I think the thing to focus on now are credit spreads. They are at Wiley coyote levels right, real fantasy stuff. How would one construct a trade to play a widening spread between say the 10 UST and the BAAs? Right now the spread is only about 1.9%. There's a longer term historical chart of this spread here:
contraryinvestor.com
Also note the previous chart of wages and salaries perhaps explaining the rising credit card problems expressed in the Moody's release I just posted.
Message 19030302
Some background on another retailer being taken under by consumer credit. Trying to pass the old maid card off it appears. Maybe the Japanese CB will pay up for them, I hear they're really suckers for dog doo-doo.<g>.
Reuters
Circuit City says credit card unit sale an option
Friday June 6, 6:06 pm ET
By Philip Klein
NEW YORK, June 6 (Reuters) - Circuit City Stores Inc.(NYSE:CC - News), the No. 2 U.S. consumer electronics chain, told Reuters on Friday it would consider selling its struggling credit card business, sending its shares higher in after-market trade.
The shares had slid sharply on Thursday after the company said its costs on certain financing transactions had been twice what it expected. Those revelations sparked fears Circuit City could become the latest retailer to be burned by its financing operations, following Spiegel Group Inc. (Other OTC:SPGLA.PK - News) and Sears, Roebuck and Co.(NYSE:S - News)
When asked if Circuit City would consider selling its credit card portfolio, investor relations officer Ann Collier told Reuters: "It is incumbent upon us at all times to consider all options and we would be doing that regardless of yesterday's announcement."
After her comments, shares of Circuit City gained 26 cents to $6.70 in Friday's post-market trading on Instinet.
Chairman and Chief Executive Alan McCollough said on Thursday Circuit City's consumer finance operations had "significantly underperformed" in the fiscal first quarter ending May 3. The credit card business accounted for nearly all Circuit City's pretax earnings in 2002.
McCollough said "adverse market conditions" had forced Circuit City to hold onto more securities backed by customer bill payments. That development fueled concern the retailer could be forced to write off bad debt if consumer default rates increased.
"We've been talking here for about six to eight months about the vulnerability of the (Circuit City) bank and this latest move is a further reinforcement of the view that it's vulnerable," Jefferies & Co. Inc. analyst Donald Trott said.
Sears, the largest U.S. department store chain, said in March it had put its ailing $30 billion credit card portfolio up for sale so it can focus on retailing.
According to Circuit City's annual report for the year ended Feb. 28, 2003, the Richmond, Virginia-based retailer had $3.17 billion in total principal amount of credit card receivables managed, versus $2.88 billion from the year earlier.
The problems at Circuit City's credit card business come at a time when its retail business is losing market share to Best Buy Co. Inc.(NYSE:BBY - News)
Circuit City is struggling to revamp its stores, hoping the renovations will boost demand for hot products like DVDs and digital TVs and help it regain lost market share.
Circuit City manages a portfolio of store-branded cards as well as Visas and MasterCards. It has struggled with rising consumer defaults in the weak economy.
Other credit card issuers such as Providian Financial Corp. (NYSE:PVN - News); Sears; and, to a lesser degree, Capital One Financial Corp. (NYSE:COF - News), made loans to customers with poor credit. Stocks of all those companies were hurt last year.
But whereas Sears has moved to sell its credit card operations and Providian and Capital One have targeted customers with higher credit profile. Circuit City has not publicly revealed plans to overhaul its finance operations.
"They are not coming forward and taking the initiative in saying, 'Hey guys, we got a problem here,'" Trott said.
Collier told Reuters on Friday that although Circuit City has not made a public show of the plans, the company has tried to slow the growth of new accounts.
She noted that default rates have been rising throughout the credit card industry.
"If they look at the trend, they will not see deterioration that is significantly different than changes that have occurred in the past year," Collier said.
Moody's Investors Services (News - Websites) said on Friday that more Americans fell behind on their credit card payments in April than a year ago, suggesting consumers were straining to support their spending.
Circuit City's finance business accounted for more than 90 percent of its $67 million in pretax earnings for 2002 -- a far larger chunk than in 2001, when the finance operations accounted for about half of the company's $206.4 million in pretax earnings. Collier said part of the shift had to do with declining retail sales. |
