JP Morgan Earnings
This week is going to be heavy on financial sector earnings. It will be interesting to see how the market reacts to Wall Street’s earnings in the face of their battle with the DOJ. The market started coming under pressure yesterday and if we continue to see pressure into the early part of the earnings season, coupled with the weak Labor Report, I think Yellen will NOT taper at the end of the month. She will have a far weaker than expected job report to justify her action. That could give the market a lift in the late part of January. For now, earnings will play a crucial role. Make sure to listen for the forecasts going forward.
Target on his back!
Courtesy of wikipedia
If there were any bank that could wish themselves out of the spot light, it would be JP Morgan. The once darling of Wall Street and the most highly respected CEO, Jamie Dimon, have been in a non-stop barrage of fire. He certainly can’t just blame the DOJ, as he has had some internal problems as well. JP Morgan was hit with a massive loss a while back, dubbed the London Whale, which didn’t help, but the company was growing fast enough (with the help of the Fed policy and zero interest rates) that they were able to overcome the loss. Dimon continued his vocal criticism of the Dodd-Frank and expansive government regulations, which he correctly pointed out have mucked up the system with uncertainty, too much over-lap, and confusion. I don’t think he, nor anyone else for that matter, would disagree that we DOJ needs transparent, clear, and enforceable regulation, but as the government follows its frequent and repetitive modus operandi of bloat, over-extension, confusion, new agencies, and over-lapping regulations it just turns into muck. Dodd-Frank financial regulation passed without being defined or even written. It was passed based on an outline that we need MORE regulation. Each month, even years after it has passed, we learn about new rules, new agencies, new reporting requirements, and even conflicting rules. Dimon publicized a chart of the financial regulation industry that became widely circulated and certainly put egg on the government agency faces because it showed a complete lack of confidence that the government even knows what it is doing.
Courtesy of JP Morgan annual report 2011
JP Morgan Fines!
Ironically, Dimon is a democrat and has supported and voted for Obama, yet that has not blinded him to being vocal and critical as well. That has put a target t\on his back and the government has brought its entire weight and force of all agencies to bare on JP Morgan. Last year JP Morgan settled for the biggest fine in the history of the US at almost $20 billion. Most of that will disappear into the government coffers and the vast majority of it is NOT designated to repay any consumers. The fine was based on the mortgage crisis and fraud. What seems odd and even absurd is that the problems did NOT originate from JP Morgan, but rather the assets it assumed when it took over the failing Bear Stearns at the bequest of the very government that fined them. One would think that if the Treasury and Federal Reserve asked your company to help in the time of crisis and to assume the risk of a failing company, your company would receive some level of immunity from the assets you just took over. There wasn’t any time to review the risks or skeletons in the closets, as the deal had to be completed in two days. I can’t help wonder if Dimon remained quiet and not critical of the new regulations and government and more supportive of the government’s new programs and agencies, that it would not be under fire. Even though they paid billions in fines, the DOJ did not release JP Morgan from any further fines and even criminal prosecution.
Now they faced another fine of $2.6 billion to settle government and private claims over not reporting suspicious activity of possible fraud in the Madoff operation. JP Morgan is under constant fire, I can’t think of what’s next.
Dimon has been under fire from the media, asking him if he WILL step down. For now his answer is no and that unless the board decides otherwise he is staying. On one hand you probably don’t want a CEO who is openly critical of the government running your operation, but on the other hand I can’t think of a stronger CEO in the financial sector that can steer the company through these tumultuous waters.
JP Morgan Earnings
JP Morgan’s earnings net income fell to $5.28 billion or $1.30 per share in the fourth quarter. That is down 7% from same quarter a year ago, which was at $1.39 per share or $5.69 billion. Analysts expected a smaller drop to $1.35 per share.
It looks like the major fines are behind them. Sure, they were whoppers and in spite of those fines the company climbed 33% in 2013 and was still able to generate a profit. Much of that was the help of the Fed’s zero interest rates, buying bonds – thus keeping longer-term yields low, and lastly buying up the unwanted MBS issuances. All that allows JP Morgan to increase leverage and loan out at margins of almost pure profits.
Volcker Rule Impact?
However, there is a new huge hit to Wall Street’s top line revenues in 2014, the new Volcker Rule. It will eliminate the majority of bank trading operations, which is a huge revenue source. However, like most of the new rules and regulations that are added to the Dodd-Frank Act, the Volcker rule, while it passed there are actually no details about the rule. It will go into effect on April 1st (yeah April Fool’s Day), but there is NO WAY for companies, lawyers, compliance officers, and even regulators to do anything or enforce anything, because there are NO details and the rule has NOT been published. All they know is the rule is to ban “proprietary trading” by commercial banks, that’s it. While this will not impact 1st quarter results, it could be a huge blow to the banking sector top line revenue going forward. Some analysts expect that after April 1st the Volcker Rule could wipe out 20 – 40% of top line revenue. One analyst stated that we will probably see banks RAISE fees on their clients (banking fees, transactions fees, credit card interest rates, penalties, brokerage fees) and maybe lower interest rate returns to make up for the huge short-fall. Just like anything else, pass a tax or fine to punish a company and a company will just pass that on to the clients.
JPM Support & Resistance
Looking at the stock and volume levels, in the short-term I think we could see a pull back to the 55 – 56 level. What happens at 55 will depend partly on the Federal Reserve and if we get a taper or not. If we don’t get a bounce there, I would look at 50 – 51 range as a low support.
Courtesy of Silexx.com
Personally, I like Dimon and in many ways his criticism is correct. However, I was in the Navy and learned the lesson; “There is the Right Way, Wrong Way, and then there is the NAVY WAY!” That is true with the government, right or wrong – there is the government way and don’t pick on the government because that will just put you in their cross hairs.
No doubt the rapid and massive fines has put Wall Street on watch. All the CEO’s and Wall Street analysts have been shocked and scared into submission, they will NOT openly criticize the government, it’s policies, regulations, or anything. In fact, if you have heard recently all the positive pro-government BS coming out their mouths since the $20 billion fine against JP Morgan, it is clear – the government has just mummed Wall Street (rightly or wrongly).
Support & Resistance
We had a good fall yesterday and I would look at 16,000 as low support. If we can’t hold there, then a drop down to 15,800 is the low area. This week the banking sector will drive the market trend.
I would look at a 3450 straddle strike and support area. Intel’s earnings will certainly be a factor this week and is an early driver in this index.
This level is a pause and short-term support. We could get a bounce, but if not I would look at 1800. The VIX popped, but should stay in the 12 range.
I would look at 1140 as the broad based short-term support for this index. Again, this is to monitor order flow in or out of the market.
DOJ on the war path!
The battle between the DOJ and Wall Street is on and so far the DOJ is winning big. They have shut down any criticism on Wall Street and just knocked down JP Morgan with a huge 1-2 blow in fines. There are open SEC, FBI, and DOJ investigations at Citigroup, Bank of America, Goldman Sachs, Morgan Stanley and the rest of the big Wall Street companies. I don’t know if this is to keep them on their toes and quite, or if they will really push forward with more fines and penalties.
Eric Holder, Attorney General – courtesy of Wikipedia
With the criminal charge option still on the table with JP Morgan and Jamie Dimon, I believe the DOJ is hoping that would inject fear into him so he will finally shut-up. I can’t tell if Eric Holder and the Obama Administration is actually vindictive and will go for the throat or if this was just a very punishing blow to put Wall Street on alert.
No doubt the big banks deserved fines and we certainly need new regulations, but what is happening is beyond extreme and I have even heard it referred to as a step towards totalitarianism. That reference was used to criticize the government’s ability to pass a law in name only and to let the regulators make it up as they go along, which is pretty much what the Dodd-Frank act has become.