Marketocracy General Forums

this Barron's article echoes some of the concerns I have
http://online.barrons.com/article/SB119404380409080978.html?mod=yahoobarrons&ru=yahoo

Merchants love credit cards because they mean more sales. Customers love them because of the convenience. And today you cannot rent a car or get a room without one. Credit cards are also a large component of one's credit rating. So cards are hard to avoid.

MasterCard and Visa have long dominated this space, making it a great oligopoly. It is not like any Mom and Pop operation is going to take over their business anytime soon. Other companies cannot duplicate what MasterCard has and a large part of that is the goodwill the company has built up long before it went public.

Everybody knows who wins in a casino. The house does. Likewise, MA just processes transactions. Something akin to eBay, perhaps. As technology improves the cost of processing the transactions should go down, which should drive the earnings upward over time.

These earnings are not a surprise to me. The company should continue to do well going forward.

so i read somewhere how folks shouldn't think of mastercard as a financial company, and that got me thinking.
i'm not sure if folks are thinking of mastercard as a financial company, i think many compare it to a info tech company -- as that is the sector that it belongs in.

If you don't want to sell some of the MA shares outright, the bear case is strong enough to at least validate my aforestated idea of selling some covered calls on part of your MA position in the Marketocracy portfolio. The approx. 5% MA position could very well be viewed as an overly large (or scary) position in light of the increasing risks in the short-term of the US dragging down the global economy a bit; the size and potential frothiness of the current market rally; and the fact that MA sold off to 130 from 170 in the most recent correction.

While I realize that the VISA IPO and the future MA indexing probably will be probably be positive catalysts at the end of the year, if you're a little nervous about your current allocation but confident about MA's prospects over the long-term, then at least sell some covered calls to give you a measure of protection and some additional return.

With MA priced at 162, I would recommend on any upsside from here selling the November 170, 175 or 180 calls somewhere around 7, 5.50 or low 4s respectively in short order (priced 2 days ago).
If the stock is exercised, your total returns would be 9-11% on your buywrites in 6 weeks with a reduction of your exposure/position. If not called, you'll make 2-4% extra on the stock that you write the calls on in 6 weeks.

John

URL http://biz.yahoo.com/seekingalpha/070910/46804_id.html?.v=1&printer=1

The Short Case For MasterCard
Monday September 10, 1:10 am ET

Zachary Scheidt submits: When looking for opportunity in this market, I have been concentrating on stocks with a significant amount of optimism surrounding the story, and names that could be damaged by a weakening global economy. While many companies in the financial industry stand to suffer from a lack of liquidity and tightening lending standards, most of these names have already experienced multiple contraction and the stock price may already reflect the detrimental conditions.

MasterCard (MA) is a company who’s investors do not appear to have surrendered their optimistic outlook. The stock is still trading over 30 times 2007 earnings and over 20 times expected 2008 earnings. The premium stems from excitement over the fact that the company has been able to continually beat expectations and has delivered stunning growth over the past three years. While the stock has only been public for a little over a year, the company has been active and growing for quite some time and has become a giant in the transaction processing business. Analysts appear to be in relative agreement when looking at the company’s future, expecting growth of roughly 15% over the next 3 to 5 years.

One of the primary differences between MA and many other financial companies is that the firm does not have any credit risk (similar to First Marblehead (FMD)). Banks issue the credit or debit cards to the consumers and those banks take the risk as to whether the consumers will be able to pay off the balance for their purchases. MA simply clears each transaction and receives a payment per transaction to offer its processing services. There is some speculation that a slowdown in consumer spending may not be such a big deal for the company as consumers will likely maintain a similar rate of transactions with each transaction simply representing small dollar amounts. While it is true the company does not have risk of consumers not paying, tighter lending standards will make it much more difficult for consumers to receive new cards and that will likely slow transaction growth. This dynamic is significantly different than during the last recession when the Fed made interest rates and liquidity extremely favorable towards the American consumer.

MasterCard receives roughly half of its revenue from domestic transactions and is likely to see most of its growth through international expansion. China will likely provide a significant amount of additional incremental revenue during the next 18 months as the Olympic rush drives growth in this high profile area of the world. However, this phenomenon is likely priced into the shares and any disappointment in this area will likely severely dampen the excitement surrounding the stock. After 2008, it is unclear what catalyst will drive further growth and the global economy is not likely to continue the rapid pace of growth seen in recent years.

In summary, I believe the risks in this name far outweigh the potential return. Even though the stock has pulled back 20% from their high, I believe a significant multiple contraction will drive prices lower. In accordance with this view, I have a short position in the stock and anticipate holding it unless significant evidence convinces me that the overall economy is in better state than originally believed.

Disclosure: Author has short position in MA