The charge off rates should jump with the higher unemployment rate. The commercial real estate problems may jump with this also. There is technical support for COF at approximately $20.30 and $19.20. This is still a long way down from the current price. Don't be caught up in the current bank hype. The banks are not going back to the profitability of the 2005-2007 period soon. They will not be making those many ill advised loans of those boom years in 2010-2013. They have at least learned a temporary lesson. COF has been significantly underperforming its sector. It has been losing huge amounts of money. Its losses are likely to mount quickly in the coming months. It is a much smarter play to the downside for the near future.

    Stocks: COF
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  • David White
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    Author’s reply » Also don't forget the imminent legislation from Congress that should limit credit card companies abilities to pass on some of these huge losses to their clients. This will have a huge near term negative impact on companies like COF as laws restricting rate increases, etc. are phased in.
    15 May 2009, 09:15 AM Reply Like
  • David White
    , contributor
    Comments (4048) | Send Message
     
    Author’s reply » The tax refunds often account for a decrease in charge off rates in April. Perhaps COF benefited from this. However, it is clear that many other credit card issuers did not. See the charge off rates below:
    AXP 10.10%
    BAC 10.47%
    C 10.21%

     

    This clearly indicates that the overall credit card business is worsening. Not withstanding a better than expected month, it seems likely that COF's credit card business will follow this upward trend in charge off rates. This will be very bad for COF. The stock is still a short in my book.
    18 May 2009, 01:10 PM Reply Like
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