After yesterday's closing bell, Capital One Financial (NYSE: COF) reported a second-quarter loss of 65 cents per share. The quarterly loss included $461.7 million COF repaid to TARP and a $38 million dividend payment. Excluding these payments, COF saw a quarterly profit of 53 cents per share. The Street expected COF to lose 73 cents per share, so the company managed to top expectations. Nevertheless, the company noted that its results were pulled lower by credit card losses along with the repayment of the government funds. COF managed to make money excluding items, but a loss is still a loss. While the company noted that people have been a bit more defensive in their spending, I'm guessing that this may change. Remember that unemployment is at record highs, which may lead to more people to depend on credit cards (if they have them) to pay for necessities.
If this is the case, we could see credit card bills jump, potentially bringing defaults along for the ride. In fact, COF's CEO Richard Fairbank predicted that unemployment will rise to 10.3%, which will lead to further losses from delinquent cardholders. The company expects to lose more money from delinquent cardholders, which is not a good sign.
This earnings season has led to a nice rally, but I am a bit concerned that the market will find itself under considerable pressure once the earnings dust settles. I have said before that a loss is a loss, even if it was less of a loss than expected. Eventually, the euphoria over less-than-expected losses is going to wane and investors will notice that a lot of companies have been losing money.
As for the enthusiasm over earnings from financial firms, the big banks are benefiting from TARP while smaller banks aren't doing as well (perhaps because they did not take TARP funds). What happens if the big banks report losses in the next quarter? I'm not saying that this situation is going to take place, but it very well could -- and I am guessing that it may put a damper on the current bull run.
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