Sunday, June 22, 2008

Long Term Trends: Part 5: Consumer Debt

Here are some current trends:
  1. Gas and Energy Prices remain expensive and may remain expensive in the future.
  2. Food Prices remain high and may remain high in the future.
  3. Consumer Income may not keep up.
  4. People can no longer use their houses as ATM machines.

With consumers being squeezed, what will the consumer (the U.S. Consumer) do? Will they start saving more or will they continue to spend?

This will depend on many factors, such as culture.

In Japan, there is a greater inclination to save compared to Americans.

However, in the United States, the Savings Rates over the last decade is below 4%, a very low personal savings rate. Even during the recession of 2001, the savings rate remains low.

So Americans (and other cultures) still want to spend despite being squeezed by higher gas, energy, and food prices. This means that in order to continue spending, consumers will need to incur more consumer debt.

Ways to play this

Two obvious plays on increasing consumer debt include:
  1. Mastercard (MA)
  2. Visa (V)

Other plays include:
  1. American Express (AXP)
  2. Portfolio Recovery Associates (PRAA) - Engaged in purchase, collection, and management of portfolios of defaulted consumer receivables.

Credit Cards Used to Finance Healthcare Procedures

In the July 2008 edition of Consumer Reports, there is an article that details the increasing use of credit card to finance health care procedures. According to the article, $45 billion is spent today, and it could triple to $150 billion in 2015.

Beware of Rising Charge-Offs

Beware of Rising Charge-Offs. In the first quarter 2008, the Big Three all reported rising charge-offs. For example, the Bank of America charge-off rate increase from 4.73% to 5.19 percent.

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