Monday, April 11, 2011

How to Profit From Nonsense -- New Financial Regulations

By Jared Levy, Editor, WaveStrength Options Weekly
One way of searching for investment opportunities is to look for businesses that are thriving with products and services that are in demand. But another method for finding investment opportunity is counterintuitive: Look for something that is broken or doesn't make sense. Once you locate that problem or fault, either look for a company that may have a solution or perhaps look at the problem itself to see if it is viable or just noise.
Financial regulation, or FINREG, is one of those "problems" that contains some noise. FINREG creates challenges for banks, brokerages, lenders and the consumer.
If you are not completely familiar with the complex 2,300-page bill, The Wall Street Journal assembled this interactive page that details the different facets.
How Can You Profit From the Confusion?
Sometimes an apparent roadblock (legislation in this case) may have holes that make it less restraining than first thought. Now, I'm not going to say that FINREG isn't a highly restrictive, far-reaching, costly (in several respects) and poorly timed bill.
But some parts are just plain ridiculous and bad for the American consumer, and should be altered or removed. One of those pieces is the "Durbin Rule."
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Back on March 10, in a note to my subscribers of WaveStrength Options Weekly I detailed this flawed piece of the FINREG puzzle:
Some of you may have heard of the "Durbin Rule" -- it's imbedded in the Dodd-Frank financial regulation bill.
The rule essentially states that "interchange fees," those fees that retails incur anytime you swipe a credit or debit card, are to be limited (fixed) to 12 cents per transaction (the average is 44 cents). It means retailers will be capped in the amount they have to pay in merchant fees that are charged by banks and by Visa, MasterCard, etc. Good news for retailers and bad for banks and our friends over at Visa and MasterCard. This rule equates to BILLIONS of dollars annually!
Our genius politicians thought this legislation would benefit the consumer because the retailers would lower prices because of their savings. This may be true in some cases, but there are serious flaws.
If this is implemented in its current form, big banks like Bank of America and JPMorgan Chase will lose billions of dollars in revenue, as will Visa and MC. What's worse is that the bill excludes smaller banks (which was meant to help them), but if small banks continue to charge high fees and the large banks are forced to do it cheaper, the small banks will lose business.
All the banks are waging war on Capitol Hill to get this rule overturned or, more realistically, modified, which I believe will happen.
Our angle is that the markets have NOT priced in a good outcome for MasterCard, but I believe a compromise will come about, because the rule as it stands now just doesn't work -- this will be beneficial for MA.
Since then, MasterCard (MA:NYSE) stock went from $241 to a high of $262. WOW subscribers were able to capture some fantastic profits there and have since exited, but I wanted to take this a bit further and share this story with you.
On Tuesday the Fed declared that it is going to delay its ruling on appropriate levels from April 21 till July 21, which was a big win for MA and Visa (V:NYSE), not to mention my hypothesis from two weeks prior.
What "Durbin" Means for You
FINREG is supposed to "help" the American consumer, but aside from the issues for the banks, there are many ways in which this hurts us. Banks have shareholders to report to, which means they must keep profits up. If you take a couple billion dollars away from their balance sheets, they must replace it.
Guess who gets to replenish their balance sheets? The American Consumer!
Some of these changes are ALREADY happening, here are some of the ways the Durbin rule and FINREG is "helping" (hurting) you:
  • Higher ATM fees -- JPMorgan Chase (JPM:NYSE) and other banks are "testing" $5 ATM fees. You think $1 or $2 is too much to pay? (I do.) How about a 300% increase in the average fee to withdrawal your money? Remember, that is a "fixed" fee at most ATMs.
  • No more rewards -- Wells Fargo announced on Tuesday that it will no longer be offering debit card rewards. Say goodbye to frequent flyer miles and gift certificates. Chase and PNC are following suit.
  • Higher minimum payments and balance levels -- For those of you who carry credit card balances, you may have noticed that your minimum payments have increased over the past year. You may also see that the breakpoints for "no fee" checking and savings accounts have increased.
  • Increase in annual fees for credit cards -- These increases started with the "CARD" act, which went into effect in early 2010. Chances are that if we see the Durbin rule passed as written, you can expect more of the same. Fees have gone up across the board at many banks. Make sure you check your statements and disclosures. By the way, you can contest some fee increases that are initiated after you have an active account, so always keep a close eye on everything your bank (credit card company) sends you!
  • Limited purchase amounts on debit cards -- JPMorgan Chase and others are also considering capping the debit purchase amount to $50 or $100. Imagine going for a nice dinner, weekly food shop or clothes shopping for the kids and having a purchase limit of $50? Will we now have to swipe the card five times and sign five times for a nice family dinner out? Does this seem like it makes our lives as Americans better?
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What Happens Now?
This is really a war between retailers and banks, we the consumer stand to lose no matter what, but more so if this rule is passed.
If the Durbin rule passes as written, we will have to deal with the above issues and still pay roughly the same amount for our goods and services. Remember, retailers who pay the fees have to turn a profit as well.
There is a slim chance that your new 3-D TV will go from $999.99 to $999.45, and even if it does, I would rather pay 45 cents on a thousand-dollar purchase than $5 to withdrawal 20 bucks for a couple of beers.
The bottom line is that the Durbin Amendment makes about as much sense as a cup holder in an Indy racecar.
I have faith (albeit minimal) that the Fed will see the uselessness and carelessness of the current bill, not to mention that price fixing is illegal (isn't it?), and either kill it altogether or at least put something together that makes sense.
In either of those cases, you can expect MasterCard and Visa to catch a bid. Of course there is risk that the bill stands as is, but I believe a good portion of that risk has been factored in.
I still think there is long-term upside for both of these companies