Market Worry: Consumer Contagion Coming?

Despite the positive economic news, there is concern about the consumer out there. Morgan Stanley just downgraded large cap banks like Citi ,Bank of America , and Wells Fargo ; the note was ominously titled, " Consumer Contagion Coming."

Key points:

--Reduced supply of credit will drive the contagion.
--The three primary drivers are tightening standards, significantly higher subprime delinquencies, and lower home prices.
--The liquidity squeeze that started in July will drive up losses in consumer loan portfolios.
--The consumer recession will trump capital market healing.

Are Mastercard's numbers good news or bad news? On the surface, it's great--they blew away the numbers--$2.31 a share, consensus $1.42. Gross dollar volume (total amount charged) up 12.8%, largely on strong cross-border transactions. Stock up 13% to historic high.

This clearly indicates consumers are still spending--but flip it around, as one trader wrote: "Shouldn't we think that the Mastercard numbers show a hurting consumer, that MUST use debt for purchases all of the sudden? The house ATM is closed..." Wonder if there is higher credit card debt in Florida, California, and Nevada, where home prices have dropped the most?

Questions? Comments?