Wednesday, March 11, 2009

Next Shoe?

I have been saying for a while that homes are the start and eventually credit card delinquencies and non-performing debt will be the final shoe to drop. Seems like banks are taking preemptive action to try and cut off the credit card problem. Here's a couple articles from the past few days, first is Meredith Witney's opinion piece from the WSJ, also today I found this article from, which references the Witney article. In general, banks are cutting back consumer credit, which will keep the economy from recovering on its own and it's not like the $400/person tax credit is going to make up for people no longer having a credit line as security.

So despite the last 2 days, I'm still not ready to touch bank stocks because even though they're cutting back credit lines, they'll still end up holding the empty bag on billions of debt. (Maybe that's why BoA is considered to be worthless) Also, no way the overall rally is real if consumers don't have money to spend. Here's a case where the rush to avoid mark-to-market accounting is having a direct economic effect.

I used to disagree with Larry Kudlow's anti-mark-to-market views, but I've come around as we've found a middle ground in either a model valuation approach or a process to amortize the write-down over a period of time. So unless there's a change to mark-to-market there will continue to be significant write-downs on credit card debt unless there's a change in the accounting rules, which may help restore consumer confidence by encouraging banks in increase or re-instate credit lines.

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