Randomly Noted

You normally wouldn’t think it’s good news that consumers are taking on more debt, especially when that debt comes in the form of credit cards, which can be very costly debt. But today’s report from the Federal Reserve that showed the first increase in credit-card debt since the month before Lehman Brothers failed is being viewed as just that – a positive sign about the economy.

In December,  credit-card debt rose $2.3 billion to $800.5 billion – the first monthly increase since August 2008. This, combined with a recent Fed survey that found banks were becoming more willing to make installment loans, has some wondering: Has the consumer stopped de-leveraging?

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J.P. Morgan reported strong earnings this quarter yet again. But there were interesting trends worth keeping an eye on for the quarters ahead. For starters, in its presentation to investors after it released earnings, the bank addressed its home lending portfolio. “It is not clear when we will see delinquencies improve.” That’s perhaps a little bit of a surprising statement because the trend line in general has been a stabalizing one in terms of delinquencies.

Looking ahead, J.P. Morgan said its loss for the next quarter in home equity loans could be close to $1 billion (in the third-quarter just reported, it had a charge off of $730 million). In prime mortgages, it said the next quarter may show losses of $400 million (3Q charge offs were $265 million). And it said it could see losses of $400 million in subprime (it had a charge off of $206 million in the 3Q).

In general, the credit picture has gotten better. But the point J.P. Morgan is making here is that problem loans haven’t gone away. One bright sign is the trend in credit card delinquencies, which appear to be improving.

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Stock performance of Discover (DFS), Capital One (COF) and the DJIA since market lows in March

If you believe consumer confidence is returning and that it will translate into consumer spending, one investment play is with credit-card companies. That way, you aren’t making a bet on a particular industry where consumers may spend money. Instead, you are playing the economics of increased credit card usage. The chart above certainly shows that’s what some investors have been thinking. Those are eye-popping gains for two credit-card companies from the market lows in March. And they have significantly outperformed the Dow.

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Imagine yourself nestled into a movie theatre seat, popcorn in hand, ready for the feature film, or at least a stream of coming attractions. Surprise. First, here comes the Federal Reserve.

The U.S. central bank announced that it is sponsoring 45-second advertisements in movie theatres designed to help people use their credit cards more wisely.

Capitol Hill is locked in debate about possible reform of the financial services industry. Part of the tension centers around whether a new agency is needed that would specifically focus on consumer protection. The Fed now has some of that authority.

The Fed said the ads will appear before movie previews at 12 highly attended venues in big metropolitan areas from Nov. 27 through Dec. 3.

The Fed message is straightforward. Pay on time; stay below your credit limit; avoid unnecessary fees; pay more than the minimum; and watch for changes in the terms of your account.

We keep banging the drum about deteriorating commercial real estate being the spoiler for any economic recovery. But we also shouldn’t forget about credit card debt and rising delinquencies in that area. Earlier today, Moody’s said U.S. credit card delinquencies rose for a third consecutive month.

As Dow Jones Newswires reported earlier: “The delinquencies, which give a glimpse of credit-card issuers’ potential losses and how much they may need to set aside in reserves, rose to 6.12% in October from 5.97% in September and 5.79% in August, driven by increases in 60-day and 90-day delinquencies.

“So-called early stage delinquencies were little changed from September but up 11% from a year ago, Moody’s said. The credit rating company expects early stage delinquencies to creep up over the next several months.”

Going back a few years ago, when consumers were up to their eyeballs in mortgage debt, they made sure they could stay current or close to it on their credit cards because this little piece of plastic is what they were living off of – they chose to let mortgages default when the refinance game didn’t work anymore. The question is: how many of these people who are defaulting now on their credit cards already defaulted on their mortgages? A double whammy for the financial sector if that number is significant.

Each month, Capital One Financial makes a filing with the Securities and Exchange Commission that details charge-off and delinquency stats in its three major lending segments – U.S. credit cards, auto finance and international cards. The monthly numbers by themselves give you a good snapshot of what’s going on at the company. But when you line up the past six months numbers like we did here, you begin to see trend lines that seem to be telling us that the worst may not be over for Capital One. What we see in the chart on the left is that delinquency rates are on the rise after trailing lower for several months – in fact, sharply higher. Delinquencies of course don’t mean the company will never get its money back. In September, Capital One wrote off $508 million of credit card receivables, up from $492 million the month before. It now has an annualized charge-off rate of around 9.77%. Last April, that annualized rate was 8.56%.

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Think of it like this. You are running a one-mile race along with 20 or so other people. After a sprint at the end, you win by seconds. Your time: 15 minutes, 43 seconds, a good 12 minutes off the world record. And slower than the 14-minute-mile you ran the week before. Would you even think about sending a brag to the local newspaper?

That’s kind of how you have to look at the press release put out earlier today by American Express: “American Express Ranks Highest In Customer Satisfaction Among Credit Card Companies For the Third Consecutive Year.” The press release is a factual representation of a study released today by J.D.Power. Amex goes on to say how it is honored, how focused it is on the customer etc. Now read the J.D. Power release and you learn how overall, consumers are dissatisfied with the fees and rates they are charged,  and many of the other services. A pretty downbeat accounting for the industry.

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It makes sense that someone would dig deep back into a depression-era program to explore ways to get people spending again. Kmart and Sears have done just that by introducing a “Christmas Club” card that is like the old holiday savings programs banks sponsored.

The Kmart-Sears card allows you to save some money each week that builds toward that budget you’ve decided to set aside for holiday shopping. It’s a smart idea to budget this way. If you want to spend $500 over the holidays, it’s easier to set aside $41 a week than to take down the lump sum.

But here’s the rub.

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Back in 2007, Time Magazine did an article on the 25 top crimes of the century. Coming in at number six was the Brinks Job, which in 1950 was the biggest theft that had ever occured in the U.S. ($2.7 million). Eleven men planned for 18 months how to pull off the robbery. They eventualy got caught, but the money was never found. They even made a movie about it. Time article. It might be time for Time to revisit “Crimes of the Century” after we got word today that the Feds (U.S. District Court of New Jersey) indicted two Russians and a Miami resident for allegedly engaging in a complex hacking scheme to steal 130 million credit card and debit numbers. Click here to read more details from a WSJ blog on the developing story.

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Interestingly, some of the media coverage of the just-passed bill by the U.S. Senate that would reign in some of the dodgier tactics of credit card companies has focused on how this reform might end up hurting card holders, not helping them.

Their story is one of unintended consequences.

The thesis is if card companies can’t nickel and dime (an expression, these are real dollars at stake) their customers, then they will pull back their other goodies.

The presumed petulance lurking in these news reports would manifest itself in reinstated annual fees to possess a card, fewer bonus points for using a card and stricter credit standards, meaning some people won’t qualify who do now.

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