## Friday, January 16, 2009

### Credit Card Losses at Citibank Expected to Peak in Mid 2010 (Plus Other Personally Related Commentary)

Economics is one of my favorite subjects. This morning on CNBC a host conveyed that Citibank is projecting that its credit card losses will peak in mid 2010. The key determinant for credit card losses is the unemployment rate. I suspect that there is some lag between peak unemployment and credit card losses since:

a.) Credit card billing cycles have a natural one month lag between accrual of debt and debt repayment.
b.) Accumulation of debt on credit card requires a 4% of balance due repayment. Unemployed personnel should be able to make minimum payments for 3-6 months while they collect state unemployment payments.
c.) If unemployment payments are not enough to sustain a household, some unemployed personnel have "emergency" funds that may sustain them until the end of unemployment payments.
d.) I wouldn't consider 30 days delinquent as a loss for credit cards. I suspect credit card payments would need to be at least 90 days delinquent, perhaps 120 days delinquent before factored in with peak credit card losses at Citibank. Let's stick with 90 day delinquent assumption.

Doing some back of the envelope math:

June 2010 minus "a" = May 2010
May 2010 minus "b" = Dec 2009 to Feb 2010
Dec 2009 to Feb 2010 minus "c" = Dec 2009 (firm, vice date range)
Dec 2009 minus "d" = Sep 2009

Using Citibank's statement for peak credit card losses, one may extrapolate a peak unemployment rate around Sep 2009. Now factoring in the U.S. agricultural growing season marked by last freeze in May and first freeze in October, one may infer that agricultural jobs will provide some employment strength up till October. Readjusting for this seasonal sector of our economy, I believe that U.S. peak unemployment could be around Oct 2009, assuming Citibank's projections are valid. The extent of Citibank's credibility in forecasting profits / losses is debatable, especially with their deplorable projections related to mortgage backed securities leading up to the real estate bubble.

The whole travel industry may get some of the traditional summer travel but should bank on significantly lower consumer travel in Thanksgiving and Christmas periods. Retailers will feel the biggest pinch during the next Black Friday and Cyber Monday in Nov 2009. Thus, I would stay away from investments in sectors involving discretionary income until at least 2010.

Yes, the Obama administration will likely provide significant economic stimulus. Even with this, American citizens will have grown to understand the impact of tough economic times. They will also realize that today's negative three percent household savings rate (an approximation) needs to be readjusted to the ten percent plus savings rates of the early eighties. This readjusted savings rate will offset much of the gains some people expect out of the upcoming Obama stimulus package. Even with the stimulus package, the financial sector has a number of emergency / TARP loans from the U.S. government. It will take these companies about 5 years (this is a SWAG) to either payoff these debts, or make significant progress allowing them to long-term refinance the debt. This 5 year period of time represents a period where there is less money available for lending. Those who qualify will naturally be those cases that have high FICO scores and present minimal risk to banks.

My best investments for 2009:
- Stocks: Bear Market mutual fund (BEARX). If you insist on going long on stocks, consider utilities, consumer staples and health care.
- Cash: Paying off mortgage early or saving to buy a house