Capital One (COF) Does Not Disappoint

One sector that I've been pointing to wretched revulsion almost since the day the blog started are the credit card companies. I spent some time last night going through some old posts - kind of funny to read some of them considering at times I was probably talking to myself and 40 readers. You know what we were worrying about a year ago? Ambac & MBIA - those were the days. Ah, memories.

I digress.

Almost a year ago to the today in [Jan 22, 2008: Earnings Preview Wednesday] I wrote

Capital One Financial (COF) - credit card company which already warned. On any spikes due to Fed cuts this one is a short... for years. Direct tie to US consumer.

A week earlier in [Jan 15, 2008: A Quick Look at earnings Today] while speaking to Citigroup's (C) $4 billion increase in provision for write offs in their consumer loans division I wrote

A totally different area and one of the things I highlighted last summer & fall that will be the long term issue for banks as the economy weakens. As we work through this mortgage situation in the first half of the year, I expect the failing consumer and his inability to pay off all other types of consumer loans to take over the reigns as an issue in the back half of the year. We are seeing these banks already start to take write offs for this - last week COF, AXP. This is why I don't see why people even bother with this niche of financial stocks or try to call a bottom...

At the bottom of this post I listed a series of posts that pertained to all the blaring red warnings we posted specifically re: credit cards. This is exactly the type of stuff we should of been benefiting from in a very large way in late 2007 and throughout 2008 in our performance metrics but instead could only talk about it since we could not short individual names.

Capital One (COF) reported last night, and yes - they did come through yet again. By come through, I mean laid an egg. I will repeat what I wrote a year ago - these are to be shorted on all bounces. For years.

• Capital One Financial Corp. said Thursday it swung to a $1.45 billion loss in the fourth quarter as the bank set aside $2.1 billion for loan losses amid rising credit card delinquencies and took an $811 million impairment charge connected to its struggling auto finance business. (woo hoo - that's like a triple threat. Sounds like a candidate for federal assistance! too big too fail!)
• After paying preferred dividends, the McLean, Va.-based credit card company lost $1.45 billion, or $3.74 per share, in the final three months of 2008. (and you are paying dividends, why? This is just like the major banks paying dividends all through late 2007 and 2008 before scurrying to the government for handouts - dividends to TARP recepients should be clawed back)
• On an adjusted basis, excluding discontinued operations, the company reported a loss of $1.4 billion, or $3.67 per share, compared with a profit of $321.6 million, or 85 cents per share. Analysts polled by Thomson Reuters, on average, expected earnings of 33 cents per share. (what universe do these analysts live on? This is their full time job and they are not even with 10 zip codes - even excluding the special one time charges)

More fun stuff following upon their most recent data from December [Dec 15, 2008: Capital One (COF) Updated us on Delinquency Rates]

• Net chargeoffs, or loans the company considers won't be repaid, grew to $1.05 billionfrom $650 million in the fourth quarter of 2007. (bad)
  
• The rate of chargeoffs to total loans jumped to 4.21 percent from 2.66 percent. (terrible)
  
• The rate on loans delinquent by 30 days or more also grew, rising to 4.37 percent from 3.66 percent. (yuck)
• The company expects the first-quarter chargeoff rate to increase to about 8.1 percent, up from the mid 7 percent rage previously forecast. (only gets worse from here as the unemployed ranks morph higher) In the U.S. card business, charge-offs -- a measure of consumer default -- increased to 7.08 percent in the fourth quarter from 6.13 percent in the third quarter.
• Capital One added $1 billion to its allowance for loan losses during the quarter in anticipation of increasing chargeoffs in 2009. The allowance was built on the assumption that the U.S. unemployment rate will increase to 8.7 percent by the end of this year and that, on average, home prices will decline an additional 10 percent, Capital One said. (haha - cmon Capital One... let's just get that $1 Billion up to $3 Billion right now and call it a day. We've seen how effective "financial models" are) The total allowance for loan losses now stands at $4.5 billion.

One bright note!

• Total deposits grew to $108.62 billion from $82.76 billion at the end of the prior-year quarter.

And not so bright

• Standard & Poor's Ratings Services on Thursday revised its outlook on Capital One Financial Corp to negative from stable and affirmed its long-term counterparty credit rating of BBB+.

Frankly I've been a bit frustrated the past two weeks since these stocks have not rebounded at all, to places I'd prefer to short them (nearer to a resistance level) in the new portfolio tracking system - so I'm watching my list of stocks I want to short on fundamental reasons fall and fall and fall. At this point many of these names are so far away from a moving average they are prone to major snap back rallies as we saw in the major banks Wednesday when some of that junk jumped +30%. I will remain patient as 2009 shall provide many opportunities to short the same names when we return to the other side of the ping pong table i.e. everything will be rosy in 6 months, Obama will save us, American consumers will now spend since we have 3% mortgages. For now I just watch in envy

Here are the "Big 3" of consumer death - unlike the shorts I've been doing the past few weeks which are short term technical "scalps" these are "buy and trade around" shorts.... I'd like to start them once they get within sniffing distance of that ugly downtrend red line (5o day MA). These are only 3 month charts - trust me the 1 year and 2 year charts should not be shown to children. On a side note as I look at these charts I wonder if I am not too negative on the market since so many names now look like this; nowhere near any moving average. Hmmm....



Earlier posts that point specific to the consumer, rather than any specific credit card company (find the trend first, then find the companies who will suffer/benefit from said trend)

[Dec 10, 07 - Consumers Increasingly Turning to Credit Cards]
[Dec 23, 07 - Unpaid Credit Cards Bedevil Americans]
[Jan 10, '08: Credit Card Warnings Here, Credit Card Warnings There]
[Apr 10, '08: Americans Keep Piling on Debt]
[Apr 4, '08: Late Payments on Consumer Loans at 16 Year Highs]
[Jun 3, '08: Credit Card Usage is Surging, Risking Another Debt Crisis]
[Jun 22, '08: Americans Running Out of Places to Hide Debt - Now Credit Cards Go]
[Sep 23, '08: Loan Delinquencies Continue their Path Upward]
[Oct 21, '08: Moody's - Credit Card Chargeoffs Rising Rapidly]

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