JP Morgan and MCD Earnings
Have we made it through the political tunnel of horrors? So far it seems so. The Taper, which initially brought concern to the market, was averted (as expected) and now with the new Fed Chairman we could very well see the QE money printing increase. I don’t see any signs of a Taper in the near future. Then we had the government shutdown and the debt ceiling battle. The market had, for the most part, ignored the silliness and at the 11th hour, again as expected, it was kicked down the road until January. So now, I hope, we can perhaps focus on earnings, business, and the economy. Perhaps the politicians can go home for the holidays and the Fed can just remain quiet. Perhaps we can have a relaxing and non-volatile holiday. Perhaps…
JP Morgan and MCD Earnings
Courtesy of wikipedia
McDonald’s (MCD), the world’s biggest restaurant chain, reported a top line revenue increase from $7.15 billion to $7.30 billion from a year ago. The company also reported a 4% increase in quarterly profits, at $1.52 per share, as global sales were up 0.9%. While the increase in top and bottom line revenue is good, it did fall short of expectations. The concern is about McDonald’s RATE of growth. The company lowered forecasts in China, their biggest growing market. They trimmed expected restaurant openings by 50 and now expect to open 1500 – 1,550 new stores globally this year. The one number that is driving concern is the global sales growth of 0.9% (less than 1%). McDonald’s was able to help boost profits by increasing prices (primarily in the Chinese market). So the equation we need to pay attention to is the number of sales vs. profit per sale. There comes a point in which a company has full market penetration (you can only build so many restaurants to serve a finite amount of people). What gave the fast food industry new life was the global boom. However, I would argue that we are reaching the zenith of the booming period and going forward annual restaurant openings will continue to slow. The company will then move from a growth story to a revenue/sales story. That is what we are starting to see. The BRICs have brought them and similar companies new growth and that cycle is coming to a close. In the future, as Africa becomes the world’s source of cheap goods, manufacturing, etc., we will see another boom and growth in McDonald’s and similar companies. However, I don’t see that cycle starting in Africa for another 5-10 years. The stock is down over 2% in the pre-market on concerns about growth.
JP Morgan, making an example!
JP Morgan had reported the best earnings so far of any of their competitors, once you strip away the legal fees and billions in fines from the government. It’s not over yet as the government goes for the throat and is looking to reach a $13 billion settlement. There are a couple of things to take away; first, don’t ever pick a fight with the government and second, there is the right way, the wrong way, and the government way. It doesn’t matter how right you may be and how wrong the government may be, you will lose. JP Morgan is going to be made an example of!
The irony of this story is that the government pleaded with JP Morgan, at the height of the crisis, for help. JP Morgan bought the failing Bear Stearns with only a couple of days to review the risk; they did the same with the failing WaMu – both deals of which the government wanted, needed, and pleaded for JP Morgan to do – or else the world would end – or so we have been told. However, in the haste in completing these deals and the close work with government agencies in trying to close these deals, no one (certainly not Jamie Dimon) thought that these deals would come back to bite.
In the years that followed, Jamie Dimon became critical of government’s lack of regulation in some cases and over regulation in other cases. He became a vocal critic of the government’s inapt failures. Perhaps he thought he could be outspoken because JP Morgan helped the government in the credit crisis, they came through the other end of the crisis better for it. Perhaps he thought they had an open and honest relationship with government leaders. His vocal criticism drew a target on his back and the internal trade losses of the “London Whale” only brought more criticism towards Dimon and JP Morgan. There was perhaps jealously and even anger that a company could take a huge trading loss and STILL make a profit for the year. Add into this growing contentious relationship that the government is running out of money, fighting amongst itself, and facing all kinds of financial concerns; it is time to go out and drum up some money, and a lot.
Jamie Dimon and JP Morgan had bought all those assets from Bear Stearns and WaMu, thus should not JP Morgan be liable for those assets? That is exactly what the government thought, the liability and failings of the companies that JP Morgan took over at the behest of the government is now JP Morgan’s Achilles’s Heel. Dimon is regretting the day that he and JP Morgan took on the assets of Bear Stearns and WaMu; maybe they didn’t have a choice. For if he didn’t and those companies failed, JP Morgan would most likely be blamed.
Try as he might, Jamie Dimon is no James Kirk and I think he will fail this Kobayashi Maru exercise. While there are those out there that feel JP Morgan should be fined (perhaps they should), they also believe that $13 billion is becoming excessive and vindictive. Remember this isn’t a class action lawsuit in which he did clients wrong. This is a fine against assets that was held by failed companies that JP Morgan obtained at the government’s behest. Only about $4 billion (so far) is being allocated to a consumer relief fund, what about the other $9 billion? That amount is being put towards resolving the DOJ and New York state related matters.
CEO Jamie Dimon and Attorney General Eric Holder met in Washington to discuss the terms. Rumors are that Holder held up such a high number (extortion) in order to give the impression that there will not be any criminal prosecution. However, the government’s official statement is that it is unwilling to provide any assurances that they will not also file criminal charges.
JPMorgan and Jamie Dimon are clearly being made an example of. No doubt it has struck fear in every U.S. company and CEO – for they will all now hold their tongue (even on the phone as NSA is listening). If Jamie Dimon is getting punished, the most respected of the bunch, then no one is safe.
Support & Resistance
INDU 14,800 – 15,700
Going forward, at least into the holiday season, the story driving the market will most likely be earnings, retail sales, employment, and holiday season expectations. With the shortest holiday season in over a decade and an economic slowdown, I don’t see any huge upside surprises at this time. I would expect to see resistance to kick in at 15,500 and 15,700, with support down at the 14,800 to 15,000 range.
All systems go! The NDX has taken off strongly. A few huge stocks have really seen some great moves higher; Netflix, Google, Tesla, Amazon and a few others. There is another technology revolution happening which is a combination of Cloud, Big Data, and SaaS. It is the next trend in technology and there is some good growth in there. This index and these stock can certainly overshoot, but for now they are moving higher and have ignored the traditional retail, government games, and general economic conditions.
The SPX is getting lifts from three areas; global market revenue, tech sector, and Federal Reserve bond buying. While the market as a whole is getting help from the Fed, crowding out the bond market and forcing investors into equities, the SPX is getting some boost form the NDX tech heavy stocks as well as a continual growth in top-line revenues (while growth is slowing – it is still growing).
The RUT continues to be the best gauge of general equity order flow; it priced in NO TAPER and it priced in an 11th hour deal by the government. The RUT is also being fueled by the Federal Reserve, which continues to hold bond prices up and yields down.
What could put a damper on this market? I don’t think there are any big concerns in the short-term (4th quarter). The government games are over for the year and the Fed is going to continue to print money.
I think we could see some disappointing earnings (mostly top-line revenue) and I think that the holiday sales are going to be challenging because they are very short this year. The general consumer seems to be tepid at best. So, I think that while the rally has legs in the short-term, it is going to fade out a little and loose some momentum in the 4th quarter. I would look for some resistance points to set-in as investors take some money off the table at year-end.
The news cycle will start selling the fear again towards the end of the year with the next round of government fighting with the debt ceiling in January, tax considerations at the end of the year, and also Europe’s ongoing sovereign issues in which more bailouts come due.
This holiday season should remain calm with some initial upside moves in the equity markets – the can has been kicked!