Now that analysts have figured out that the credit crisis is moving from subprime to prime borrowers, the economic detective squad has begun to look for what's next. Turns out they don't have to look much further than the same consumer who cannot afford his mortgage.

According to The Wall Street Journal, "Rising defaults on credit-card payments, coupled with a bleaker economic outlook, are spooking investors in the market where this debt is packaged and sold." The result is a double-edged blade. Banks that hold these packaged securities will have to begin to write them down just as they did mortgage-backed paper. And consumers will find credit harder to come by because banks do not want more write-offs.

The consumer will have lost one of his last places to find cash, and banks will face more losses and the risk of having to raise additional capital. Since credit has driven consumer spending, the retail industry may be in for another shock.

Hank Paulson led the charge this morning talking about the need and credibility of the GSE's. Oil was up for a while but after Tropical Storm Dolly headed further south than the oil and gas infrastructure that locked in heavy oil selling. The major focus continues to be earnings and financial stocks in particular. Below are today's unofficial closing bell levels:
DJIA 11601.60 (+134.26)
S&P500 1276.80 (+16.80)
NASDAQ 2303.96 (+24.43)
10YR T-Note 4.097 (+0.03%)
52-Week Lows
Top Analyst Calls

American Express Company (NYSE: AXP) was one of the more poor financial stocks today after the company choked on earnings last night. It is also facing deteriorating business despite it being thought of as the highest quality credit card around. Shares were down 9.2% at $37.13 in today's final minutes.

American Express (NYSE: AXP) saw a big sell-off in its shares during the after-hours session on Monday following the release of its second-quarter earnings numbers. The shares already closed down over 11%.

It isn't difficult to comprehend this one. According to Earnings.com, Wall Street was hoping for the credit company to make 83 cents per share. American Express only delivered 57 cents per share from continuing operations. Not only did the company disappoint the Street by a very wide margin, but it disappointed itself, since that 57 cents per share represents a 35% drop compared to the bottom-line results achieved a year ago.

Yep, the financial crisis is still with us. American Express needed to significantly add to its credit reserves. Management stated that the economy is having a negative effect on its cardmembers, and that previous guidance can no longer be relied on. Translation: don't buy this stock! At least, that's my opinion.

I simply can't see allocating investment funds to American Express at this point. If investors wanted to get some exposure to plastic, all they would need to do is consider Visa (NYSE: V) or MasterCard (NYSE: MA). Both of these businesses are based primarily on transactions, not on credit risk. Whenever a card is used, these businesses get a little cut. And that adds up, my friends. Granted, both of these companies sold off on Monday and have been weak lately, and they have litigation risk, but I'd at least look at them for the long-term. Over time they should do well.

American Express, however, is way off my list of potential investment ideas. Not even going near this one. Name a timeframe (e.g. year-to-date, one-year, five-year, etc.), and you'll find that the stock is down. The economy is going to have to turn sharply before I even remotely consider it.

Disclosure: I don't own any company mentioned; positions can change at any time.

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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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.

Credit cards ... the little plastic cards in your wallet that are so convenient to rely on when you are strapped for cash. While the convenience of having cards definitely makes it easier to buy items when you are running low on cash, the flip side is that credit card debt can drown the typical household, and statistics are showing that Americans are pulling out their cards more than before.

One of the reasons why credit card usage has been on the rise is the fact that homeowners are having a harder time using home equity to get a cash infusion into their accounts. As a result, they are looking to borrow money from somewhere, and more times than not, they are turning to credit cards.

The evil with credit cards is that once you start to use them to pay for your basic necessities like food and gas, you find that in the months to come you still can't afford your basic needs but in addition, your monthly bills are racking up like crazy due to your credit card expenses. It's a scary cycle that many families find themselves trapped in.

This post is part of our Battle of the Brands feature. Let us know which brand you prefer, and check out other Battle of the Brands posts.

In the battle for "cool history," American Express (NYSE: AXP) wins this one hands down. The company was started in 1850 as an express delivery service. At the time, the U.S. Postal Service was slow and unreliable, and sending anything important or valuable was ill-advised. The American Express Company was known for its "expressmen," who delivered valuable packages all over the country, usually on horseback or with stagecoaches.

After establishing a strong reputation for delivery service, the company later decided to phase out deliveries and move into financial services. They had delivered countless documents for banks, and the money business was appealing. American Express first offered money orders in 1882, followed by travelers cheques in 1891. The travelers cheque business was the main focus of the company for many years.

In 1958, the company gave in to market pressures and issued its first charge card. For almost 30 years, though, the card was not to be used as a "credit" card. All balances were to be paid in full each month. In 1987, that changed as American Express finally issued a card that allowed revolving balances.

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.

Bloomberg News reports that Bank of America (NYSE: BAC) missed earnings expectations by 44%. Specifically, its first-quarter net income declined to $1.21 billion, or 23 cents a share, from $5.26 billion, or $1.16 a share in 2007. The 21 analysts surveyed by Bloomberg expected the bank to make 41 cents a share. The bank experienced a huge rate of late credit card payments in its $81 billion credit-card portfolio -- 5.8% compared with an industry average of 4.1%.

Bank of America's problem is its exposure to the housing market. Assuming 2% of its home-equity loans are uncollectible this year, the cost may be $2.3 billion according to a Fitch Ratings analyst. If the bad loans reach 5%, the damage could total $5.9 billion. Meanwhile, Bank of America is still on track to buy Countrywide Financial Corp (NYSE: CFC) which had $34 billion in home-equity loans at the end of 2007.

Both Bank of America and Countrywide have home-equity loans concentrated in the regions with the most foreclosure filings. California, Nevada, Arizona and Florida are the four states where housing prices are sliding faster than the national average -- ranking among the top 10 states with the most foreclosure filings in March.

Andrew Horowitz, is a money manager and author of The Disciplined Investor. He discusses COF in the most recent episode of The Disciplined Investor Podcast

In an 8-K release this morning, Capital One Financial Corp. (NYSE: COF) reported a 13.7% increase in the monthly charge off rate for the U.S. card segment as compared to the December, 2007 report. As has been predicted, global credit card debt has been rising at an alarming rate. The most recent announcements of a 40% workforce reduction for Capital One's U.K. unit once again displays how "predatory lending practices" have now come back to haunt those companies that have been playing with financial-fire. As the Capital One Management was working on keeping credit card customers, they did not realize that that same level of loyalty would eventually come back to bite them in the asterisk. (Chart from 2007 COF Investor Conference)

When looking at the total picture, Capital One's $505,083,000 monthly principal write-off is becoming more and more concerning as we are continuing to witness a global economic contraction. Consumers are spending less as they have greater worries about their shrinking wallets...Right? They (we) are also becoming painfully aware that the housing slowdown is not going to be a short-lived phenomena. As their home values continue to fade, they are looking for alternative ways to pay for their everyday living expenses. This has led most to the only alternative they have to feed and clothe their family: The Credit Card in the wallet and the ones in the back of the drawer.

Now, as the "almost-affirmed" recession is upon us, delinquencies will rise along with foreclosures and bankruptcies. This will surely trickle down to the lenders as the inflows they receive dwindle, outflows grow and non-recoverable debt increases. While a 6% rate may seem historically high, back in 2003, Capital One posted rates closer to 8% as the U.S. was starting on the road to recovery from a difficult 2 years of recession and the fall off from the domestic stock markets averaging near -50%. The same predicament is what lies ahead as the stock market losses are substituted by housing losses. Even though property values may appear to be "on paper" the physiological wealth effect (or is it defect?) still hurts consumer confidence. All of this leads us back to an ever increasing problem with consumer credit.

In a stat that most likely will surprise few economists, credit card delinquencies are increasing in the U.S. -- a sign that the housing sector slump that has displaced thousands of employees is beginning to exact a toll on revolving credit accounts, The Wall Street Journal (subscription required) reported Friday.

The number of credit card accounts at least 60 days delinquent or that had gone into default increased to 7.6% in December 2007, up from 6.4% in December 2006, according to research compiled by RiskMetrics Group, the Journal reported. Further, Americans had $944 billion in total revolving debt in December 2007, which amounts to a seasonally adjusted annual increase of 2.7%, well below the seasonally adjusted growth rates of 13.7% and 11.1% for November 2007 and October 2007, respectively.

Another bubble: credit cards

Economist Glen Langan told BloggingStocks Friday the credit card sector, like the housing sector, is correcting from an unprecedented -- and unsustainable -- growth period.

American consumers, the pivotal factor in the consumer-dependent U.S. economy, may have modified their spending philosophy, The New York Times reported Tuesday.

Stung by the housing market correction, stagnant wage growth in certain job segments, above-average debt levels, and a slowing economy, Americans are saving more and using credit less -- a shift that some analysts argue is a cultural inflection point of sorts, with huge implications for the economy.

Economist Steve Affinito told BloggingStocks Tuesday that while The Times' interpretative report did not "cite a large enough sample size to meet my fancy," it nonetheless provided data points that support what macroeconomic indicators are saying about consumer choices.

"We know that the savings rate has increased in the last six months, and retail sales are sluggish, at best. Take these and combine them with much tighter credit terms for home equity loans and other credit and what you get is a pull back in purchases, particularly purchases on credit," Affinito said.

Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.

A new year always holds great promise. Resolutions are made. Intentions are strong. Still each year, as the days pass, resolve wanes and soon we're back to our old ways. This year be different. Here's a chance to make some investing resolutions, act on them, and have a positive impact on your wealth.

First, pay off credit cards. This is the one of the strongest investments you can make because credit card debt can hit as hard as 18% or higher. Very few stocks make 18% or better. The average return for large stocks is 10% a year, for small stocks 12%. You do the math, and you'll find a focus on paying off credit cards is best.

Second, fund your matching IRA program at work on January 1, if you can. This truly is free money. If your company matches your contributions to your retirement account, the sooner you get that money (and yours) working, the more money you'll make. If you earn 7% interest from January 1st, by the end of the year, you'll have more money than if you start on Feb 1 or April 15 or any other, later date. Get your IRA funded as a priority, even if you don't have a matching program with your employer. You'll earn more on the contribution the sooner it's made.

With consumer credit tightening this year in the fallout from subprime mortgage meltdown, are more Americans falling behind on their credit card payments? Yes they are, as the "cash machine" mentality many consumers isn't jiving with the "must make minimum payment" moniker those crazy pieces of plastic come with.

Did you know that a $6,000 credit card balance with a revolving credit line can run a minimum payment of about $200 per month? Quite a bit, isn't it? And that's below the average credit card debt load in this country. With less access to cash, cost of living increases and goofy financial decisions, those credit card payments are becoming a lower priority of borrowers. After all, that's what credit is -- borrowing. Did you just charge that flat-panel TV? You're actually borrowing it from your credit card company in a manner of speaking. Nice, eh?

The Associated Press report also said that the largest increase in past-due credit card payments were those that were 90 days in arrears already. If you think the mortgage loan default and term reset problem was bad in 2007, it will only continue into 2008. Perhaps the serial borrowing American will learn a hard financial lesson this year. And then, perhaps they can get back to paying those credit card payments on time and in good fashion.