Friday, January 16, 2009

Mastercard (MA)/Visa (V) Weak as Democrats Look to Move Up New Regulations

Mastercard (MA) & Visa (V) are not participating in yesterday's reversal or this morning's happy time. In a quick search of news it appears Democrats want to move up the timetable of the previously announced Federal Reserve regulatory changes [Dec 18: New Limits on Credit Card Companies; in a Related Note - Hell Freezes Over] And "strengthen" them.
  • Democratic U.S. lawmakers said on Thursday they reintroduced credit card legislation aimed at curbing "unfair and deceptive" practices against consumers hit by unexpected rate increases and other fees.
  • The action comes almost one month after the Federal Reserve approved final rules to prohibit a number of highly criticized practices starting next year but lawmakers said the Fed rules failed to go far enough sooner to rein in the industry.
  • The Fed's rules take effect on July 1, 2010. They prohibit raising the annual percentage rate (APR) on existing balances except under certain circumstances, and give consumers 45 days notice before a rate increase and 21 days to pay. Among other changes, Fed rules will ban a practice known as universal default, in which card terms are changed based on how the holder performs on other bills, such as utilities or gym memberships. The Fed also approved a disclosure plan that was drafted after extensive focus group tests that even covered the size of type on credit card statements.
  • Maloney, who chairs the House Financial Services Subcommittee on financial institutions and consumer credit, said she was unhappy with the July 2010 implementation date and wanted Congress to act sooner. She is seeking to have the rules go into effect 90 days after enacted instead of a full year as the bill previously stated.
Now again, there is no direct credit risk when you own these companies - they simply take a "toll" on each purchase. However, with the constant bad news coming out of banks about credit - along with these new rules - we're heading for a contractionary pool of credit in the U.S.

...or the stocks could simply be a reflection on the weakening consumer in developed countries worldwide. Either way, the stocks are telling us bad things are happening.

Mastercard (MA), a former long holding for us, was one of the names we identified as a potential short at the beginning of 2009 [Jan 2: Potential Short Setups]

This is yet another nail in the coffin of the U.S. consumer, and consumer disretionary stocks; not just in the short run but in the long(er) run as we embark on a structural shift in spending/habits and credit availability.

You can also see a complete lack of bounce in the 3 major "credit card" brands (who not only carry the legistlative risk but also the consumer default risk) This is an area we've been highlighting since '07 as a potential mine field. I'd love to get my hands on these on the short side on any bounce... but they are dead in the water. Please note - the last name is now under the protective shield of the government ("bank holding company")... and still sucking wind. Just as telling as stocks that are holding steady or up during corrections, are stocks that cannot make any headway upward during good periods. These are "Danger Will Robinson" stocks.

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