Two Credit Card Companies I Got My Eye On

While the markets have spent the last several months focused on the macro economic issues of Europe, this week brings a slew of earnings. And even in macro-economic dominated periods like the one we’re in now, paying attention to what’s going on at the corporate level can still give you good insight into the health and direction of the economy.

One thing in particular that I’ll be watching this week from financial stocks as they report is commentary on loan growth demand, especially from the largest banks.

That’s because, as I have long said, one of the issues the economy has wrestled with since the crisis of ’08, and that was recently improving, was the unwillingness of businesses, and consumers, to take advantage of the Fed engineering generationally low interest rates.

You need to remember that low interest rates, by themselves, do not stimulate the economy when a) the only people who can access them are those who don’t need the money, and b) when people/businesses do access them, and then use that money to repair their balance sheets or create a large “rainy day fund.”

In the beginning of this economic recovery, that was exactly what was happening! It would appear, though, that …

The Trend Is Changing

We’ve seen commercial and industrial loans and consumer credit ticking up steadily since late 2010. And just this past week, we saw consumer credit rise 0.8 percent in November, the largest monthly increase since 2001.

Now to be fair, strength in student loans accounted for a lot of the gain. But even revolving credit (credit cards) posted the largest monthly increase in two years.

Increasing consumer credit is indicative of a consumer who has a more positive outlook on the economy. And while it’s just one number, hopefully it represents an acceleration of a positive trend for the economy — of people and businesses finally taking advantage of low rates to spend and invest.

From an investment perspective, increasing consumer credit is a positive for credit card companies like Capital One (COF) and Discover Financial Services (DFS). So I’ll be watching their upcoming earnings announcements to see if they confirm what we saw in the consumer credit numbers last week.

Best,

Tom Essaye