CNBC: I read that you have a chart system? How does that work?
WILBUR ROSS: We use charts, not stock trading charts but business charts, and the way they work is, when we're looking at an industry we try to put down in paper everything we can imagine that's wrong with the industry. Usually it's quite a long list. We then go over it, and over it, and over it, and over it till we're pretty well satisfied that we've identified everything that is wrong or is very likely to go wrong. Then we start work on a second chart, which is if we have control of this industry, what would we do to fix these problems. When the two charts get more or less similar in length, that's when we get serious about investing.
So, when looking at American Express, you have a business with several positive trends working in its favor:
1) Long term increased spending
2) Long term increased use of cards over cash
3) International growth potential
4) Increased retailer acceptance potential.
Now the main concern with American Express is their exposure to bad credit debt in this down-cycle. So:
Problem ...................... | Solution
-exposure to bad debt | -tighten standards, raise rates
(excuse the quick chart)
Remember, AmEx is not the typical card company. Most cards are issued by banks who make their money off of late charges and interest costs. AmEx earns a vast majority of its revenues from merchant fees. In fact, it has actually been losing money on its lending operations for some time.
Which led me to my next question: how fast can they reduce lending and change standards? To figure that out, I'm trying to find out the average loan length. I found this:
The first one is for consumer lending, while the second is for charges that go late. Am I reading it right then that consumer loans have an average life of about 5 months, and consumer charges are a little over 1 month? If so, it seems like guidelines can be tightened fairly quickly and without too much damage.
Disclosure: I own shares of American Express.