Archive for July 1st, 2009

WASHINGTON (CNN) — President Barack Obama’s White House staff appears to be safe from a tax increase, for now.The White House on Wednesday issued its annual report to Congress listing the salaries of all staff, revealing that everyone gets paid less than 200,000.During the election campaign, Obama promised no income tax increase for anyone making under 250,000.The report, which did not include the president’s salary, showed that David Marcozzi, the director of public health policy, is the top paid White House staffer at 192,934 a year, with better-known figures such as Chief of Staff Rahm Emanuel and Senior Advisor David Axelrod getting 172,200.Obama froze all salaries above 100,000 upon taking office, affecting 146 staff members including his personal aide Reggie Love, who is paid 102,000 a year.Other notables are Robert Gibbs, the White House press secretary, and National Economic Council director Lawrence Summers — both at 172,200- – and Nancy-Ann DeParle, director of the White House office for health care reform, at 158,500.

Source:CNN

NEW YORK: The housing bust has finally clobbered super-pricey Manhattan home prices.Reports released Thursday by four major New York brokers show that prices cratered during the three months that ended June 30.Prices fell between 13% and 19% compared with the same quarter last year. The brokers found median prices that ranged from 795,000 to 849,000. The decline shows a marked turn from the first quarter of 2009, when the year-over-year change in median home prices ranged from a loss of 2% to a gain of 6%. Another change in the recent period: More people are buying.The number of sales picked up by more than 28% in the second quarter, according to Prudential Douglas Elliman. Driving the increase were sales of studio apartments and one-bedrooms, both of which gained market share, according to Jonathan Miller, president of appraisal company, Miller Samuel, which compiles data for Prudential Douglas Elliman.”It’s value-based shopping,” said Pam Liebman, chief executive of the brokerage Corcoran Group. “People are coming back into the market, but nobody is going to overpay.”Of course, in Manhattan “value” means studio prices that go for a median of 400,000 and one-bedrooms that fetch 650,000.Long reboundDespite the bleak report, the ingredients for a recovery are already in place, according to Greg Heym, chief economist for both Halstead Property and Brown Harris Stevens. But it will be very slow coming.”There are still risks to the economy, both national and local,” Greg Heym said. “But job losses have slowed, consumer confidence is higher and the stock market returned more than 30% during the quarter.”Furthermore, the impact of the Wall Street meltdown on the New York economy has been less catastrophic than first predicted. The city has held up well, according to Heym, and now the financial system has started stabilizing. Heym also pointed out that the foreclosure plague, so damaging to many markets, has never been a major problem in Manhattan. Co-ops have, if anything, stricter financial requirements than the lenders, requiring buyers to show their assets and come up with 20% down. That has meant that few co-op owners are in trouble with their mortgages.And now, the national housing market may be improving with sales at steady, albeit, lower volumes and home price declines flattening out. Those are all positive signs for Manhattan. The housing market may may be at or near the bottom of the cycle, according to Heym.”But people shouldn’t think that a bottoming out means a quick rebound,” he said.The high-lowHow quick any recovery will be depends a lot on the availability of jumbo mortgages, those exceeding 729,750. The difficulty in obtaining such loans has hurt sales in Manhattan. It has caused the strength of the market to switch from the sales of big, expensive homes to sales of smaller, cheaper ones.”The entry level market did not fall as far as the high end,” Miller said. “The difference was a jumbo versus a conforming mortgage.”Conforming loans, the ones bought or backed by Fannie Mae and Freddie Mac, are still available at very favorable rates. But jumbos, which exceed the loan limits imposed by Fannie and Freddie, have not been.Manhattan buyers are heavily reliant on jumbo loans because many homes are priced at well over the conforming loan limit. And it ain’t easy getting such mortgages right now.”Most banks are requiring jumbo borrowers to put at least 30% to 40% down — some need 50%,” said Miller. “Someone buying, say, a 4 million home, even with perfect credit and a raise this year, might not have the 1.2 million to 2 million to put down.”But there are a couple of positive factors prompting many entry-level buyers to get into the market, according to Bill Staniford, CEO of PropertyShark.com, which compiled Corcoran’s statistics.One is the first time homebuyers tax credit, the federal tax refund program available to anyone who hasn’t owned a home during the past three years.”People say that’s making a difference,” said Staniford. “And if interest rates continue to climb, that will introduce some urgency.” Once the economy recovers, the prospects for the Manhattan housing market are good. The market could quickly tighten again. There’s little new building going on. As a matter of fact, not a single building permit was filed in all of February, according to Heym.Plus, glamorous Manhattan is still drawing residents from all over. The population of New York, unlike many other old U.S. cities, is still growing.”In a couple of years, there’ll be a housing shortage again,” said Heym.

Source:CNN

DETROIT (Reuters) — Auto seating supplier Lear Corp. said on Wednesday it would file for Chapter 11 bankruptcy protection in a reorganization supported by key secured lenders and bondholders and that it had obtained 500 million in bankruptcy financing.Lear (LEA, Fortune 500), which had been in talks with its lenders since late June, said in a statement that its board of directors had approved a bankruptcy filing as the “fastest and most effective way” to reduce its debt in the face of slumping global auto demand.The Southfield, Michigan-based company said its restructuring plan had the support of most of the members of a committee representing its secured lenders and another group representing its bondholders.Lear said its operations outside the United States and Canada would not be affected by the bankruptcy filing.Lear had sales of 13.6 billion in 2008. Almost 80% of its sales were from auto seats supplied to customers such as General Motors Corp (GM, Fortune 500) and Ford Motor Co. (F, Fortune 500)The company had warned in March that it might have to file for bankruptcy protection after breaching debt covenants at the end of last year and borrowing all of the 1.2 billion in its main credit facility.A waiver from lenders on its loan defaults expired on June 30. Lear was also near the end of a 30-day grace period on a 38 million bond interest payment it missed on June 1.0:00
/09:21One-on-one with GM’s CEOThe Obama administration, which made 5 billion available to guarantee receivables GM and Chrysler owed suppliers earlier this year, last month rejected a request by suppliers for up to 10 billion in additional loans.Suppliers and restructuring advisers have said the lack of new financial assistance would result in a wave of bankruptcies because many auto parts suppliers lack capital to ramp up production to meet expected demand in the current quarter.

Source:CNN

NEW YORK: Stress tests. Massive government interventions. Speculation that the government would nationalize Citigroup and Bank of America.Suffice it to say that the first half of 2009 was anything but normal for the usually sleepy U.S. banking sector. But even as some sense of calm has returned, there are few indications that lenders will make a full recovery by year’s end.For starters, many banks are still trying to get a firm grip on their unwieldy loan portfolios that continue to deteriorate. The focus for many big-name banks lately has been on credit cards as more and more consumers find themselves out of work. Construction and development loan problems remain front and center for smaller lenders, particularly community banks.As the recession drags on, however, losses are starting to migrate to other areas, including commercial and industrial loans, as well as traditional commercial real estate, said Blake Howells, an analyst at Becker Capital Management, a Portland, Ore.-based investing firm which oversees 1.7 billion in assets.Howells and others suggest that as a result, banks will have to continue building their loan loss reserves through the end of this year and quite possibly into 2010. That could be a further drag on profits — especially for regional banks. Full-year earnings for regional banks in the S&P 500 are expected to decline 34% this year, according to Thomson Reuters. Large diversified financial services firms, which include JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500), are expected to post a 19% increase in earnings for 2009. Experts said that the recent flurry in capital markets activity, including newly-issued corporate debt, is helping buoy results of the larger banks. It hasn’t hurt that the 19 stress-tested banks themselves have conducted 93 billion in debt and equity offerings since May, according to SNL Financial. Fees tied to those offerings have also helped to boost profits at those same big banks.”Banks that have capital markets operations are clearly are benefiting from those markets in first half of this year,” said Howells. “Whether that holds for the second half remains to be seen.”Few answers, lots of questionsThis uncertainty, as well as broader questions about banks’ underlying earnings power, has caused bank stocks to stall after a sizeable rally in March and April. Both the KBW Bank Index and S&P Banking Index – two of the most widely-watched barometers of the sector – have doubled in value from their March lows. But they have largely traded sideways since the government released the results of its stress-test program in May.0:00
/4:12Feds changed bailout ‘rules’The outlook for U.S. banks has been clouded by other issues too, namely which banks might be next to escape the government’s controversial Troubled Asset Relief Program, or TARP, and whether some of the biggest banks indeed have enough capital on hand to weather the recession.”There are a lot of questions about whether banks are adequately capitalized to deal with a recovery that goes on for several years,” said analyst Nancy Bush, founder of NAB Research. There’s also the question of how Congress will decide the fate of the financial services industry. Lawmakers on both sides of the aisle have appeared willing recently to back some of the changes proposed by President Obama two weeks ago as part of his sweeping regulatory reform plan. Some of those proposals, however, including the creation of a new agency geared towards protecting consumers from financial products and stiffer capital requirements for banks, are certain to impact banks’ profitability, note experts. But no one seems to know by how much.Tom Kersting, a financial services analyst at St. Louis-based Edward Jones, estimates that banks will feel the pinch as they spend more money to implement some of these proposed regulatory changes, but adds that the costs will not have a “material impact.” More changes in Washington could also become an issue before long. At the end of October, the Federal Deposit Insurance Corp. is expected to bring to an end its debt-guarantee program, which has helped banks access cheap forms of financing. And of course, there have been rumblings that the Federal Reserve may have to move to raise interest rates later this year as part of an effort to unwind some of its ongoing rescue programs and combat the threat of inflation in the future. Such actions could potentially weigh on recovery efforts for banks that have relied on wide interest rate margins to borrow and lend money.Investors, however, may take comfort in knowing that banks are unlikely to undergo the type of turmoil that defined the first half of 2009, which would certainly be welcome news for the hard-hit industry.”We certainly believe we are past that point,” said Kersting.

Source:CNN

NEW YORK: General Motors CEO Fritz Henderson has argued this week that a bankruptcy court needs to approve plans to create a new GM, one unburdened by many of the contracts and liabilities of the past.But there are many auto industry experts who question whether Henderson, who has worked at GM ever since graduating from business school 25 years ago, is the right man to bring about a necessary change at the company.Critics argue that if ever there was a company in need of shaking up the executive culture, it’s GM (GMGMQ), long a land of fiefdoms that divided not just different brands but different business functions, such as purchasing and manufacturing.Trying to get agreement between all those disparate parts has led to cumbersome decision making at GM, some maintain. That has turned GM into a company unable to respond quickly to changes in the market. One former GM employee said the company’s management culture needs an almost immediate overhaul if GM is to start producing the vehicles it needs to revive sales and return to profitability.”The removal of managers and executives so far has been mainly at lower levels, thinning ranks and taking out layers,” said Rob Kleinbaum, previously a GM market research and planning executive and now a managing director of consulting firm RAK & Co. “It’s not replacing people who made the mess and created the culture.”0:00
/09:21One-on-one with GM’s CEOGM’s top rivals are now led by people who are not industry veterans. Ford Motor Co. (F, Fortune 500) went outside the auto industry to find CEO Alan Mulally, a top Boeing (BA, Fortune 500) executive before he was tapped to run Ford in 2006. Chrysler, which emerged from bankruptcy last month, is now being run by Fiat CEO Sergio Marchionne, who himself was new to the auto industry when he took over Fiat (FIATY) in 2004.”Most successful turnarounds have been led by outsiders,” said Kleinbaum, who recently completed a study with researchers from the University of Michigan on corporate turnarounds. “The fact that Fritz seems dedicated to keeping the management team in place makes me extremely uncomfortable.”Henderson is relatively new to his current job, being promoted to CEO in March when the Obama administration forced then GM CEO Rick Wagoner to resign. But many in the industry saw that as a move to put in place a GM management less resistant to the idea of a bankruptcy filing, rather than shaking up the company altogether. With administration support, GM filed for bankruptcy June 1.Not surprisingly, Henderson said he believes he’s the right man to be making the changes that are necessary at GM.”I know the company inside and out. I know the industry well,” he told Fortune in a recent interview. “I think that does bring some experiences that can be very helpful in terms of change because I know what needs to be changed. That’s my job to show I can do it.”Time for fresh blood?But Henderson’s critics say that the company would benefit greatly from an outsider’s perspective as it attempts to start fresh following bankruptcy.”You need some fresh blood in there,” said Erich Merkle, an independent auto analyst and consultant. “The culture is not one that fosters speed, especially speed to market. It’s a smaller company that still act like a large company.”Not all outside experts think Henderson is a bad fit for a new GM. David Cole, chairman of the Center for Automotive Research, said he believes Henderson is very different from traditional GM executives, partly due to his time spent overseas in GM’s South American and European operations.Cole said Henderson is a “high speed decision maker” who doesn’t get enough credit for the changes in executive culture at GM already being put in place.”The system at GM has been changing rapidly in the last few years,” said Cole. “Observers have this picture that things haven’t changed in 20 years. That’s not the case.”Cole said the bankruptcy is forcing GM to already make dramatic changes, and that he believes bringing in an outsider at this crucial point in the company’s history would be too risky.”This business is far more complicated than most industries,” he said. “The last thing you want is people making decisions with no foundation for those decisions.”Not all auto industry outsiders have worked out well. When Cerberus Capital Management bought Chrysler LLC in 2007, it installed former Home Depot (HD, Fortune 500) CEO Robert Nardelli, who did little to turnaround the company’s fortunes.But Kleinbaum said this is precisely the time a different perspective is most needed at GM. He said all of the company’s problems can be traced to the company’s management style.”It’s all about them being out of touch with customers, and being risk averse,” Kleinbaum said. “And there has long been a complete lack of accountability. No one has been dismissed by poor performance except for Wagoner, and he was dismissed by the president.”

Source:CNN

NEW YORK: Today the government will begin offering a repayment plan that lets graduates reduce their monthly student loan payments based on their income. It’s called the income based repayment plan and it’s available to borrowers who took out federal loans or used a federal consolidation loan to combine their debt. 1. Advantages and disadvantagesSome of the benefits of the program include the ability to get your monthly payments lowered. If you make timely payments for 25 years, the balance of your loan is forgiven or if you go into public service, your debt is forgiven after 10 years. But there are drawbacks. First, you’ll pay more in interest over the life of the loan since you’re stretching your payments out. And you must submit documentation of your income and family size each year to set your payment amount. If you do not provide the documentation, your payment reverts to the standard 10-year repayment amount. 2. Do you qualify? You will generally qualify if your federal student loan debt is high compared to your income and family size. While your lender will perform the calculations to determine your eligibility, you can use the Education Departments calculator at studentaid.ed.gov to estimate if you would benefit from this program. Contact your lender or the lenders who hold your student loans. Keep in mind you may need to submit a copy of last year’s taxes. 3. Help for the unemployed If you don’t have any income at all either because you can’t find a job, or you lost your job, you can still take part in this program. And if you qualify, your monthly payments could turn out to be zero. Keep in mind there are other options out there too. The government has always allowed for people who can’t make their student loan payments to apply for deferments and forbearances. In both cases you can stop making payments for a little while. The debt doesn’t go away, but interest does continue to accrue even if you don’t make payments. And, just to mention another bit of good news, interest rates on subsidized undergrad Stafford loans are now at 5.6% and older variable rate Stafford loans consolidated after today will carry an interest rate of 2% — a historic low. — CNN’s Jen Haley contributed to this article.Got a financial dilemma? Go to CNNMoney.com/helpdesk to submit questions, read the Help Desk articles and check out new Help Desk videos. And tune in to CNN’s Newsroom Tuesdays and Fridays, when Gerri Willis and other experts answer your questions.

Source:CNN

NEW YORK (Fortune) — “More people go with Visa” — the company’s slogan may hold true for credit card holders, but it’s a tougher sell for stock pickers who wonder how safe the business is during a recession.Many industry watchers say Visa has been surprisingly resilient during the current chaos, and investor concerns are overstated at best — and misguided at worst.”It seemed anything that looked like a financial stock last fall was under pressure” and Visa got lumped into that group that was sold off, says Craig Wildfang, a partner at Robins, Kaplan, Miller & Ciresi LLP, which specializes in financial law.The selloff began only months after Visa (V, Fortune 500) exploded into the public arena in March 2008 with an IPO that raised 17.9 billion — the largest in U.S. history. Initially, the stock rallied, more than doubling in value over two months. But jittery investors, spooked by anything even remotely associated with credit, started dumping the shares in May.Fears about credit risk, as well as concerns that a recessionary plunge in consumer spending could cause a subsequent drop in credit card purchases weighed on the stock. Visa shares tumbled to a low of 41.78 last January, down 53% from their all-time high of 89.83 set in May 2008.The crush came even though the company continued to exceed Wall Street’s expectations by cranking out healthy revenue growth and double-digit quarterly earnings increases over the past year. Visa CEO Joe Saunders says the company remains on track to generate annual earnings-per-share growth of at least 20% (excluding one-time items related to pre-IPO merger costs and litigation settlements) over the next three years.0:00
/1:05′Consumer-friendly’ credit”I think the concerns have been overblown,” says JPMorgan analyst Tien-tsin Huang. Visa shares recently traded at 62.98, but Huang has a 12-month price target of 73. Piper Jaffray analyst Robert Napoli is even more bullish with a target of 78.Credit risk concerns are largely unfounded. Unlike banks and other credit card companies, such as American Express and Discover, Visa doesn’t take on risk because it doesn’t lend money. The credit card company simply collects transaction fees every time a card is swiped and assumes no risk for late payments or defaults on cards.No one goes untouchedSaunders admits the company hasn’t been unscathed in the recession. In the latest quarter, Visa reported a 10% decline in the average dollar amount spent in U.S. credit card transactions, which cuts into the processing fees it receives. Big-ticket items, such as airline tickets and hotel bookings, dropped off. Even gasoline purchases, which historically account for about 10% of credit card purchases, were down. Changes in foreign exchange rates and a decline in cross-border transaction fees also took a toll.Saunders ratcheted down revenue guidance for fiscal 2009, which ends Sept. 30, to a single-digit increase from previous estimates of 11% to 15% growth. But the revenue slowdown hasn’t affected Visa’s bottom line. In the latest quarter, a 6% increase in the number of transactions and a surge in the use of debit cards globally offset smaller-sized purchases. “To see that the number of transactions is growing in the high single-digits in the worst economy in 70 years is a pretty eye-opening statistic,” says Saunders.Cost savings of 300 million related to the merger of Visa’s six operating units prior to its IPO also helped keep earnings up.”They’re delivering 20% earnings growth despite a lot of pressure on the top line,” says Huang.A new threat to the bottom lineShares have rebounded in 2009, rallying as much as 71% of their January lows, but another cloud of uncertainty has moved in: the threat of federal changes to so-called interchange fees and a merchant antitrust litigation related to those fees. This prompted another selloff, and shares are now up 51% from the low.Several bills are floating in the House and Senate, which, if passed, would allow merchants to negotiate lower interchange fees, which are the charges merchants pay each time a card is swiped at their stores. Credit card companies currently set the rates that banks can charge merchants and only occasionally negotiate different rates with individual merchants, usually larger retailers. The fees amount to about 2% of the value of each transaction or about 50 billion a year.Investors worry that legislation and lawsuits affecting interchange rates could potentially take a bite out of Visa’s bottom line, but analysts dismiss these concerns. It’s the banks — not Visa and MasterCard — that receive interchange fees, says Huang. However, David Robertson, publisher of the Nilson Report, a research firm that tracks the industry, believes banks will likely pass on the cuts by trimming Visa’s processing fees.As for the merchant lawsuit, Visa locked up about 155 million shares, or about 9.9 billion, in trust from banks at the time of its IPO to cover litigation costs. But Wildfang, who represents the merchants, wonders if it will be enough.Saunders isn’t worried. He says the banks will assume any damages above the 9.9 billion as a result of a “retrospective responsibility deal” that was hammered out prior to the company’s IPO – a protection that rival MasterCard doesn’t have. “Financially, we’re protected,” he says.

NEW YORK: Ford Motor reported a modest decline in U.S. sales in June, feeding hopes that the industry may have finally turned the corner following the dramatic drop in sales that forced two of Ford’s rivals into bankruptcy.Ford’s June sales declined 11% from a year earlier, the smallest year-over-year decline since February 2008. Ford’s sales also came in better than the nearly 16% drop forecast by sales tracker Edmunds.com. Sales declined 4% from May though, ending a string of four straight months of improved sales on a month-over-month basis.Still, the stronger than expected sales from Ford could lead to industrywide light vehicles sales topping a seasonally adjusted annual rate of 10 million for the first time this year.0:00
/01:52GM tries to polish its imageFord also announced it was upping its third quarter production plans by 25,000 vehicles to 485,000. That will put production for the quarter 16% above year-ago levels. In another encouraging sign, Ford said its inventory declined by 8,000 vehicles over the past month.Ford appears to be benefiting from the problems faced by its two Big Three competitors. The company said that its market share rose 3 percentage points from a year ago, despite the decline in sales.During the month, Ford (F, Fortune 500) rival General Motors (GMGMQ) filed for bankruptcy protection, while Chrysler emerged from bankruptcy and formed an alliance with Italian automaker Fiat (FIATY). All major automakers, including Asian rivals Toyota Motor (TM) and Honda (HMC), are still expected to post double-digit year-over-year declines in U.S. sales for June when they report results later Wednesday, despite signs of improvement.

Source:CNN

NEW YORK: The Obama administration is widening its mortgage refinancing program to allow more borrowers hit hard by falling home prices to take part.Borrowers whose loans are now worth up to 125% of their home’s value are now eligible to refinance their homes under the Obama foreclosure prevention plan announced in February. Previously, the limit was 105%.The move acknowledges that home prices in many areas have fallen so far that many people were shut out of the program. Some 67% of homeowners in Las Vegas — one of the hardest hit areas where Housing Secretary Shaun Donovan announced the expansion Wednesday — owe more than their homes are worth.”The president’s Making Home Affordable plan is already helping far more than any previous foreclosure initiative and with today’s announcement we will extend its reach still further,” said Donovan.Some 20,000 loans have been refinanced so far, according to the Treasury Department. The initiative waives the requirement that homeowners have at least 20% equity in their home, allowing to take advantage of today’s lower rates. Homeowners must still meet other criteria, including being current on their payments and having loans that are owned or backed by Fannie Mae or Freddie Mac.The program, however, has been slow to ramp up. Borrowers have complained that banks are not approving their applications, and a recent uptick in mortgage prices has blunted the plan’s benefit.The Mortgage Bankers Association last week slashed its 2009 forecast of originations because fewer refinancings were being done than they originally expected. The group said only 13,000 were done in the three months after the plan’s launch.0:00
/3:57Hope Now’s foreclosure fightThe administration has projected that 4 million to 5 million mortgage borrowers would be helped. A Treasury official Tuesday said that the figure applied to those who would be eligible, not necessarily those who would participate.A second part of the program lets eligible borrowers who are in default — or at risk — lower their monthly payments to no more than 31% of their pre-tax income. This can help those who are not making as much at their jobs or who have monthly payments they can’t handle. Homeowners, servicers and mortgage investors can receive incentives to entice them to participate in the program.

Source:CNN

NEW YORK: Last I checked, the economy’s still in recession, unemployment is rising, and consumers are having trouble paying their bills. But you wouldn’t know this from looking at what’s going on in the credit card world lately.The First National Bank of the U.S., aka Citigroup (C, Fortune 500), recently jacked up the rates on 13 million to 15 million credit cards it offers through co-branding relationships with retailers. The move comes only a few months before new government rules are set to kick in that will make it more difficult for card issuers to raise interest rates and tack on more fees for borrowers.Citi, which will soon be 34% owned by taxpayers, is not alone. Other big banks, including Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), have been boosting rates on cardholders ahead of the looming crackdown. Most banks have argued that the higher rates are justified because the only way they can continue to offer credit to consumers is if they are able to make a profit from doing so.”This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles. These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit,” said Citi spokesman Samuel Wang in a statement to CNN Wednesday about its recent rate hike. Still, you can argue that higher interest rates for already struggling borrowers could lead to even more defaults — which will just compound the problem for card issuers. So Citi could wind up shooting itself in the foot by raising rates.In fact, rating agency Fitch said in a report Wednesday morning that U.S. credit card chargeoffs rose 62% in June from a year ago to a new high of 10.44%. “U.S. consumers continue to fall behind and default on their credit cards at record rates,” Fitch said in its report. The company added that even though the pace of chargeoff increases may soon slow, “actual improvements are not foreseen at this time.” That makes sense since the unemployment rate is expected to increase for some time. A general rule of thumb in the card industry is that chargeoffs tend to rise in tandem with the unemployment rate. Economists are predicting that it hit 9.6% in June — those figures will be released by the government Thursday. Talkback: Should the government be even tougher on credit card companies? Have you been hit with higher rates or new fees lately?Leave your comments at the bottom of this story. Despite all this, shares of several companies with big exposure to the credit card business have surged during the past few months on hopes the worst is over for the economy. American Express (AXP, Fortune 500) has gained back all the ground it lost in the market’s January and February swoon and is now up 25% so far in 2009, making it the best performer in the Dow Jones industrial average in the just-ended first half of the year. Shares of Discover Financial Services (DFS, Fortune 500), Visa (V, Fortune 500) and Mastercard (MA, Fortune 500) are also in the black year-to-date.The rally doesn’t appear to make sense. Aren’t consumers saving more and cutting back on their spending? And won’t the new rate and fee restrictions take a bite out of profits?Probably. But despite those challenges, some analysts believe that things are still looking up for credit card companies. In a report Monday Keefe, Bruyette & Woods analysts Sanjay Sakhrani and Steven Kwok argued that credit cards “will continue to provide one of the most lucrative returns of the asset classes within banks’ portfolios.”0:00
/2:11′Credit reforms were necessary’The KBW analysts conceded in their report that card companies are “under siege on many different fronts” and that “the industry is likely to be somewhat smaller and less profitable after new laws are put in place.” But they added that the card companies should be able to adapt to the new regulations.Sakhrani and Kwok also wrote that the new rules on fees will least affect credit card networks Visa and Mastercard and probably won’t have as big of an impact on AmEx and Discover as some fear. Instead, they suggested that Capital One Financial (COF, Fortune 500), which has a higher dependence on fees, faces the most risk from the new card law. Not surprisingly then, Capital One’s stock is still down sharply this year — even though it too has surged from its lows in March.Still, it may be unwise to dismiss the prospect of unemployment topping 10%, more scrutiny from the government and consumer’s newfound sense of thrift — especially after the sizable bounce the credit card stocks have enjoyed as of late.”The second half of the year could be a lot more difficult for the card companies, particularly with the new legislation coming in. Plus, the economic recovery is still far from strong,” said Frank Barkocy, director of research with Mendon Capital Advisors, an investment firm that focuses mainly on financial stocks.Barkocy said his firm has short positions in some of the credit card companies, which means that the firm is betting the stock prices will go down. He declined to name specific card companies it is betting against, however. But he said that the run-up may not be justified given that delinquencies and defaults should keep rising.”We should have further periods of economic weakness so losses are likely to be higher than anticipated. That might take some of the excitement out of the card stocks,” Barkocy said. Talkback: Should the government be even tougher on credit card companies? Have you been hit with higher rates or new fees lately?
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