It’s the worst selloff of the decade — of course, the decade’s only two weeks old.
US stocks see their first material down day in this fresh young year, despite some bullish earnings reports out of bellwethers Intel and JPMorgan. DJIA loses 101 (0.9%) to 10610, down about eight points on the week. S&P 500 drops 12 (1.1%) to 1136, Nasdaq Comp falls 29 (1.2%) to 2288. Conversely, the dollar had a very strong day, which helped drive crude prices below $78/barrel.
Importantly, this week was the second of the past three that the market’s been down.
But, now, just between us, we all know why the market really sold off, right?
Bellwethers Intel and JPMorgan post good earnings, but the market’s already priced “good” in — and JPMorgan’s consumer-related businesses remind everybody that the consumer remains under duress. Industrial production jumped in December, but mainly on weather-related utilities; manufacturing edged down.
On another programming note, I got bumped from the News Hub broadcast at the last minute. But, you know, if you tuned in, you still got some good information, so it wasn’t a total loss, right?
- It’s no coincidence the biggest banks are on pace to pay record bonuses. “How hard is it for any finance firm to make risk free money when they can borrow form the Federal Reserve at zero, and lend that same cash to the Treasury (by buying bonds) at 3%?” Barry Ritholtz ponders.
- Editor & Publisher finds a buyer, although editor Greg Mitchell is out of a job.
- Obama’s bank tax may prevent firms from over-expanding and taking on too much risk yet again. “It will be better than doing nothing at all,” Greg Mankiw says. James Kwak says the tax “isn’t nearly big enough.”
- The bank tax doesn’t create an incentive to lend. Or maybe it doesn’t have any effect on lending.
- Mark Thoma wonders if the bank tax will create a moral hazard problem. “The proposed financial crisis responsibility fee is a good first step, but much more is needed to try to prevent the next crisis, and to reduce the impact if a crisis hits despite our best efforts to prevent it,” he says.
- The market’s reaction to reports from Intel (INTC) and JPMorgan (JPM) suggest earnings season has gotten off to a slow start for stocks.
- Stocks are dropping and the news isn’t half-bad. Chad Brand says the markets have priced in good news.
Posted by Steven Russolilloon January 15, 2010 Banks, Economy /
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JPMorgan (JPM) shares are slumping, down about 2% today, even after reporting a better-than-expected quarterly profit. Explanations for the decline vary, but the move mostly seems the product of heightened expectations, reflected in a stock price run-up in the past couple weeks. The mega bank also fell short of revenue estimates, and when CFO Michael Cavanagh was asked to sum up prospects for the banking business this year, he said: “Cautious outlook, two words.”
But Reuters blogger Felix Salmon makes an awkward argument that shares are down because the interests of JPM and its shareholders “are not perfectly aligned.” From Salmon:
Let’s be clear about this: JP Morgan’s earnings today were very strong indeed. So why are the shares down? Simply because this is one of those instances where the interests of the bank and the interests of its shareholders are not perfectly aligned. Investor disappointment with the earnings is a function of the bank’s loan loss reserves, which are now a whopping $32.5 billion, or 5.5% of total assets. It’s entirely proper that JP Morgan should be treading cautiously when it comes to loan losses these days: the real economy is still very shaky. Shareholders would doubtless be much happier if the bank took a large chunk of those loan loss reserves and reclassified them as profit, but that’s not the responsible course of action.
To the contrary, we’d argue that JPMorgan’s caution reflected in building up a war chest of loan-loss reserves strongly aligns the company’s interests with those of its shareholders. Investors should be pleased with the bank’s caution at this stage, not be turned off by it. And if the provisions prove excessive, that cash should eventually find its way back to JPM’s bottom line as excess loan-loss reserves get reversed when credit quality improves.
And who’s to say that even if JPMorgan had reclassified more of its loan-loss reserves as profit, the stock price would be higher? JPMorgan’s $3.3 billion haul already exceeded analysts’ expectations, so how much more would it’ve taken to rally shares?
JPMorgan’s caution may very well be warranted, and the reserve building may help the bank avoid costly and dilutive capital raising down the road. We’d consider that very closely aligned with shareholders’ interests.
Posted by Paul Vignaon January 15, 2010 China, Economy, Markets /
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So Intel and JPMorgan posted some sharp numbers that didn’t do anything for the markets, and the data disappointed as well. On the other hand, China’s mountain of money keeps growing.
On a related programming note, I’ll be on WSJ.com‘s “News Hub” today at 4 p.m. ET.
Equities are selling today despite what is generally considered good news. Even the sources of that good news are selling off. JPMorgan and Intel both topped Street views, and yet both stocks are down, as are their respective sectors (with financials incidentally leading all sectors down,) as is the entire market.
What gives? Well, for one thing, the good news on the earnings front has been well anticipated by investors, and the gains you could argue are already priced in to the stocks. Remember, the market prepared itself for big numbers, big percentages coming off last year’s 4Q, which was the worst on record, the first time the S&P 500′s 500 companies as a group ever lost money. So Intel and JPMorgan didn’t really surprise anyone.
But there could be another explanation for the selloff. We wrote Tuesday about a rare sell signal drifting around the VIX charts. It came to us via UBS’ Art Cashin, who quoted Main Line Investors’ Robert McHugh. It’s a pretty convoluted one, to be sure. The VIX had to close below its lower Bollinger Band on one day. Then rise above it again on another. Both those things happened this week. And stocks are down sharply today.
As I said yesterday on Foxbusiness.com Live, a so-called “double dip” recession is still a very real possibility for the economy. What I didn’t get to say is that if that does occur, say by the second or third quarter, it wouldn’t surprise me if the NBER, the outfit that dates recessions, were to declare this entire span, beginning in December 2007, one long recession.
And this morning we got a report that industrial production rose in December, with capacity utilization edging up to 72%. That’s good, but (and there’s always a but) IP rose mainly on the back of increases from utilities ramping up because of the cold winter.
And capacity utilization remains well below its long-term average of 80% (and that’s just the average, forget about an economy that’s roaring,) and is still closer to its record low of 68.3% hit in June. There’s still an awful lot of slack in the economy, is what that all means. Which is a goofy, econospeak way of saying the nation’s factories could be producing more, but aren’t. The reason, of course, is a lack of demand from consumers.
Here’s something from another part of the DJ empire:
WASHINGTON -(Dow Jones)- The World Bank’s chief economist warned Thursday the global economy may suffer a double-dip recession.
“The foundation for the recovery is very fragile,” Justin Lin told the Council on Foreign Relations. “We may have a double dip,” he said, citing excess global capacity that could linger until 2014.
Beyond the weak economic fundamentals underlying the emergence from recession, Lin said he is also concerned that the world economy is entering “uncharted waters.” In an environment of low interest rates and excess capacity, most of the liquidity could go into speculative investments, he said.
Other risks are that banks continue to hold bad debts on their balance sheets, as well as an potential rise in protectionism, said Lin. While rising debts from fiscal stimulus is also a concern, it will only become an issue if the spending doesn’t boost productivity, he said.
Get this man five billion cc's of liquidity, and call me in the morning.
Uncle Sam wanted to save the banks, to restore them to profitability, and that’s fine. The banking sector is central to the economy. But did they have to make the banks so profitable?
Major U.S. banks and securities firms are on pace to pay their people about $145 billion for 2009, a record sum that indicates how compensation is climbing despite fury over Wall Street’s pay culture.
An analysis by The Wall Street Journal shows that executives, traders, investment bankers, money managers and others at 38 top financial companies can expect to earn nearly 18% more than they did in 2008—and slightly more than in the record year of 2007. The conclusions are based on an examination of securities filings for the first nine months of 2009 and revenue estimates through year-end.
That’s the culmination of a number of efforts from all over Washington to levitate the bank’s profitability, rather than any organic economic recovery, and that’s what’s generating all this anger and backlash. Look at JPMorgan’s results this morning. Underwriting, trading were big winners; its consumer businesses were losers.
It’s like the banks got rushed through the hospital to the operating room, right past Joe Six-Pack, who’s been sitting on a hard plastic chair in the hall for he doesn’t even know how many hours anymore. Every doctor’s left their post to operate on the banks (gold-plated healthcare plan, don’t you know,) while Joe sits there, clutching his broken arm with his other broken arm and wondering when in the hell anybody’s going to take a look at him.
And, yes, that may be hyperbole, but to the average American, that’s about how it feels these days.
Early tone’s a little squishy for US stocks, despite a big beat in Intel’s 4Q results and EPS upside in JPMorgan’s 4Q. Both stocks have recently priced in fairly high expectations for their results, so reaction looks mostly muted.
With hopes for overall 4Q results running high and pretty well priced into the market, it makes you wonder if stocks will get much of a kick higher on upside earnings reports.
December CPI, NY Fed’s January Empire State survey both due at 8:30 a.m. December industrial production and capacity utilization set for 9:15am, and Reuters/Univ of Michigan consumer sentiment out at 9:55 a.m.
US dollar index up 0.5% at 77.15. S&P futures down 5.70, DJ futures down 35. Ten-year a little higher, yield at 3.72%.
J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees […]
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