I love the long-term prospects of Visa (NYSE: V) and MasterCard (NYSE: MA), but I do have to concede that a pesky lawsuit by Discover (NYSE: DFS) is the one big fly in this story's soup. According to the following article, Discover wants both credit-card companies to pay $6 billion for perceived violations of antitrust regulations. Unfortunately, these damages could be tripled if Visa and MasterCard lose. One of the big problems here is that American Express (NYSE: AXP) already won a settlement of $2.1 billion from Visa late last year and the company established an escrow fund worth $3 billion for litigation payments.

I'll admit, this lawsuit does give me and my credit-card investment thesis a little case of the shivers. After all, tripling $6 billion to $18 billion means that a huge amount of money is in play here, and a successful outcome for Discover would hamper the stocks of the two big card entities. When you read through the litigation risks in Visa's SEC filings (out of MasterCard and Visa, the latter is my favorite since it is still relatively fresh off its IPO and MasterCard has already had a big run), they are pretty scary. And the fact that the $6 billion figure just came to light this week has probably soured the perception of some investors and analysts. Nevertheless, all the previous litigation talk didn't stop Visa's stock from taking off after its IPO earlier this year.

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Before the bell: Futures lower following Bernanke's inflation comments

After the 3G iPhone was finally announced Monday, with a price tag and a business model that could take the funky phone to the masses, Apple Inc. (NASDAQ: AAPL) ended lower on some profit taking. But have no fear. Already this morning, Citigroup raised Apple's price target to $287 from $248 with a Buy rating, and Lehman raised it to $234 from $202, maintaining its Overweight rating. Despite the stock trading higher in European markets, it's still not showing signs of recovery in premarket trading in the US.

ThinkPanmure initiated Intel Corp. (NASDAQ: INTC) with a Buy, claiming it is gaining market share over rival Advanced Micro Devices (NYSE: AMD). The analyst also said Intel is gaining prominence in the server, desktop and notebook markets.

Hewlett-Packard Co. (NYSE: HPQ) updated its desktop and notebook computers. It introduced Tuesday in Berlin a new ultra-thin portable, the Voodoo Envy, to rival Apple's MacBook Air. H-P also added a new version of a touch-screen desktop PC and 16 notebooks for consumers and businesses.

There is a great article on Visa (NYSE: V) and MasterCard (NYSE: MA) over at TheStreet.com. It talks about the incredible growth in prepaid cards. A prepaid card is one which has a certain quantity of stored value on it. Think of it as being similar to a gift card, except that a prepaid card can be used most anywhere. Both Visa and MasterCard want to capture as much market share for prepaid cards as possible because they offer the same revenue model as existing credit cards in terms of processing fees.

The wonderful thing about stored-value cards is that they represent the ultimate desire of the business economy: conversion into a cashless society. Not only does business want this, but so does the government, which will probably increase its use over time in terms of distributing monies such as unemployment benefits and social-security funds to individuals lacking bank accounts.

An important point made in the piece is the fact that prepaid cards will take a long time to reach critical mass and to become economically significant for Visa and MasterCard's bottom lines. This must be kept in mind, yet I have to say that I personally think prepaid cards could become more significant sooner than people think, assuming that the two big guns in this area buckle down and make some smart moves. Let me describe what I mean.

You know, I can't take much more of the financial crisis. That's because I own Newcastle Investment (NYSE: NCT) and CapitalSource (NYSE: CSE). I'm kind of hoping we get out of the mess brought on by the housing-bubble pop and the mark-to-market devaluation so that these stocks will rise again. As we continue through this recession, another problem may soon assert itself.

According to this article, consumers are starting to rely on their credit cards a little too much. This could lead to a larger quantity of delinquencies. In fact, the piece states that card delinquencies were at 4.86% in Q1, a multi-year high. Further, revolving debt increased 7.9% in March, coming in at $957 billion. Not too far away from a trillion, my friends. Let me tell you, this is the last thing we need right now. Delinquencies will become a major problem for the banks, leading to further erosion of confidence on financials by investors.

As can be expected, two ideas immediately came up during the course of the article: Visa (NYSE: V) and MasterCard (NYSE: MA). How could they not? If people are taking credit debt, then they must be using those two brand names. Since Visa and MasterCard don't really have exposure to the debt side of things, they are relatively safe from that aspect.

Visa Inc. (NYSE: V) is a worldwide retail electronic payments network. The firm owns and operates VisaNet, a global processing platform that provides authorization, clearing, and settlement services to some two billion card holders. Visa also licenses its name to member institutions, which issue and market their own Visa products and participate in the VisaNet system. The company went public in March of this year, pricing 406 million shares at $44 per share.

The stock popped last week, on positive brokerage remarks. SunTrust reiterated its "buy" rating on the issue and raised its target from $87 to $100, citing solid organic revenue and EPS growth prospects. That sparked a run to the upside in V shares, which was subsequently magnified by word of a bullish outlook from rival Mastercard (NYSE: MA). The move was accompanied by heavy interest in Visa call options, particularly the June $85 instrument.

MasterCard (NYSE: MA) is recently up $25.91 to $312.80. MA raised its long term financial goals and expects double digit net revenue growth for 2008. MA May option implied volatility of 39 is below its 26-week average of 43 according to Track Data, indicating decreasing price risk.

Visa (NYSE: V) is recently up $3.21 to $85.20. V call option volume of 72,103 contracts compares to put volume of 10,196 contracts. V June option implied volatility of 48 is near its nine-week average of 45, suggesting non-directional price uncertainty.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

MOST NOTEWORTHY: Learning Tree, Shengdatech and Cepheid were today's noteworthy initiations:

• B. Riley initiated Learning Tree (NASDAQ:LTRE) with a Buy rating and $24 target. The firm believes investors have an opportunity to invest in a compelling revenue growth/margin expansion story at reasonable multiples with the stock off recent highs.
  
• Merriman started Shengda Tech (NASDAQ:SDTH) with a Buy rating and points to the company's growing nano-particle business and the vast market expansion opportunities associated with this business.
  
• Stephens believes Cepheid (NASDAQ:CPHD) possesses a best-in-class platform for molecular diagnostic testing with a virtual monopoly in the molecular point of care market; shares were assumed with an Overweight rating and $32 target.

OTHER INITIATIONS:

• Visa (NYSE:V) was started at Morgan Keegan with a Market Perform rating.
  
• Morgan Stanley initiated Dr. Pepper Snapple (N YSE:DPS) with an Equal Weight rating and $30 target.
  
• Goldman initiated Kraft Foods (NYSE:KFT) with a Neutral rating.

After the world's largest credit and debit card processor, Visa Inc. (NYSE: V), reported earnings last night, today was its main competitor MasterCard Inc.'s (NYSE: MA) turn to step up to the plate. The company posted quarterly earnings figures that topped analysts' expectations, pushing its shares up 10% in morning trading.

MasterCard reported that its first quarter profit more than doubled to $446.9 million, or $3.38 a share, helped by gains from the sale of its investment in Redecard S.A. in Brazil. The weak dollar and more customers who used their credit and debit cards for purchases also boosted the company's earnings.

Included in MasterCard's earnings was 37 cents a share related to the terminating of a customer business agreement. Excluding that, the credit-card giant posted earnings of $3.01 a share, exceeding analysts' estimates for a profit of $2.00 a share.

Stocks futures were lower early Tuesday morning ahead of the Federal Reserve Open Committee two-day meeting set to start today. On Wednesday, Fed chairman Bernanke will announce the policy decided, and while most investors expect a quarter point rate cut, they also expect the Fed to announce a pause in the cuts following some inflationary pressures.

On Monday, stocks finished the day little change ahead of the Fed meeting and despite some big deal news involving candy maker Mars and Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) buying chewing gum maker Wrigley (NYSE: WWY) for some $22 billion. Also, Kirk Kerkorian's Tracinda Corp. announced its intention to purchase 20 million of Ford (NYSE: F)'s shares at $8.50 per share. With that, the Dow industrials ended the day down 20 points, or 0.16%, the S&P 500 fell 1 point, or 0.11%, while the Nasdaq rose 1 point, or 0.06%.

Not many economic releases today. Still, already RealtyTrac reported that foreclosures soared 112% in the first quarter, compared to a year earlier. And still in the housing sector that doesn't seem to be able to find a bottom yet, before the bell, the S&P/Case-Shiller home price index is due for release.
Also today at 10 a.m. EDT, April consumer confidence index will be reported and economists are expecting the index will slide from the previous month. With higher food and energy prices, along with the troubles in the housing sector and the increasing troubles in the labor market, this is far from surprising.

Visa Inc. (NYSE: V) reported earnings for the very first time since its IPO last month -- and I'll bet there are a lot of you out there who are, like myself at the moment, kicking yourself for not buying the card-entity's stock!

As for the Q2 numbers, Visa saw its revenues decline by 50% to about $1.5 billion. Net income on an adjusted basis was $0.52 per share for the Class A common stock. Looking at the cash-flow statement, we see that cash from operating activities for the six-month period was used instead of generated, to the tune of $252 million -- last year's operational cash flow was much better at a positive $386 million. There was a big hit on the cash-flow statement from litigation effects.

Here's my reaction to the earnings -- from a pure individual-investor viewpoint, I personally don't think the stats are so important from this first report. Visa has just begun its life as a stock; it has incredible brand equity, and if you look at how MasterCard Incorporated (NYSE: MA) shareholders have benefited from that company's float, I'd be surprised if something similar doesn't happen with this one over the next couple years. I meant to buy Visa on its first day of trading, but I didn't; how wrong I was. The shares closed today at $75.63, but are trading down 4% as of this writing in the post-hours. Management gave some guidance in the press release -- revenues should grow the next few years somewhere between 11% and 15%, earnings per share should see solid 20% appreciation, and annual free cash flow will be at least $1 billion (this assumes that litigation reimbursements from litigation escrow are added back). I like the guidance, I like the strength of the stock, I like that people use Visa cards like crazy -- I want to watch, maybe even pray, for pullbacks on this stock.

Disclosure: I don't own shares in any of the companies mentioned here; positions can change at any time.

MOST NOTEWORTHY: Visa, Cardionet and Motorola were today's noteworthy initiations:

• RBC initiated Visa Inc (NYSE: V) with an Outperform based on margin expansion opportunities, the secular growth story towards electronic payments, lack of credit risk, and international opportunities. Piper started Visa with a Neutral rating. While the firm believes that Visa should generate long-term earnings growth and free cash flow, the firm thinks that Visa's valuation has increased the risk that strong earnings growth may not meet investors' expectations. However, the firm believes that Visa can still post strong results despite the U.S. consumer slowdown. Goldman initiated Visa with a Buy rating and $90 target and Morgan Stanley started shares with an Equal Weight rating and $75 target.
• Citigroup rated Cardionet Inc (NASDAQ: BEAT) a Buy, citing favorable arrhythmia monitoring trends. The firm has a $26 target on Cardionet.
• Motorola Inc (NYSE: MOT) was assumed with an Equal Weight rating and $75 target at Morgan Stanley on valuation.

OTHER INITIATIONS:

• Merriman initiated Netezza Corporation (NYSE: NZ) with a Neutral rating.
• Credit Suisse started Cascal N.V. (NYSE: HOO) with a Neutral rating and $11.65 target.

Visa (NYSE: V) is recently up $1.39 to $76.44.

V will report its first quarterly EPS results since its IPO tonight.

SunTrust says: "We project that significant prospective operating leverage will propel EPS, EBITDA and FCF well ahead of organic revenue growth."

V call option volume of 39,763 contracts compares to put volume of 10,938 contracts. V May option implied volatility of 66 is above its five-week average of 45 according to Track Data, suggesting larger price uncertainty.

Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Before the bell: Futures higher following deal news; investors await Fed move

Kirk Kerkorian's Tracinda Corp. is planning to offer $8.50 per share for up to 20 million shares of Ford Motor Co. (NYSE: F), a 13.3% premium over Friday's close. Tracinda now owns 100 million Ford shares, or 4.7% of the outstanding stock, which would increase to 5.6% when the offer is completed. Ford shares climbed over 6.5% in premarket trading. The deal, announced recently, is helping stock futures' upward movement.

Verizon Communications Inc. (NYSE: VZ) reported a 9.8% rise in its first-quarter earnings as its wireless division attracted more customers than other carriers. Excluding items, earnings were 61 cents per shares, inline with estimates. Revenue rose 5.5% to $23.8 billion, also inline with estimates. VZ shares are up 1.9% in premarket trading.

According to The New York Post, Barry Diller and Liberty Media (NASDAQ: LINTA) Chairman John Malone are continuing to talk about "a deal that would trade one or more of IAC Interactive (NASDAQ: IACI)'s assets for Liberty's ownership stake in IAC." Diller is also "expected to meet with his board this week to restart the process of breaking up his company into five separate pieces."

Goldman Sachs affirmed its "neutral" rating on Sysco (NYSE: SYY), saying "shares have been trading lower on concerns related to whether softening consumer spending is affecting casual dining and upper-end restaurants," according to the AP.

Thomas Weisel downgraded Motorola (NYSE:MOT) to "market weight" from "overweight" according to Briefing.com. The news service also reports that Morgan Stanley intiated Visa (NYSE:V) with a rating of "equal weight".

Credit Suisse (NYSE:CS) was raised to "peer perform" at Bear Stearns according to a report at 24/7 Wall St. The financial website also writes that Goodyear Tire & Rubber (NYSE:GT) was cut to "neutral " at JP Morgan.

Douglas A. McIntyre

Visa Inc. (NYSE: V) shares are rising today after competitor American Express (NYSE: AXP) posted a first-quarter profit of $991 million, or 85 cents a share, ahead of analysts' estimates of 81 cents per share. AXP's international customer base nearly tripled in the quarter, which could be a good sign for V. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on V.

After opening trading at $55.00 on March 19, the stock has hit a new high today. V opened this morning at $76.00. So far today the stock has hit a low of $73.91 and a high of $76.08. As of 12:25, V is trading at $74.67, up $2.37 (3.2%). The chart for V looks bullish and steady.

For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $60 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just two months as long as V is above $60 at June expiration. Visa would have to fall by more than 19% before we would start to lose money. Learn more about this type of trade here.

V hasn't been below $60 since just after its IPO and has shown support around $70 recently. This trade could be risky if the company's earnings (due out on Monday) disappoint, but even if that happens, this position could be protected by the support the stock might find between $60 and $65, where it made intermediate bottoms over the past two months.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in V or AXP.