The major banks {Bank of America, JP Morgan Chase, etc) that issue credit to people like you and I, are reporting numbers that will help us understand what people are doing (or not doing) with their debt lately. A good number of the banks reported that chargeoffs are on the rise again. Charge0ffs measure the number of accounts that no longer have the ability to pay off the debt that they've spent. This can happen for a number of reasons and be a sudden occurrence but usually charge0ffs are the end result of the cardholder being delinquent and not paying minimum amounts off for their credit balances. For example, I may chargeoff because I declared bankruptcy, made some type of settlement agreement with the bank, or after a long period of time (7mos) the bank determines that I will not be paying my debt off. So the fact that there are more of these situations occurring is not not a good thing. In general, the banks chargeoff levels mirror the rate of unemployment which is understandable. The one thing this trend tells me is that it appears to be more likely that once a cardholder starts to become delinquent they usually stay that way until the bank writes them off (after 7mos) and determines that they won't get their money back.
If people aren't making good on their existing debts then that means their available credit is shrinking and I go back to my example that indicates the consumer will be pulling back or not making new purchases because they don't have any more room on their cards. This means that most purchases need to come from cash and that is hard to come buy nowadays. Does this signal another leg down for the economy...its hard not to think that we've come too far too fast.
Now before you go and think that I have nothing positive to say, there was some good news. Most of the banks reported that the number of people going delinquent is declining slightly. So its seems like the key will be for the banks to do everything in their power to keep people making those minimum payments.
See the attached link for a view of the "Lifecycle of a Deliquent Card Account" (provided by creditcards.com):
http://www.creditcards.com/credit-card-news/life-cycle-delinquent-debt-1265.php
And the reaction of one credit card issuer is to charge very high interest rates, see the what a 79% interest rate looks like here:
http://www.creditcards.com/credit-card-news/first-premier-79-rate-fees-credit-card-1265.php
Showing posts with label JP Morgan Chase. Show all posts
Showing posts with label JP Morgan Chase. Show all posts
Thursday, December 17, 2009
Monday, March 23, 2009
Wall Street - When is Toxic Good?...
The resounding answer to this question is when you don't have to hold the toxic stuff anymore. That appears to be the solution to the problems plaguing America's banking system, which is clogged with these non-trading pools of mortgages that are usually packaged together to be sold off to investors. (Note: Other assets can be packaged together and sold off...like credit cards debt, however for this discussion we will just focus on mortgages)
The investors who usually bought these packages of assets lost faith in them and ran away and the market just dried up. So the assets began selling for less and less and the banks soon became stuck with these assets that "currently" had little to no value. But here is the tricky part for most people to understand: These assets could have value some day if the economy stabilizes.
So what the government is attempting to do is bring all the key players bank to the table and make it worth everyones while. Here are the players and how they will benefit:
Banks - They benefit, if and when they get these assets that "currently" have little value off of their books
Investors (Private Firms) - They benefit by being able to buy these assets again at reasonable prices, because they provide consistent income
Government - They benefit if both the Banks and Investors come together and hold hands again and start trading these assets again. It will help to stabilize the banks and assist in stabilizing the economy
How the Government plans on doing it:
The stock market is on the rise today because the government has officially unleashed its plan to loan $1 Trillion dollars to private firms(investors) who will share in the costs to find a price and buy these toxic assets from banks and split both the profits and losses around these assets.
This gets all the major players involved again and could change the way Wall Street looks at the banks.
Urb Thoughts:
I think that this plan is a well put together solution to the troubling problem around toxic assets. Ironically it helps and hurts the banks but overall it helps the banks and I will explain why. This hurts the banks because "one day" these assets will have value and they will miss out some of those gains but the biggest plus is getting these toxic assets off of their books. And in my opinion, once these assets are off the books, the banks should have no excuse to not make money. They are borrowing money and pay next to nothing for these dollars because the rate at which banks are being charged is at historic lows (Fed Funds Rate)...its between 0 and .025%!!! I could make money if I was borrowing money at these levels. Now the explosive part is all those bad assets that were sagging down their balance sheets will be sold off...this definitely puts the banks in a better position. The one thing to note is that as banks sell off these assets they will have to take a write-down and earnings for the next few quarters may not be pretty but LONG-TERM the banks may be the best BUY of the century.
I'm not sure how I will play this but I will gain some exposure to:
Direxion Financial Bull 3X Shares (FAS)
Also adding the banks that I belive have the best ability to survive will be key:
Wells Fargo (WFC)
JP MorganChase (JPM)
Bank of America (BAC)
The investors who usually bought these packages of assets lost faith in them and ran away and the market just dried up. So the assets began selling for less and less and the banks soon became stuck with these assets that "currently" had little to no value. But here is the tricky part for most people to understand: These assets could have value some day if the economy stabilizes.
So what the government is attempting to do is bring all the key players bank to the table and make it worth everyones while. Here are the players and how they will benefit:
Banks - They benefit, if and when they get these assets that "currently" have little value off of their books
Investors (Private Firms) - They benefit by being able to buy these assets again at reasonable prices, because they provide consistent income
Government - They benefit if both the Banks and Investors come together and hold hands again and start trading these assets again. It will help to stabilize the banks and assist in stabilizing the economy
How the Government plans on doing it:
The stock market is on the rise today because the government has officially unleashed its plan to loan $1 Trillion dollars to private firms(investors) who will share in the costs to find a price and buy these toxic assets from banks and split both the profits and losses around these assets.
This gets all the major players involved again and could change the way Wall Street looks at the banks.
Urb Thoughts:
I think that this plan is a well put together solution to the troubling problem around toxic assets. Ironically it helps and hurts the banks but overall it helps the banks and I will explain why. This hurts the banks because "one day" these assets will have value and they will miss out some of those gains but the biggest plus is getting these toxic assets off of their books. And in my opinion, once these assets are off the books, the banks should have no excuse to not make money. They are borrowing money and pay next to nothing for these dollars because the rate at which banks are being charged is at historic lows (Fed Funds Rate)...its between 0 and .025%!!! I could make money if I was borrowing money at these levels. Now the explosive part is all those bad assets that were sagging down their balance sheets will be sold off...this definitely puts the banks in a better position. The one thing to note is that as banks sell off these assets they will have to take a write-down and earnings for the next few quarters may not be pretty but LONG-TERM the banks may be the best BUY of the century.
I'm not sure how I will play this but I will gain some exposure to:
Direxion Financial Bull 3X Shares (FAS)
Also adding the banks that I belive have the best ability to survive will be key:
Wells Fargo (WFC)
JP MorganChase (JPM)
Bank of America (BAC)
Monday, September 15, 2008
The Aftermath...
I wanted to develop this post in response to a great comment from a reader, LLROOMTEMPJ:
"here's a stupid question for you. Now that lehman has filed for chapter 11, why would buying lehman now with an understanding that it may go back up in the future be a stupid idea?Is there no return from bankruptcy? Weren't there some airlines that filed chapter 11 that bounced back?i'm really an idiot, but if you could teach me, or direct me to some resources that would help me to make sense of things, it would be much appreciated."
My response: I wanted to say thanks for reading Urbanomics and I will answer you question to the best of my ability. You are correct Lehman has officially filed for Chapter 11 bankruptcy. I believe that buying Lehman now is not a sound decision because to my knowledge this firm as we know it will cease to exist.
Our first indication is that Lehman did not include any of their viable businesses that can still continue operate in its chapter 11 filing. It has businesses that act as brokers - dealers as well as Neuberger Berman (an investment advisory firm) that were specifically left out...because they still have VALUE. These viable businesses will be sold or liquidated to provide for more cash. I imagine other things like the headquarters (real estate) will be liquidated also. I believe that this decision is key because chapter 11 can give Lehman or more importantly Lehman's creditors the ability to reorganize of sell all the assets of the company and we already see the rush to sell those assets mentioned above quickly for their highest value. Unlike retailers, manufacturers, or airlines...Lehman does not have a lot of assets to sell to generate money to pay back all of the money it borrowed from banks (or creditors) so it must sell the businesses that make Lehman money (similar to how an airline might sell its planes) and with each sale of these assets Lehman begins to disappear.
Secondly, reorganization is unlikely because Lehman's biggest asset is it's NAME. People must trust the name to lend it money so that Lehman can make more money. There will be little trust in a company that has failed at managing your money if it came back.
Lastly, buying the shares at this point is not a sound decision because stockholders get no love in the PRIORITY of recovering money during bankruptcy. Anyone holding the stock will receive nothing and only creditors (usually banks who let Lehman borrow money) get PRIORITY. Once the stock is delisted, or removed from the stock market, it can still be traded but terms of the reorganization would terminate your shares...and leave you with NOTHING.
Hope this helps.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Today's Aftermath:
The only other thing I wanted to point out is that my long shot recommendation on Lehman was purely a high risk - high reward play. There were only two options BANKRUPTCY OR BUYOUT! And after reading my own post the other night I should have listened to myself and known that if the Fed has already promised not to assist in the process that it was a longshot.
AIG is now in focus and I will take the course of action that I should have taken with Lehman. AIG should be shorted as you see in my STOCKTRACKER PORTFOLIO because they also need cash and the Fed is in no position to lend it out. AIG is considered to big to fail but if I am JP Morgan and Citigroup why should we post $75Billion dollars by ourselves to pay for their mistakes. Even more importantly, AIG's ratings were downgraded tonight and that raises more implications where AIG has to come up with cash really quickly to pay contractual obligations that arise from ratings decreases.
"here's a stupid question for you. Now that lehman has filed for chapter 11, why would buying lehman now with an understanding that it may go back up in the future be a stupid idea?Is there no return from bankruptcy? Weren't there some airlines that filed chapter 11 that bounced back?i'm really an idiot, but if you could teach me, or direct me to some resources that would help me to make sense of things, it would be much appreciated."
My response: I wanted to say thanks for reading Urbanomics and I will answer you question to the best of my ability. You are correct Lehman has officially filed for Chapter 11 bankruptcy. I believe that buying Lehman now is not a sound decision because to my knowledge this firm as we know it will cease to exist.
Our first indication is that Lehman did not include any of their viable businesses that can still continue operate in its chapter 11 filing. It has businesses that act as brokers - dealers as well as Neuberger Berman (an investment advisory firm) that were specifically left out...because they still have VALUE. These viable businesses will be sold or liquidated to provide for more cash. I imagine other things like the headquarters (real estate) will be liquidated also. I believe that this decision is key because chapter 11 can give Lehman or more importantly Lehman's creditors the ability to reorganize of sell all the assets of the company and we already see the rush to sell those assets mentioned above quickly for their highest value. Unlike retailers, manufacturers, or airlines...Lehman does not have a lot of assets to sell to generate money to pay back all of the money it borrowed from banks (or creditors) so it must sell the businesses that make Lehman money (similar to how an airline might sell its planes) and with each sale of these assets Lehman begins to disappear.
Secondly, reorganization is unlikely because Lehman's biggest asset is it's NAME. People must trust the name to lend it money so that Lehman can make more money. There will be little trust in a company that has failed at managing your money if it came back.
Lastly, buying the shares at this point is not a sound decision because stockholders get no love in the PRIORITY of recovering money during bankruptcy. Anyone holding the stock will receive nothing and only creditors (usually banks who let Lehman borrow money) get PRIORITY. Once the stock is delisted, or removed from the stock market, it can still be traded but terms of the reorganization would terminate your shares...and leave you with NOTHING.
Hope this helps.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Today's Aftermath:
The only other thing I wanted to point out is that my long shot recommendation on Lehman was purely a high risk - high reward play. There were only two options BANKRUPTCY OR BUYOUT! And after reading my own post the other night I should have listened to myself and known that if the Fed has already promised not to assist in the process that it was a longshot.
AIG is now in focus and I will take the course of action that I should have taken with Lehman. AIG should be shorted as you see in my STOCKTRACKER PORTFOLIO because they also need cash and the Fed is in no position to lend it out. AIG is considered to big to fail but if I am JP Morgan and Citigroup why should we post $75Billion dollars by ourselves to pay for their mistakes. Even more importantly, AIG's ratings were downgraded tonight and that raises more implications where AIG has to come up with cash really quickly to pay contractual obligations that arise from ratings decreases.
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