Discover and Capital One reign in consumer credit limits

Discover and Capital One reign in consumer credit limits

In recent weeks we’ve learned that small banks are seeing increased credit card charge-offs, and now we are hearing that two large credit card issuers — Capital One and Discover Financial — are starting to dial back credit limits.  It seems those two companies are seeing the consumer debt data and wage growth data that we are and are trying to get ahead of any potential problems that might emerge. Most likely a prudent business decision but one that could tighten the screws for those in our Middle-class Squeeze investing theme that are living credit cards to make ends meet

Capital One Financial Corp. and Discover Financial Services said last week they have become more cautious in how they’re handling credit limits. The two lenders said they don’t currently see signs of deterioration in consumers’ ability to pay their debts but do question how much longer the economic recovery will last.

Capital One and Discover, on the other hand, signaled they are paying more attention to how consumers use their cards’ spending limits. Mr. Fairbank said on the earnings call that the company had “further dialed back” during the past year on spending limits for newly issued credit cards and on raising existing cardholders’ spending limits.

Discover said it reduced the number of credit-card balance transfer offers to a group of consumers it considers to be higher risk. That was in part to avoid consumers who would likely transfer a balance to a Discover credit card that would max out their spending limits, CEO Roger Hochschild said in an interview. He said the move is a “nuanced example of tightening.”

Discover also said it expects losses to increase on personal loans, and it has cut back on originations there.

“It really is about reducing risk,” Mr. Hochschild said. “By traditional measures we’re pretty late into an economic cycle.”

The renewed caution comes in part because consumers have been taking on record levels of debt. The total dollar amount outstanding on credit cards, personal loans, student loans and auto loans in the U.S. has never been higher.

Rising interest rates also play a role. The rates charged on credit cards, for example, generally rise when the Federal Reserve raises rates, leading to larger required payments for consumers. The Fed has raised short-term rates three times this year.

Source: Credit-Card Spending Limits in the Crosshairs as Issuers Grow Cautious – WSJ

WEEKLY ISSUE: Positioning for Fed Stress Test Result

WEEKLY ISSUE: Positioning for Fed Stress Test Result

Key Points in this Issue

 

Positioning for the Fed Stress Test Results

Over the last few weeks, as the last of the March quarter earnings have been reported, investors have been focused on fresh economic data as well as the escalating back and forth on trade and tariffs. As that escalating conversation has taken up more headlines, it’s rankled the market with uncertainty, which has led the market to once again move up and down in the span of not weeks, but days.

Odds are not all investors have been paying attention to the Federal Reserve’s annual stress tests for banks.  As we’ve seen in the past, the likely outcome of these tests is a dividend increase, a boosted share repurchase program or a combination of the two.

This very topic was the focal point of a piece in Barron’s over the weekend. While the article touched on several banks, including Citigroup (C) and Goldman Sachs (GS), it clearly called out expectations for JPMorgan Chase & Co. (JPM):

“Among the biggest banks, JPMorgan Chase may raise its dividend by about 50%, boosting its yield to 3%… Overall, banks are expected to return an average of 100% of their earnings to shareholders over the next 12 months, the highest capital return of any major industry group.”

The results of the first round of annual stress tests by the Federal Reserve were released last week, and the second set, which takes into account capital adequacy in stressed environments after planned distributions to shareholders, will be announced after today’s market close. That means in the coming days, JPMorgan and others are likely to make their capital return announcements.

With investor sentiment bouncing between Fear and Greed amid escalating trade talks, as I shared in yesterday’s Tematica Investing weekly issue, odds are we will see a rocky 2Q 2018 earnings season as companies do their best to guesstimate the potential impact. Harley Davidson (HOG) was the canary in the coal mine for this. As that happens,  I suspect the investing herd will once again flock to higher dividend yielding stocks and other safer ports in an earnings storm.

The prospects of a higher dividend and stepped up share repurchase program at JPMorgan combined with the likelihood of greater investor demand is a mixture to drive JPM shares higher. To capitalize on that, I’m adding the JPMorgan Chase & Co. August 110.00 calls (JPM180817C00110000)that closed last night at 1.37. As we add these calls, I’m setting a stop loss at 0.90.

  • We are issuing a Buy and adding the JPMorgan Chase & Co. August 110.00 calls (JPM180817C00110000) that closed last night at 1.37 to the Tematica Options+ Select List. As we add these calls, we are setting a stop loss at 0.90, and will look to adjust that higher as the underlying JPM shares and the calls move higher.

 

 

Comcast still circling 21stCentury Fox keeps these two call positions in play

As we all know, Disney (DIS) recently upsized its bid to acquire 21st Century Fox (FOXA) and Fox quickly endorsed the new deal. Even as the proposed transaction received conditional approval from the Department of Justice provided that Disney divests 22 of its regional sports networks, I am hearing that Comcast could be making another counteroffer. This likely means there could be more media M&A drama in the short-term, but nonetheless, one of the bidders for Fox will be left on the dancefloor and that will more than likely lead to another round of takeovers. As such, I continue to have a Buy on both on both AMC Networks (AMCX) September 2018 $65 calls (AMCX180921C00065000)and Discovery (DISCA) October 2018 30.00 calls (DISCA181019C00030000)