American Express suggests continuation of downtrendThanks 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 www.forbes.com). 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 www.forbes.com). 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
