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Capital One Financial Corp. (NYSE: COF)

Nov 18 2008

Capital One Financial Corp. (NYSE: COF)

A Goldman Sachs analyst today is predicting that losses at the biggest credit card companies will increase by 25% in the coming year as unemployment climbs and borrowers are unable to pay back the money they have outstanding. This increase would mean close to an 8% default rate compared to a current 6.35% rate.

October Statistics Sobering

October data for the credit card industry has already shown increases in metrics that will affect the profitability of the credit lenders. Both charge-offs and delinquencies rose during the month of October. Most shares of credit issuers fell on Monday and continued to fall on Tuesday along with the market.

Too Many Issues to Profit

With a sure recession in process, unemployment increasing, and the current credit crisis affecting the consumer’s home refinancing options, it should be no surprise that credit card companies will also see profits fall sharply over the next 12 months.

The Trade

Analysts are downgrading Capital One’s ability to profit in the current quarter, the next quarter, and the full year. Next quarter’s earnings growth is currently expected to fall 31% compared to the same period a year ago. Sales are also slowing next quarter according to analysts, 5.7%. If there is a rally in the stock it would be a good opportunity to take a short position and being to build into a large position with additional bad news to come.

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