Friday, 11 January 2008

More Signs Of US Recession

Just a few cut and pastes of stories that I believe are indicative of a slowing US economy and more specifically an ailing US consumer.

Capital One shows credit woes firmly hitting consumer

Credit-card shares were among the top decliners in the financial sector Thursday after Capital One Financial Corp. lowered its earnings outlook and raised its loan loss reserves, with increasing clarity that the credit crisis sparked by careless home lending has spread to the consumer sector.

As delinquencies on subprime mortgages surged this year, there were initially few signs that similar problems were leaking into the credit-card industry. However, that changed in recent weeks as evidence, like Thursday's news from Capital One, shows that consumers loaded up on credit-card debt to make up for a loss in the purchasing power they once wielded by refinancing mortgages during the real-estate boom.

Early Thursday, Capital One Financial Corp. cut its 2007 earnings view to $3.97 per share, below its previous forecast of $5, and said that it expects fourth-quarter earnings of 60 cents a share.

The McLean, Va.-based financial holding company said that the reduction was driven by increased provision expense and additional legal reserves established in the fourth quarter...

... Capital One said that the fourth-quarter 2007 provision for loan losses was approximately $1.9 billion. This is made up of approximately $1.3 billion in charge-offs and an allowance build of about $650 million.

"The allowance build reflects fourth-quarter delinquencies in the company's national consumer-lending businesses, continued deterioration in the approximately $700 million Held for Investment portfolio of Home Equity Lines Of Credit (HELOCs) originated by GreenPoint Mortgage, and expectations for a weaker U.S. economy in 2008, as evidenced in recently released economic indicators," the company said in a statement Thursday.

American Express Has $440 Million Charge for Quarter

American Express Co., the third- largest U.S. credit-card network, forecast first-quarter earnings below analysts' estimates and adopted a ``cautious view'' for 2008 because of a slowing economy.

The company will take a $275 million fourth-quarter charge as more cardholders fail to repay their debts, New York-based American Express said in a statement today. The company fell 7 percent in extended trading.

"We did see some negative credit trends among U.S. consumers during December, particularly in California, Florida and other parts of the country most affected by the housing downturn,'' Chief Executive Officer Kenneth Chenault said in the statement.

American Express said its first-quarter 2008 earnings from continuing operations will be less than the 90 cents a share in the same period in 2007, missing the 93 cent average estimate of 12 analysts surveyed by Bloomberg.

``Credit-card performance will noticeably deteriorate during the year, given spillover from residential mortgages, weaker economic trends, and higher levels of unemployment,'' Fitch Ratings said today in a report on the U.S. industry.

Weak holiday sales spark profit warnings

U.S. retailers reported disappointing holiday sales in December, sparking several profit warnings, as promotions, last-minute shopping and gift-card redemptions failed to turn around lackluster performance in the largest sales month of the year.

Retailers from Gap Inc. and Kohl's Corp. (KSS) to Limited Brands and Macy's Inc. (MC) missed analysts' forecasts.

Hot Topic (HOTT), American Eagle Outfitters Inc. (AEO) and Men's Wearhouse Inc. (MW) were among the retailers to lower their fourth-quarter profit forecasts.

No. 1 retailer Wal-Mart Stores Inc. (WMT) and No. 1 wholesale club Costco Wholesale Corp. (COST)were rare bright spots, benefiting from budget-conscious consumers seeking bargain electronics and buying bulk-food items. Off-price retailer Ross Stores Inc. (ROST) also benefited from shoppers seeking name brand products at a discount.

Two-thirds of retailers missed what were for many already lowered expectations, well above the long term average of 43%, according to Retail Metrics.

U.S. retailers reported a 0.4% gain in December, Retail Metrics said. Coupled with results from November, sales rose 1.7%, the worst performance since 2002.

More profit cuts expected

"Department stores and specialty retailers were among the losers in December, while discounters served as a relative source of strength," said Morgan Stanley analyst Michelle Clark. "Lackluster traffic levels in the weeks leading up to Christmas drove increased promotional activity."

Retail profit estimates appear to be at least 3 percentage points too high for 2008, the analyst said.

"We'll see a soft year in terms of consumer spending," said Stephen Hoch, Wharton School marketing professor.

According to ShopperTrak, retail foot traffic for November and December combined dropped 2.7%.

Possibly some of the worst data on the US consumer to date, yet the market rallied in anticipation of another interest rate cut. Despite the fact that 100bps of rate cuts have done nothing for the market and will do nothing for embattled consumers and declining company profits.