Did quarterly earnings released by financial giants JPMorgan Chase (JPM) and Goldman Sachs (GS) surprise? Not really. Some of the numbers did, but the hits and misses were largely where we expected them.
Did the June Consumer Price Index (CPI) numbers released by the Bureau of Labor Statistics (BLS) surprise much? Maybe a little, but if you had to guess high or low, I think all of us would have gone with high. The thing I am surprised by most is the lack of any immediate knee-jerk reaction to the inflation data, neither in the debt nor equity space.
Readers of my early morning Market Recon column here on Tuesday know I came in this morning short both JPM and GS, having put those trades on as late as possible last night. Currently I am up small on one, down small on the other. Clearly neither trade is going to make a significant impact on my P&L today.
Perhaps the marketplace is trying to figure out just how much of this inflation, which unfairly compares a rapidly recovering economy to one that was locked down by mandate, is transitory, but the month-over-month data does manage to catch the eye. Still, the most outsize impacts on June inflation came from used vehicles, which is obviously transitory, and transportation services. That, too, may be transitory, as one can only guess at the future of fuel prices, as it must be understood that folks will not go on multiple vacations or business trips continually after an initial burst runs out of steam. Energy pricing is therefore a structural risk. Most interestingly I thought was the fact that food both at home and away from home inflated for the month but below trend.
As for the banks, there will be talk around financial media of pressure being increased on the Federal Open Market Committee (FOMC) to raise rates and tackle inflation. Traders must understand that more nuance is required than that. Simply increasing short-term rates clearly slows and injures economic growth if long-term rates cannot rise similarly, keeping focused-upon spreads in a healthy place. That would include damaging traditional banking as a business through squeezing net interest.
JPMorgan Chase reported earnings per share of $3.78, which beat the street by an impressive $0.60 or so. One must keep in mind, however, that the quarter included credit cost benefits of $2.3 billion, which consist of a $3 billion release of net reserves and $734 million in net charge-offs. Ex the net reserve release and the EPS drop to a much less impressive $3.03. Those reserves are real profits that have been stowed away, and these are GAAP numbers but they do dress up this quarter.
Revenues printed in contraction, at $30.5 billion (down 7.9%), which was expected. By division, Consumer & Community banking printed up 2% quarter over quarter and 3% year over year at $12.8 billion. Consumer & Business Banking hit the tape at $6.02 billion, up 7% quarter over quarter and 15% year over year. Credit continued to struggle. Home Lending landed at $1.35 billion, down 7% sequentially and down 20% annually. Card and Auto net revenue gave up 1% both quarterly and year over year, at $5.4 billion.
As for the Corporate & Investment Bank, net revenue for the quarter ended up at $13.2 billion, down 10% for the quarter and down 19% from last year. The group was supported by investment banking that grew 1% from last year while trading fell way off from that frenetic pace. Fixed-income surrendered 44% year over year while equities backed up to the tune of 13%.
Overall, this was another stellar quarter from the large money center bank that I consider to be best in class. Unfortunately, a lot of the love is already priced in. The thing that would not be priced in at this point would be net interest income, which for the half year ran at $25.63 billion, forcing the company to cut full-year guidance to $52.5 billion from $55 billion.
Goldman Sachs for the most part hit the ball out of the park. It reported EPS of $15.02 on revenue of $15.39 billion. The EPS number beat the street by more than $5, while the revenue number not only beat the street by more than $3 billion but also was good enough for 15.7% year-over-year growth. In perhaps bigger news, the board also approved that 60% increase (to $2) in the quarterly dividend that has had investors drooling. That dividend will be payable Sept. 29 to shareholders of record Sept 1.
As always, Goldman is a lot more about trading and investment banking than are Wall Street's other large banks. Investment Banking fell 4% from the record print of the first quarter, but increased 36% year over year to $3.61 billion.Global markets produced revenue of $4.09 billion, down 35% sequentially and down 32% annually, forced lower by a 45% reduction in fixed income, commodities and currencies (FICC).
Asset Management revenue increased from $4.61 billion for the first quarter to $5.13 billion for the second. Consumer and Wealth Management produced revenue of $1.75 billion, up 28%. Most of the action provided by Wealth Management and not consumer banking, though that small piece of the pie is growing.
Trader's Note (kind of important)
I had placed two low-ball bids well below the market to cover both my JPM and GS shorts. I just noticed that they were both hit while I was writing. I made money on both. Yay. I could have made more. Boo
I will therefore declare no position down below in the disclaimer. Just not to confuse the reader. That also does prove that I am really trading. (Your move, guys, and by guys I mean a whole lot of you on FinTV.)
My Thinking on the Banks
Most readers know that I remain long Wells Fargo (WFC) and KeyCorp (KEY) . Wells Fargo for me has performed. I am up 20% on that one and I am all about the Charles Scharf resurrection story. (BTW, Wells Fargo is a holding of Jim Cramer's Action Alerts PLUS charitable trust.)
KeyCorp is my regional successor to US Bancorp (USB) , which was a good name for us earlier in the year. I always have at least one regional bank on my book. KEY has not performed for me as of yet. I am up 2% on that position.
As I have said many times, the banks can find a million ways to make money. They can sing, they can dance (Goldman is different), but banks will always be valued by the marketplace relative to other revenue-producing businesses based on their ability to drive loan growth and drive net interest income.
That means I watch the Fed now. Fed Chairman Jerome Powell sings for tips in front of our (not so) esteemed legislators twice this week. I need to hear that while the committee understands that the Fed may have to tackle inflation, it intends to do so in a way that preserves the key yield spreads that can endanger economic growth. They screw that up and we are talking about finding each other a job, not about where to put out money.
Bottom line: I'm maintaining current exposure to the banks. I'm willing to take another look at USB or maybe PNC Financial (PNC) if the Fed looks like they get it. If not, then I reduce what I have now.