American Express suggests continuation of downtrend
Updated
Thanks for viewing,
I'll give my technical and fundamental view briefly;
Technical;
- After the sharp drop from February highs AMEX has under-performed the market - dipping ~51%,
- This compares to an over 80% drop in 2009,
- The dip was followed by the formation of a rising wedge, which normally indicates continuation of the trend preceding the pattern (which is down),
- Elliot Wave seems to also suggest continuation - with wave (5) down possible,
- The 55 EMA showing resistance,
- I see potential support below at $60, $57, and the $50 - but if the stock equals its 2008-9 drop in % terms we are looking at sub-$25.
Fundamental;
- Credit Card (and charge card) Companies have a licence to print money, all payments made on credit expand the monetary supply (inflationary) - until debt is extinguished (deflationary). Over the past 10 years, they have been able to borrow at negative real rates and pocket the spread. But when the economy turns down, these Companies are hit hard by defaults,
- Even in good times, retailers balk at being charged 6% per charge card transaction,
- What are air miles gained on transactions worth these days when no-one is flying?,
- From the last recession, I read one consumer credit exec talking about the increase in defaults in terms of MULTIPLES of the rise in unemployment forbes.com/sites/jeffkauflin/2020/04/16/exclusive-early-data-shows-12-of-online-loans-in-trouble-double-just-weeks-ago/ They didn't say what multiple, but If the multiple is just 1, then the default rate (which would impact shadow banking, consumer credit, and unsecured lenders first and worst) could jump to 20-25% of all outstanding debt balances (pre-crisis unemployment below 4% and estimated to exceed 30% by Goldman Sachs). Even a 1.5 multiple would yield 35% default rates. Who knows how things will shake out,
- It will all depend on the underwriting standards over the past few years, if newly signed-up customers are among the most credit-worthy, then things won't be so bad (data suggests that default rates even among CC customers with FICO scores above 740 have tripled recently forbes.com/sites/jeffkauflin/2020/04/16/exclusive-early-data-shows-12-of-online-loans-in-trouble-double-just-weeks-ago/ If, when times were good cards were sent to anyone with a pulse then things won't be as great,
- The Fed is buying distressed ABS and MBS securities, apparently without regard for the creditworthiness of the underlying security, it is feasible that all this credit card debt packaged up and sold as an asset backed security has/will be been sold to the Fed at 100 cents on the dollar as it started to show signs of rising defaults in the underlying assets. This is a positive factors for the Company - I have doubts if it is positive for the economy down the line,
- CC Companies are offering repayment holidays - possibly in part to defer incurring defaults - this will of course impact on profitability.
- It all depends how you see this crisis - as being better or worse than 2008-9. My view is that this is many times worse, but that is just me. There are many reasons to expect higher defaults as compared to 2008-9 in an economy that has stopped on a dime,
- Today's dividend yield of 1.79% seems insufficient to compensate investors for the higher risk associated with holding equities - considering the stock is down over 30% from Feb highs. This is my view in general as well, a lot of stocks are "growth" stocks, which do not pay (in my view) a high enough risk-adjusted dividend to be worth owning. This is all gravy when the stock is rising, but when the dividend is below inflation AND the stock is losing value, there is less incentive for an investor to hold firm. If you combine this with a tendency of this stock to significantly underperform the market in recessions then you understand the basis for my bearish view.
So, overall, this stock rides high when times are good and has a history of being impacted more than the average. I don't see why that wouldn't still apply.
Cheers, and protect those funds
I'll give my technical and fundamental view briefly;
Technical;
- After the sharp drop from February highs AMEX has under-performed the market - dipping ~51%,
- This compares to an over 80% drop in 2009,
- The dip was followed by the formation of a rising wedge, which normally indicates continuation of the trend preceding the pattern (which is down),
- Elliot Wave seems to also suggest continuation - with wave (5) down possible,
- The 55 EMA showing resistance,
- I see potential support below at $60, $57, and the $50 - but if the stock equals its 2008-9 drop in % terms we are looking at sub-$25.
Fundamental;
- Credit Card (and charge card) Companies have a licence to print money, all payments made on credit expand the monetary supply (inflationary) - until debt is extinguished (deflationary). Over the past 10 years, they have been able to borrow at negative real rates and pocket the spread. But when the economy turns down, these Companies are hit hard by defaults,
- Even in good times, retailers balk at being charged 6% per charge card transaction,
- What are air miles gained on transactions worth these days when no-one is flying?,
- From the last recession, I read one consumer credit exec talking about the increase in defaults in terms of MULTIPLES of the rise in unemployment forbes.com/sites/jeffkauflin/2020/04/16/exclusive-early-data-shows-12-of-online-loans-in-trouble-double-just-weeks-ago/ They didn't say what multiple, but If the multiple is just 1, then the default rate (which would impact shadow banking, consumer credit, and unsecured lenders first and worst) could jump to 20-25% of all outstanding debt balances (pre-crisis unemployment below 4% and estimated to exceed 30% by Goldman Sachs). Even a 1.5 multiple would yield 35% default rates. Who knows how things will shake out,
- It will all depend on the underwriting standards over the past few years, if newly signed-up customers are among the most credit-worthy, then things won't be so bad (data suggests that default rates even among CC customers with FICO scores above 740 have tripled recently forbes.com/sites/jeffkauflin/2020/04/16/exclusive-early-data-shows-12-of-online-loans-in-trouble-double-just-weeks-ago/ If, when times were good cards were sent to anyone with a pulse then things won't be as great,
- The Fed is buying distressed ABS and MBS securities, apparently without regard for the creditworthiness of the underlying security, it is feasible that all this credit card debt packaged up and sold as an asset backed security has/will be been sold to the Fed at 100 cents on the dollar as it started to show signs of rising defaults in the underlying assets. This is a positive factors for the Company - I have doubts if it is positive for the economy down the line,
- CC Companies are offering repayment holidays - possibly in part to defer incurring defaults - this will of course impact on profitability.
- It all depends how you see this crisis - as being better or worse than 2008-9. My view is that this is many times worse, but that is just me. There are many reasons to expect higher defaults as compared to 2008-9 in an economy that has stopped on a dime,
- Today's dividend yield of 1.79% seems insufficient to compensate investors for the higher risk associated with holding equities - considering the stock is down over 30% from Feb highs. This is my view in general as well, a lot of stocks are "growth" stocks, which do not pay (in my view) a high enough risk-adjusted dividend to be worth owning. This is all gravy when the stock is rising, but when the dividend is below inflation AND the stock is losing value, there is less incentive for an investor to hold firm. If you combine this with a tendency of this stock to significantly underperform the market in recessions then you understand the basis for my bearish view.
So, overall, this stock rides high when times are good and has a history of being impacted more than the average. I don't see why that wouldn't still apply.
Cheers, and protect those funds
Note
Ha, I always start out with the intention of giving a brief summary... Oh well :)Note
A break below $72 will open the door to $67. If $67 is broken, look out below. Sorry I don't have a link for this one, but I remember reading recently credit card balances outstanding dropped over 30% in 2020 as people saw an uncertain employment situation and wanted to reduce costs. While that reduces the scope for bad debts in the short-term, it also means less interest income.
A lot of belt tightening out there; I have started gardening, am brewing cider and beer at home, am investigating solar ovens, aquaponics, am adding to gold, silver, and cash holdings, and am considering buying productive land (to start small-scale urban farming now and to build on later to create a largely self-sustaining lifestyle). I don't need to do any of it as I am still in secure well paid employment - but I value the long-term security of self-sufficiency and now is a good time to start gaining life-long skills.
Overall, I am a bit surprised by the markets; Some commentators are indicating unemployment rates that could top 30%, history's biggest debt bubble, and extreme market vulnerability, and the potential for at a minimum another 18-24 months of hardship, but still the S&P and DJI edges up to new all time highs in terms of valuations. There will not be a return to normal; tourism, hospitality, transport, anything requiring people to congregate in groups (Amusement parks, movie theatres, concerts, plays) will be stunted for many years to come - and the businesses may never see pre-virus levels again. That is even if we get a vaccine (but please be realistic; we have co-existed with coronaviruses since at least 1930 and there has yet to be one successful vaccine developed for any of them. So all this 12-18 months waffle you hear is rather unrealistic when we have failed to develop one in the past 80 - 90 years (for admittedly less-serious viruses) - but it has juiced the markets).
All this "the markets have priced this and that scenario in already and are looking 12-24 months out..." What rubbish, who could possibly expect to accurately forecast things out that far in an historically unprecedented environment like this.
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