High Unemployment Could Provide a Lift for Some Stocks (V, MA, DFS, AXP, MCD, YUM, WEN, COST, DG, WMT)

Financial services firms that offer consumers revolving credit are at the top of the list. Visa Inc. (NYSE: V), Mastercard Inc. (NYSE: MA), Discover Financial Services (NYSE: DFS),and American Express Co. (NYSE: AXP) lead the list. Consumer-oriented companies that offer low-priced goods and services are also serious contenders for a boost. These include McDonald’s Corp. (NYSE: MCD), Yum! Brands, Inc. (NYSE: YUM), The Wendy’s Co. (NYSE: WEN), Costco Wholesale Corp. (NASDAQ: COST), Dollar General Corp. (NYSE: DG), and Wal-Mart Stores Inc. (NYSE: WMT).

Credit card debt in the US has fallen from a high of $957.5 billion in 2008 to $790 billion in April of this year. [http://www.federalreserve.gov/releases/g19/current/] The Federal Reserve Bank’s preliminary estimate for May indicated a rise in revolving debt to $793 billion. As more people are unemployed or stay unemployed longer, they often have no choice but to access any revolving credit that is available to them. The Fed’s May estimate indicates an annual percentage increase in revolving credit of 5.1%, the largest positive move since 2007, when revolving credit grew at an annual rate of 8.1%.

The national average credit card lending rate is nearly 15%, while the lowest rate available is near 11%, not including the teaser rates. The rate rises to nearly 25% for consumers with bad credit. One could argue that the rates should be lower, but as the recent growth in credit use demonstrates, consumers will pay the market rate when they have no other choice.

Because the unemployed still need to eat and wear clothes, low-priced stores ought to get the boost they felt back in 2008 and 2009, when consumers shunned the mid-priced outlets and shopped instead at Wal-Mart, Costco, and Dollar General stores, where everything from fresh vegetables to shoes cost less. Recent consumer movement away from some of these stores is very likely to reverse itself.

This morning’s report on non-farm payroll gains in July was slightly encouraging as the unemployment rate fell from 9.2% to 9.1%, and the country added 117,000 jobs. The drop in unemployment was mainly attributed to an increase in the number of people who are too discouraged to continue looking for work.

It is almost painful to make these observations because they are based on the misfortune and misery of millions of Americans. The country is staring another recessionary period right in the eye and, as always, there will be winners and losers.

Paul Ausick