Capital One (COF) Defaults Continue Their Upward March

After reading a quite excellent article in Barron's this weekend re: American Express (AXP) that actually explained away some of the main issues I had with the company, I am considering a long AXP/short Capital One Financial (COF) strategy over the intermediate term. I will post the AXP story later in the week, but there are some differences between American Express vs Capital One and Discover Financial (DFS). In a normal market I'd put this trade on - but in this market where student body runs left and all stocks in a sector move together without discerning the difference between one or the other, it really doesn't work well. What you would make as being long one you'd lose being short the other so they'd cancel each other out. This has been the problem with the market since summer 2008; the herd moves in and out of sectors and individual stock metrics mean little.

While I let go the American Express (AXP) short last week [Apr 8: Closing American Express Short], I did hold up to the Capital One even though its chart also went "positive" - and took some major pain since "all financial stocks are now blessed"; but yesterday (-10%) and this morning (-9%) COF returned to Earth. It is very difficult to hold onto these stocks either long or short because the mood and price swings are simply enormous and again, you can be correct intellectually but when an army of short sellers is trying to squeeze out of the same door at once you take a lot of pain. I am covering a good portion of my short this morning in the $15s and will assess how the stock reacts from there.

Here is the latest data released from Capital One on their defaults ... under my scenario of "aggregrate" US economic data will improve based on US paper printing presses, BUT the consumer is still cooked - this company will continue to suffer broadly.

Via Reuters

• Capital One Financial Corp (COF), a leading issuer of MasterCard and Visa credit cards, said on Wednesday that credit card defaults rose in March in the United States as unemployment soared to a 25-year peak.
• In a regulatory filing, the company said the annual net charge-off rate -- a measure of credit default -- for U.S. credit cards rose to 9.33 percent in March from 8.06 percent in February, but the rate for loans at least 30 days delinquent fell slightly to 5.08 percent from 5.10 percent.

So the rate of default took an ENORMOUS hike, 15.7% sequential month over month growth... while those 30 days deliquent fell. I expect the latter number to be "ok" here for the next month or two as people get income tax returns and use it to pay credit cards - and then back to reality by summer.

• In auto loans, Capital One's charge-off rate fell to 4.08 percent in March from 4.44 percent in February, while the delinquency rate was stable at 7.52 percent.

Same idea with income tax returns helping

• In international operations, the charge-off rate rose to 8.67 percent in March from 7.20 percent in February, while the delinquency rate rose to 6.25 percent from 6.16 percent.

Some more ugly numbers especially in the huge spike in charge off rate....

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This morning an analyst came out and said the recent move is a bit overdone as well... usually I ignore analysts but this guy apparently upgraded in March at the bottom so I will give him some credence.

• Credit card companies including American Express (AXP Quote), Capital One Financial Services (COF Quote) and Discover Financial (DFS Quote) are overpriced these days, according to one boutique investment firm.
• Given the recent run-up in financial stocks since early March due to increased investor optimism about bank profits, the economy and regulatory/political issues, Stifel Nicolaus analyst Christopher Brendler downgraded the credit card companies on Tuesday.
• He lowered his rating on American Express to sell from hold and on Capital One and Discover to hold from buy. He had upgraded the stocks in March. Shares of American Express have nearly doubled over the last month. The stocks of Capital One and Discover rose 59% and 47%, respectively, since the end of February, Brendler writes in company notes.
• "[I]t is an opportune time to step aside," Brendler writes in an industry note. "While we still see this group as survivors, the key question remains the timing of a turn in the economy. In our view, just as the market was overly bearish a month ago, it now appears overly optimistic that a turn is imminent."
• Brendler says that the full effects of a sharp rise in unemployment have yet to be realized in the economy and is concerned that "this will lead to another leg down in housing and credit quality, possibly reigniting fears of a prolonged deep recession," according to the note.
• He adds that credit card losses are expected to rise significantly as recent data showed "accelerating deterioration partially due to rising bankruptcy filings," according to note.

From what the analyst commentary is, readers will know I agree with those thoughts - so gives me another reason to lend credence to his thought process. After this rally, even AXP is now trading at well over 30x FORWARD earnings. But in his market valuation means nothing; only fast money and squeezed shorts ...

[Sep 15 '07: Consumer Spending Continues, Where is the Money Coming From? Credit Cards]
[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]
[Dec 15, 2008: Capital One (COF) Updated us on Delinquency Rates]
[Apr 7, 2009: Moody's Credit Card Charge Offs Hit Record; While 8.2% of All Type of Loans are Delinquent or in Default]

Short Capital One Financial in fund; no personal position