Thursday, September 17, 2009

Optimism Abounds

Capital One CEO sees flat to shrinking credit card industry

SAN FRANCISCO (MarketWatch) -- The credit-card industry probably won't grow or will shrink in coming years as a powerful wave of consumer de-leveraging washes over the business, Capital One Financial Chief Executive Richard Fairbank said Wednesday.

No. No. That's not the optimistic part. Keep reading.

"It's very healthy to have a de-leveraged consumer," Fairbank added. "We as lenders will be paid through better credit performance."

Bingo! That's what I love about optimism. You give an optimist a lemon and he turns it into lemonade.

Analyst Picks and Pans: Capital One, AmEx, Discover, AMD

Shares of Capital One Financial Corp., Discover Financial Services and American Express Co. rose on Aug. 24 after Barclays Capital analyst Bruce Harting upgraded the companies, saying credit card issuers will see earnings steadily increase in the next three to five years.

Harting cited recent signs of stabilization in the rate of defaults. He expects the three companies to post positive earnings in 2010, more normalized earnings by second half of 2011, and historical above average earnings-per-share by 2012.


Wow. Historical above average earnings-per-share by 2012? That sounds a bit optimistic too. Does he know about the "powerful wave of consumer de-leveraging" washing over the credit card business in the coming years?

Dictionary.com's Optimistic

1. disposed to take a favorable view of events or conditions and to expect the most favorable outcome.

5 comments:

Stagflationary Mark said...

Here's an update.

http://finance.yahoo.com/news/Stocks-Below-Book-Value-tsmp-4278493952.html?x=0&.v=1

"Citigroup and Capital One are also below book, but they are at the top of my "not with a gun to my head" list of stocks that I think are just too dangerous to own."

That's some serious risk avoidance there. Even as bearish as I am, I would own Citigroup and Capital One Financial if I had a gun to my head.

Granted, that's the only way I'd be buying at these levels. Hahaha!

mab said...

Stag,

I normalize P/E ratios over longer periods than most. It's very telling. For instance, I have a spreadsheet for the S&P 500 that generates a P/E ratio using a 20 year average of real earnings. Shillers 10 average method many use is much more volitile. That spooked me given the incessant bubbles over the last two decades.

The current S&P 500, 20 year avg. real P/E is 22. That's very high historically, going back to 1871!

Some perspective of the only periods when the 20 yr real avg. p/e met or exceeded 22 (with bonus info of dividend yield & 10 yr treasury yield at the time):

1906 - 24 (dividend yield = 3.6%, 10yr = 3.6%)

1929 - 27 (div yield = 3.0%, 10 yr = 3.4%)

1937 - 22 (dividend yield = 4%, 10yr = 2.7%)

1956 - 23 (dividend yield = 3.7%, 10yr = 3.1%)

1966 - 27 (dividend yield = 2.9%, 10yr = 4.61)

1995-2007 - you know the deal, p/e's from 25 to 45!

BTW, the current forward dividend yield on the S&P 500 is 2.1%. The lowest ever outside of the recent stock bubbles. Plus, our debt levels today don't exactly allow for private sector credit expansion in my view.

Sell!

Stagflationary Mark said...

mab,

I have to run a few errands so I can't reply in way that would do it justice right now.

This seems worthy of its own post with charts included!

mab said...

Stag,

The divergence between the 10yr p/e & the 20yr p/e is interesting too. In 2000, at the peak of the dot.CON bubble, the divergence was ~11%. At the peak of the housing led stock bubble, the divergence was ~ 17%.

The ten year was obviously weighted much more by the two bubbles than the 20 yr p/e.

Imo, dividends are the best yard stick for stocks. Real dividends grow steadily and very slowly

Stagflationary Mark said...

mab,

"1929 - 27 (div yield = 3.0%, 10 yr = 3.4%)"

So let me get this straight.

Today's 10 Year Treasury Yield is 3.47%. That's better than in 1929.

Today's current forward dividend yield on the S&P 500 is 2.1%. That's worse than in 1929.

Further, we've already crashed once just to get here.

"Plus, our debt levels today don't exactly allow for private sector credit expansion in my view."

Now you are telling me that our debt levels have not been removed during our most recent deflationary event? What about the mark-to-make believe accounting? Surely that helped.

Mark-to-Make Believe

http://www.rgemonitor.com/financemarkets-monitor/257706/mark-to-make_believe

“It’s easier to patch and mend and temporize away;

Immediate cost is tough, we favor gradual decay.”

Gosh. I have no idea why I am still a long-term bear. ;)