Credit Market Overview: American Express, Target, JC Penney

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Includes: AOL, AXP, DIA, JCP, MA, QQQ, SPY, TGT, V
by: Jim Delaney

Actions, as they say, speak louder than words. So, when American Express Co. (NYSE:AXP) recently bought Revolution Money for $300 million it was a bit of a “Jerry Maguire” moment, only in reverse. Jerry said “help me, help you,” but since Revolution Money has developed an internet-based payment system that cuts costs for merchants, AXP’s take on that famous quote was more like: “let me help you, help me”.

When asked about the acquisition, AXP’s CEO, Kenneth Chenault, said: ““While there are many growth opportunities in our traditional payments businesses, we believe that it is important for us to keep identifying cutting-edge technologies that can extend our leadership into new areas.” Given that merchants currently pay AmEx 4% of purchases while MasterCard (NYSE:MA) and Visa (NYSE:V) only charge 2%, the new technology could make AmEx the preferred way to pay as more and more business is transacted online.

Also interesting is that Steve Case, the founder of AOL (NYSE:AOL), is one of the people behind Revolution, which also is involved in Zipcar. Obviously these are people used to finding innovative solutions.

With the Holiday shopping season in full swing, the battle between bricks and mortar retailers and those offering products and services online is in full swing. Coremetrics Inc., a Web analytics company that tracks shopper behavior on sites for more than 500 U.S. brands, reported recently that Thanksgiving Day sales were up 30% from last year and Black Friday sales were up 11%. “In many cases, I’ve found the prices to be the same or better online. I am definitely not going out to brave the stores for the one or two items that might be available at a better price,” was how Erin Gifford, a blogger on Coupon-Cravings.com, put it.

Target (NYSE:TGT) and J.C. Penny (NYSE:JCP) have been enticing online customers with promotions as has Amazon to keep the momentum from Black Friday going. “Extending the length of the promotional season makes perfect sense, because when you look at what people buy in those early door-buster sales, it’s usually something for themselves,” was how Paul Leinwand, VP in Booze & Co. retail consultancy practice put it. “There is a lot of pent up demand for personal purchases right now. It doesn’t compete with the gift shopping, which comes later,” he went on to say.

AXP’s CDS have moved from 712bps on 3/9 to 105bps last night, falling pretty dramatically right after the panic subsided this past spring and then meandering lower. The stock also took off earlier this year consolidated sideways for a while and then continued higher at what appears to be a faster rate of climb than the CDS’s rate of decline. The low this year for AXP’s stock this year was $10.26 on 3/6 and the high was reached on 11/30 at $41.83. AXP closed last night at $40.23.

TGT’s CDS came into the year moving lower and continued to do so until 7/23 when they closed at 58bps. Since then they have been as high as 94bps on 9/2 and closed last night at 70bps, about in the middle of the July/September range. The stock bottomed in March rose quickly until the beginning of May, consolidated and then made another run up to its high for the year of $51.35 on 10/14. Having closed last night at $47.26 the CDS and equity would appear to be out of synch although the relationship needs to be watched with patience.

JCP’s CDS/equity combo is positively correlated at the moment with both the CDS and equity prices moving lower. The CDS peaked at 551bps in March, reached a low of 140bps in August and closed last night at 148bps. The stock moved from $14.18 on 3/9 to $36.81 on 10/14 but closed at $27.43 on 12/9, roughly 25% below its high.

With the CDS spreads for TGT and JCP at or very near their lows for the year the credit market would appear to have a different view of these retailers’s business prospects than the equity market does. This will probably come to a resolution once data on Holiday shopping is released.