The attached image basically sums up my current investment thesis - credit cards are the next mortgages. Think about it this way - the average household has $2,000 in credit card debt that they carry over from month to month. These are the same people that are defaulting on their mortgages left and right. The thing is though, credit cards have much more lenient terms, allowing people to put off payments again and again. They are also unsecured. If you don’t pay your mortgage, at least the bank gets your house. If you don’t pay the credit card, the lender has no recourse.
So the strategy is - short Visa (V), Mastercard (MA) and Discover (DFS). Going to leave AMEX alone, as their lending policies are stricter.
Thoughts? Are there better ways to short credit card debt than shorting the individual credit card companies’ stock?
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You might want to look at the business descriptions for those companies. V and MA don't take any credit risk; there are no loans to consumers on their balance sheets. They simply own the payment network and collect a fee (% of transaction value) every time a transaction occurs with one of their cards. It is the banks that issue these cards that hold the credit risk. For instance, if I default on my Bank of America-issued Visa card, BAC is the one who takes the loss. (That is not to say, however, that V and MA will not be hurt by the recession. As spending decreases, their fees should decrease as well.)
AXP and DFS, on the other hand, do hold credit risk. DFS has lower quality borrowers of the two, but AXP's high credit standards of years past has largely gone out the window in the last few years. That's why you've seen them take so many writedowns over the past few Qs.
As far as other ways to play this, I'm sure there are securitizations of credit card debt out there that some trading desk would be happy to write you a CDS for. (Joking here, of course, unless you're a hedge fund.)
DCMonkey, you're right. Thanks for pointing out the difference between the two groups. My thinking was that if people can't pay off their credit cards (or even get credit in the first place), V and MA are going to see a major decline in their revenues. In addition, the decline in consumer spending means there are less transactions to take fees on.
Can anyone else think of another way to play this in a personal account (ie, can't trade CDS)? Any ETFs?
Ergo, to compensate for slowing consumer spending, note V's fee increases and aggressive push to process additional transactions (e.g. debit, mobile platforms, etc.)
These banks for sure packaged groups of CC debt into some type of product...
If you wanted to short a pure credit card company, you could short capital one...
http://finance.google.com/finance?client=ob&q=NYSE:COF
They have their hands in a lot of other businesses now too, but I think at the heart of just about everything they do is lend money to people who do not have good credit.
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Your thesis is way late. This debt has been securitized and sold, and - depending on credit of borrowers - trades anywhere from 20 to 80 on par to account for defaults.
Credit card debt can be lessened or avoided through refinancing, lowering monthly payments and interest, which can at least give a bit more breathing room as well. In today's economy, it is most definitely in your best interest to do whatever you can, including getting a cash advance to stem off foreclosure. So if , you want to take care of your own mortgages, try investing now. Due to economic foreclosures and recession, a lot of people lost their jobs, mortgages and even their homes. Foreclosure is epidemic. Many thousands of people are losing their jobs, and with the loss of income the rate of foreclosure has been going up. If you can do so, then getting a cash advance to stem it off isn't a bad idea.
I'm aware this is what your thesis is on, but I have heard from countless people, either professors or people in the industry, that the average household Credit card debt is 6K. Now I could be getting the information wrong, but this is what i remember. Also I 3 my plat AMEX for airports!
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