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The Nation’s Debt: Collectors are in for rough times

Posted April 24, 2008

“It may not appear to be a major problem for those of us that pay our debts in full every month, but psychologists have found a major link between spending real cash and budgeting.  The more we put on a credit card, the less our brain registers the true amount of the expenditure.” - Andrew Snyder 

By Andrew Snyder

Baltimore (TFN)– There is no denying when it comes to soaring fuel prices, this nation has a major problem on its hands. Thanks to credit cards, the problem may be exponentially larger than most folks think.  

Look at it this way.  For the vast majority of us, a stop at the pumps is pretty simple.  We swipe our credit card and squeeze.  We are $40 poorer, but we never shell out any cash.  That pain comes in a few weeks when the credit card statement arrives.   

It may not appear to be a major problem for those of us that pay our debts in full every month, but psychologists have found a major link between spending real cash and budgeting.  The more we put on a credit card, the less our brain registers the true amount of the expenditure.

The impact of this mental fallacy is already being felt across the nation.  Folks that are used to filling up once a week and spending $150 each month on fuel are now opening their credit card bills and seeing a tab of over $300. 

Their pain is not your gain

Many investors are looking at this phenomenon as a great opportunity to invest in the nation’s debt collectors.  It is a strategy that will cost them money. 

Why?  I hate to use such an old cliche, but you can’t get blood from a turnip.  If people are spending all of their money on high fuel and food prices, they have that much less money to pay off their old debts.

Over the last few years, the nation’s debt collectors have done very well.  Even the nation’s delinquent credit card owners had the ability to find some extra cash.  But now that the price of everything is forcing the basic cost of living into the stratosphere, those same folks are doing their best to stay alive.  They do not stand a chance at repaying old debts.  They have already cut out all non-essentials.  Every penny is going to financial survival

I have heard several first-hand accounts from debt collectors complaining of increased difficulty.  Because it is a commission-based industry, many of them are feeling the crunch in their own wallets.  They are not optimistic. 

A falling tide lowers all ships

Instead of being a boon for the nation’s debt collection industry, this economic downturn will be highly detrimental.  The evidence is already hitting the Street. 

Just look at Encore Capital Group (ECPG:NASDAQ).  Its share price has dropped by nearly 50% in the past six months.  A lot of investors are losing a ton of money.

The next debt collector to follow suit is Portfolio Recovery Associates (PRAA:NASDAQ).  It specializes in recovering written-off credit card debt.  Business was great in 2007, but the days of easy pickings are over.  It is going to take expensive lawsuits and long-term recovery options if the company wants to recover any money.

Last summer, Portfolio Recovery Associates had a share price over $60.  Today, it is at $40 and threatening to drop.  If you own this stock, get out before the damage is even worse.  If you are looking for a short play or an options opportunity, this is a good opportunity.

Just because bad debt is slamming the nation does not mean debt recovery agencies are going to get rich.  The last few years have been great because we were still inflating the bubble.  But now that it has burst, all sorts of problems are happening.

Stay away from this industry.  There are better places for your money. 

 


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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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