3 themes:
- A world increasingly going to plastic, especially foreign markets which are where the US was 20 years ago
- A cash strapped consumer now paying for necessities of life with credit - groceries, gasoline. Did you notice a few years ago even McDonald's (MCD) started taking credit?
- No credit risk - they do not issue the cards - they do not take the credit risk; the banks issuing the cards take the risk of a faulty consumer.
Adding in the $185s.
p.s. With that said the American Express (AXP) news is another nail in the coffin for the US consumer, and another "myth" hyped by the financial press all fall and early winter is DEBUNKED. That is, decoupling of "upper class" from "the rest of us". Just like the myth that is decoupling of foreign emerging markets from the Western world will be debunked in a few quarters. But until the proof is in the pudding, people will continue to argue otherwise.
Long Mastercard in fund and in personal account
6 comments:
i agree with your thesis and have also been looking for an attractive entry, but at a 30 P/E it could see further downside, especially if the broader market just pulls it down. I'm waiting for the 200 day MA for entry around 160. It may never get there, but I'm willing to wait. At least you'll have some skin in the game for the long-term which still looks pretty good.
Agreed Parker. 200 day would be a gift. Can't call the market, so I don't try to. As things get cheaper I try to buy more, as they get more expensive I try to lighten up. Darn crystal ball won't tell me the exact bottom or tops :)
Excuse me for my ignorance as I am still a novice.
Logically, if the economy goes down just as you are indicating,wouldn't we have lesser credit card as Banks don't offer credit? As a result, there is lesser use of CC?
Edward good point. If we do reach that stage you have a good thesis. I do think things will curtail to some degree, but thats new credit. People have a lot of credit cards in their pockets today. That's still a lot of capacity. You'd literally have to have card issuers cancel those cards and/or drop the credit ceiling on these cards and stop letting people spend. This would essentially implode the card issuers as their business is making money off people charging, and not paying off balances, and paying 15%, 21%, 25% and 29% rates.
So if we get to the scenario you are describing, well we are in a lot worse shape than we are now. This is the definition of a credit crunch (the scenario you are describing) where no one refuses to grant credit. This is what the Fed is trying to fight with its constant injections. At some point they will drop the rate so low (if this happens) that banks can borrow at say 1% (like in 2002-2003) and (we hope) would be willing to extend risk to consumers because even if they only make 2% return, its a profit when you borrow at 1%.
Granted thats what got us in this trouble in the first place... but thats the playbook. Keep in mind also, most Chinese have never seen a credit card, many cash based societies have very little credit cards. MA is very much an international story.
Why pick MA instead of AXP? To me it seems like MA may still have a long way to go (down), while AXP is starting to really look like it's bottoming out. If you look at insider activity AXP still has some recent buys, while MA's execs are really loading off.
The business models are completely different
Discover, American Express, Capital One are peers. Mastercard is not.
If a customer defaults, Discover, American Express, Capital One have to worry about it, and hence the write offs you are seeing. Mastercard makes money at the point of purchase. If the consumer defaults 30 days later, it doesn't matter to MA. They made their money. Sort of like EBAY. Each transaction created is revenue. What happens after the transaction means nothing to Mastercard.
Again, completely different business models. Mastercard is being painted with the wrong brush.
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