Bank Earnings – JPM / WFC

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The market had a huge rally yesterday; it was as if it was telling the President, “Take the Deal!” I wrote last week that the Republican’s strategy should be to raise the debt ceiling first, to get that OFF the table, and to pass it clean. That removes the biggest concern and most of the fear mongering. While this still leaves the government shutdown in place, it does remove the default part of the equation. It is clear that the market doesn’t really care about the government shutdown (so far), what it IS concerned about is that debt ceiling and a possible default (expected to run out of money on Oct 17th). Now there is NO deal yet, just a meeting at the White House and the Republicans in Congress offering a clean raise in the Debt Ceiling. The question is does the President and, more importantly, the Democratic-controlled Senate take the deal? If the rhetoric returns and a deal can’t be made, yesterday’s huge rally will be moot. The rally helped bring some optimism to the financial and banking sectors; however, one day’s rally may not be enough to lift optimism for bank earnings.

Bank Earnings

As we are focused on the government shutdown and debt ceiling battle, which may get some reprieve as early as Monday, there is a growing concern in the banking sector. The banking sector and their earnings are a barometer for the domestic economy’s strength or weakness.

JP Morgan

bank earnings
Courtesy of Wikipedia

The one bank that has been barraged in the headlines is JP Morgan. The once savior and government partner, who was asked to bailout and take over Bear Stearns, is now under brutal attack from the same administration that looked to them for help.

If there was ever a mistake that Jamie Dimon made, it was to NOT ask for any immunity for his company for taking on assets and risks of Bear Stearns and other MBS related securities. The irony is now the company is forced to contend with subpoenas, investigations, and allegations by the Department of Justice into mortgage related securities, most of which were acquired from Bear Stearns and other related enterprises, at the government’s bequest.

Politics: Eric Holder is an Embarrassment, NCAA v. Crime
Eric Holder – DOJ

JP Morgan ran a taut ship through the financial crisis and afterward made billions of dollars in the recovery period. There was, of course, the “London Whale” that cost the bank serious money, but even with those losses, the company continued to make money.

CEO Dimon has been critical of the Dodd/Frank regulation and the constant government intervention, enough so that he stated; “I’m just barely still a Democrat.” He was one of the biggest contributors to the Democratic Party for a long time; however, those donations are waning in light of all the government over-reaching.

The problem for JP Morgan is that it is they’re fattest piggy bank in an economy where the government is running out of money. The government is going after JP Morgan, much like Willie Sutton’s answer as to why he robs banks, because that is where the money is. The current fine that JP Morgan is facing is the biggest in history, already surpassing $10 billion.

The company announced third quarter earnings of a net loss of 17 cent per share on revenue of $23.9 billion. Remove the legal fees and fines, the company had a net income of $5.8 billion or $1.42 per share. The company has a current war chest of $23 billion for legal fees and fines, the CFO reports they believe that it will take a couple of more quarters before this is over. The company is flat in the pre-market, the net income per share (before litigation costs) was better than expected.

Hurting Shareholders

Ironically, the fines and fees from the government doesn’t hurt the bank, it hurts their clients and shareholders, pensions, savings, and retirement funds. The more the government fines a company, the more it takes from the shareholders. For some strange reason I believe too many people view companies as some independent entity that is in and of itself, ruled by some evil CEO that is the only one that makes the money. The fact is, if you look at many companies and their ownership, it is made up of huge pension funds, retirement funds, individual investors, and people just like you and me. I am not giving a company a free pass, but I think it is also important to understand who actually owns, is benefited and hurts – it’s the shareholders.

It reminds me of a story I once heard when a person vocally railed against a company to the extent that he hoped for its demise. I pointed out that he owned the company in his Mutual Fund. I wonder how many people pay attention to their investments, pension funds, and retirement plans? Hypocrisy at work.

JP Morgan Shareholders:

Wells Fargo (WFC)

Wells Fargo
Courtesy of wikipedia

Wells Fargo (WFC) reported a 13% rise in quarterly profits. Net income rose $5.32 billion or 99 cents per share, better than expected. However, there was some concerning news in their mortgage unit. Wells Fargo is the U.S.’s biggest mortgage lender and it reported some troubling numbers. The mortgage banking unit income fell 43% in the quarter. They made only $80 billion in home loans, down $139 billion from a year earlier. Mortgage origination was down 40% and refinancing was down sharply. The company has announced big layoffs in their mortgage units and can’t cut costs fast enough. The bank’s trust and investment fees were up and helped offset the huge losses in the mortgage unit.

The news wasn’t good and the stock is down almost 2% in the pre-market.

Support & Resistance

INDU 15,000
We blasted higher yesterday when it seemed that the politicians in DC would at least move forward on the debt ceiling. I don’t expect any big moves today, but would look for some more volatility. If we get good news about the debt ceiling on Monday we could see this market rally up to 15,400, if not, expect it to break down below 15,000 again.

NDX 3200
The NDX moved back up to 3200, but this is a consolation area and I wouldn’t expect a big move higher or lower, until after some news either way on Monday.

SPX 1680
We are back in that consolidation zone and the VIX came sharply down as well. However, I wouldn’t call this volatility over yet. I would continue to look at 1660 as a support area with 1700 as some resistance.

RUT 1060
The RUT continues to price in a raise in the debt ceiling and doesn’t seem effected by the government shutdown. Monday will be the next big volatile day.

Take the DEAL!

Finally, the President and Republicans have met. The Republicans are looking to make a deal to raise the debt ceiling and to take that worry and concern off the table, with no strings attached. But will the Senate and President accept it?

As I previously indicated, this would be the only strategy the Republicans could play with any hope of success. This leaves everything else on the table with the CR and government shutdown to negotiate.

We could very well get the debt ceiling raised and the government shutdown could last through till the end of the month. Remember, the market is focused on the debt ceiling and default; so far it doesn’t seem to care at all about the government shutdown. In fact, the market may like this government shutdown of non-essential services, as it helps reduce the deficit spending and takes pressure off the treasury market. Bonds are rallying and the 10-year yield is down to 2.64%. This is what austerity feels like.

2 Responses to “Bank Earnings – JPM / WFC”

  1. McRocket says:

    I say NEVER raise the debt ceiling again and balance the friggin’ budget…and then talk about slowly paying off the national debt. And if the economy goes into a recession because of it – then boo hoo.
    I am so sick of the ridiculously pathetic notion that running massive deficits is fine. This gigantic irresponsibility is a one way ticket to financial stagnation and eventually, financial catastrophe…how can SO MANY smart people be SO ignorant on this obvious truth?
    America, the EU and especially Japan have gone cheap money/cheap debt mad.
    And when the cliff approaches, the rich will have the golden parachutes and the middle/lower class will go over the side.
    My faith in humanity has never been lower.

  2. McRocket says:

    Obviously, I am not referring to you Michael in the above.

    And I should change the last line to read ‘My faith in the common sense of humanity has never been lower’.