Give Visa (V) and Mastercard (MA) Some Credit

Visa (V) and Mastercard (MA) may be cheap and at significant support areas

Funny how I bought my first shares of Visa (V) last week and was just writing up an argument that V is cheap and at an important technical area only to find that Barron's beat me to the punch this weekend.

Shares of Visa (V) have been beaten up since the April top in the market currently down 17.5% year-to-date. Mastercard (MA), likewise is trading down 19% YTD, a significant lag of the S&P 500's 0.6% gain. The headlines have shown nothing but pain to shareholders over the last several months.

The Durbin amendment attached to the financial reform bill mandates the Federal Reserve to regulate debit card fees. Investors have significantly discounted shares fearing a major cut in fees for issuers of cards and processors of transactions. On top of this uncertainty, recent news that AT&T (T) and Verizon (VZ) are investing in a swipe system for cell phones that would charge through Discover Financial (DFS) added to investors' worries.

Fears over the Durbin amendment's impact along with the smartphone competition may easily be overblown. If one still believes that the secular paper-to-electronic transition occurring globally has yet to run its course then this may be a prime opportunity to be an investor. The legislation is ambiguous and the financial hit is unknown at this stage but there may be enough value in shares to provide a solid margin of safety. The over $5 and $3 billion in cash balances on V and MA's balance sheets should offer powerful flexibility.

Quick Fundamentals

V, at $72 per shares, trades at 15 times forward estimates and a PEG of 1.2 with over $6 in cash per share and virtually no debt.

MA, at $207 per share, trades at 13 times forward estimates and a PEG of 0.90 with over $26 in cash per share and virtually no debt.

Quick Technicals

The support levels are roughly $70 in V and $200 in MA. Shares of both are trading very near these levels that have shown continued buying interest.

Disclosure: Long V.

Euro in Freefall, Volatility Picks Up

The euro is still in freefall hitting new lows of $1.2143 so far this evening. German Chancellor Angela Merkel announced today a ban of naked short-selling on the stocks of 10 major financial institutions and a ban of credit default swaps purchases on German government debt by speculators until March 31, 2011. This action is seemingly unneeded as the German DAX is up 0.8% year-to-date and yields on 10-year sovereign bonds are a mild 2.83%. Naked shorting of equities should be illegal to begin with; it's against regulations in the United States and many other markets. The CDS ban is on transactions by traders that do not own the underlying and therefore do not qualify as hedgers. Yet, most of the speculative CDS purchases occur in London and fall outside the jurisdiction of the German government so the ban is largely ineffective. (WSJ) The move seems very misguided and I do not see how it will help the situation in Europe, it may even cause a great deal of harm with many analysts seeing it as a sign of "desperation".

The credit card companies have been crushed in this market downturn so far. The so-called Durbin amendment, proposed by the Democratic Senator of Illinois, Richard Durbin, has investors concerned about the loss of revenue from capped debit card fees. The market's reaction seems vastly overdone with a Goldman Sachs report stating that "the financial impact of interchange legislation would be marginal for MA and V at 1-2% of earnings". Visa (V) closed down over 6% today after comments from CEO, Joe Saunders, were interpreted very negatively by the Street. Saunders believes "there may be some reduction in the volume in the short run" but does not "view the legislation as having much long-term risk for the largest U.S. debit processor" (Reuters). Visa and Mastercard have cascaded off highs 21.7% and 24.7% respectively, colossal under-performances relative to the market only 8.1% off recent highs.

The equity markets look fairly terrible with the bears solidly in control. The market closed on the lows of the day back at yesterday's lows even after the big late-day rally into positive territory seen yesterday had encouraged the bulls. The S&P futures are down another 10 handles after hours this evening. The VIX closed at 33.55% today, a strongly bearish signal as uncertainty about future prices grows. The markets have changed dramatically in short order and the bid has been removed from the market. I have some small long positions in a few US equities but I have been quickly losing on all positions. Gold has been my only successful trade as of late and I am adding on this pull-in the last couple days.

On tap tomorrow is the CPI report along with FOMC meeting minutes. Tokyo is down 1.6% already this evening looking rather dismal.


Disclosure: Long GLD.