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US Credit Card Spending On The Rise

Wed, Apr 30 2008, 15:39 GMT
by Grace Cheng

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Yesterday it was Visa (V: 84.18 +3.30 +4.08%) and today Mastercard (MA: 279.89 +5.91 +2.16%) reported its earnings. The results for both were good, with Mastercard earning more than double last Q1 at $446.9 million, or $3.38 per share up from $214.9 million, or $1.57 a share last year. Some of these earnings came from “one time” events such as the sale of holdings in Brazilian company Redecard. Even after excluding those earnings, the results were still far better than what analysts had expected at $2.59 vs the expected $2.

Internationally, Mastercard had a surge in gross spending volume of 30% with regions such as Latin America, South Asia, the Middle East and Africa showing strong card growth. Much of this is probably due to the lower dollar which give those outside the US higher purchasing power in dollar-denominated goods and gives US companies higher dollar profits when they book income made abroad.

Mastercard’s gross US dollar volume also rose, although somewhat less, to 8.9%, indicating that US consumers are spending more on credit and debit cards. However, Mastercard’s CEO Robert Selander said that US consumers continue to move away from luxury purchases towards necesities like food and gas, which are both rising in cost. What this looks like is that US consumers are being squeezed: on the one hand their home equity has gone down tremendously, there is job insecurity and increasing unemployment, and on the other hand the basic cost of living is going up so much that they have to increase spending just to cover the bare necessities. This seems a lot like stagflation.

As if to underline this possibility, Countrywide (CFC: 5.82 -0.03 -0.51%), the largest mortgage lender in the US reported a loss of $893 million in Q1; the S&P/Case-Shiller home price index reported a 12.7% fall in February, and BP (BP: 0.00 N/A N/A) reported a record 63% profit increase to $7.6 billion from $4.4 billion last Q1 on the back of record breaking oil prices. The companies making money now are those that have a strong international presence or those whose profit is strongly correlated to the rising commodities prices.


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