"Oh"
The world is blowing up
The world is caving in The world has lost her way again But you are here with me But you are here with me Makes it ok I hear you still talk to me As if you're sitting in that dusty chair Makes the hours easier to bare I know despite the years alone I'll always listen to you sing your sweet song And if it's all the same to you I love you oh so well Like a kid loves candy and fresh snow I love you oh so well Enough to fill up heaven overflow and fill hell Love you oh so well And it's cold and darkness falls It's as if you're in the next room so alive I could swear I hear you singing to me I love you oh so well Like a kid loves candy and fresh snow I love you oh so well Enough to fill up heaven overflow and fill hell Love you oh so well The world is blowing up The world is caving in The world has lost her way again But you are here with me But you are here with me Makes it ok Oh girl you are singing to me still Like a kid loves candy and fresh snow I love you oh so well Enough to fill up heaven overflow and fill hell Love you oh so well |
Friday, April 11, 2014
Dave Matthews - Oh
Alarm Clock Goes Off on Dream Stocks
| Investors have recently woken up to the reality of overpriced US momentum stocks in technology and biotech. But a knee-jerk shift toward defensive sectors isn’t the answer. In early April, money has flowed away from companies such as Netflix and Twitter, which we call “dream stocks” because investors believed they could grow without any help from the economy. A more thoughtful reaction to this collapse would be to reach for cheap stocks—rather than safe ones—because they have value on their side and will diversify interest-rate risk. And we believe that there are good reasons to anticipate more appreciation ahead—if you focus on the right parts of the market. Defensive Sectors Look Risky In the flight from momentum, investors appear to be flocking toward companies in utilities, real estate investment trusts or REITS and consumer staples. Yet these stocks are not risk-free. They are priced high relative to their own history because people are still paying a high price for safety. After all, the argument goes, if the economy doesn’t grow, companies in defensive sectors won’t suffer their usual valuation penalty that traces to high dividends, which leave very little capital for growth. But what if growth accelerates? In our view, companies that are unable to invest in future growth could underperform significantly if the economic recovery accelerates. By concentrating their portfolios in defensive companies, investors may miss an opportunity in those companies that are more likely to thrive in a faster-growth environment. Understanding Valuations Stock valuations help point the way. Spreads between the cheapest and most expensive quintiles of stocks based on price/book value are extremely wide. This has been driven largely by the inflated valuation of dream stocks in the most expensive group, as we explained in a recent blog, but also by continued underappreciation of companies with uncertain profit trajectories. Indeed, price/earnings multiples vary enormously. Even amid the recent declines of momentum stocks, the most expensive stocks trade at valuations that are still 4.8 times the market median (Display)—quite high relative to history, higher than during the financial crisis and approaching the record levels seen during the tech bubble. The pain investors have already experienced in this group could just be the beginning.
Economic Growth to Unlock Value There are plenty of attractively valued stocks to be found at the other end of the spectrum. Many boast high profit margins that we believe are sustainable. In some cases, sales growth is well below the long-term trend and can be expected to improve. In others, improved cost structures and more benign competitive environments support future profits. These underpriced companies are generally more sensitive to economic growth, so their value could be unlocked when the economic waters become clearer. But these stocks have another important characteristic. Since the Fed has made clear that interest rates will rise when the US economy’s growth prospects improve, we’re likely to see economically sensitive stocks appreciate just as bond values are falling, providing much needed diversification to balanced portfolios. Those rushing into defensive stocks as shelter from the carnage in the dream stocks may find themselves trading one risk for another as the defensives are likely to underperform when interest rates rise. Momentum Rout Exposes Passive Flaws There’s another important lesson from the recent rout in momentum stocks. Investors who have bought into an index have also been buying into dream stocks, often unintentionally. As these stocks rose to excessive valuations, they automatically became a bigger part of the benchmark. In the aftermath of the correction, we think investors should reconsider the merits of buying the entire market without any scrutiny. Taking a stock-picking approach can also help avert a rush into expensive defensive stocks. In our view, staying active and focusing on attractively valued stocks that can perform well as an economic recovery unfolds is the best way to get a better night’s sleep in today’s restless markets. |
Nasdaq Suffers Worst Day Since 2011
The Shellacking ContinuesIt could well be that the divergences between various market sectors and indexes we have recently pointed out will in hindsight be recognized as having constituted a major warning signal. Of course the correction is so far not big enough to make that determination, but it may be worth taking another look at the comparison chart we recently posted:
NDX, Russell 2000, SPX and DJIA compared. We have added vertical lines that align with the peaks in the indexes – as can be seen, they all peaked at different points in time, spread over a lengthy time period – click to enlarge. Interestingly, we have seen no particular 'reason' cited in the media for Thursday's wave of selling, which is rare and should alarm bulls. It is usually a bad sign when a market declines sharply without there being an easily identifiable trigger event. Usually there is almost always something that serves as an easily digestible sound bite to 'explain' the action to us mere mortals. Here is an update of the 'safety versus growth' indicator we showed previously, namely the XLU-QQQ ratio. When this ratio rises, it indicates that investors are rotating out of 'risky' growth stocks into 'safe' high yielding stocks the earnings of which are considered relatively immune to economic downturns. One could construct similar charts using e.g. tobacco stocks instead of utilities or other permutations on the same theme, but this chart should suffice to make the point:
The XLU-QQQ ratio rockets higher, making yet another new high for the move – click to enlarge. A Closer Look At BiotechnologyHowever, we want to take the opportunity to look at a specific sector this time, namely biotechnology stocks. Biotech has been a major upside leader, along with 'social media' and other internet stocks and a few other sub-sectors. In terms of Austrian capital theory, R&D activity is certainly a very early stage of production, precisely the type of business activity that will tend to look more profitable when interest rates are artificially suppressed and at very low levels. It will therefore attract a lot of investment – much of which will later turn out to be malinvestment, as the economy can actually not support all the projects that are initiated in the higher stages of the capital structure. It is quite noteworthy that this sector has assumed the mantle of downside leadership lately – it has declined by nearly 19% from its late February peak. Of course this may still turn out to be a temporary, if very sharp, correction. However, there are a number of warning signs to ponder. There has e.g. very rarely been a Rydex sector fund attracting a similar amount of bullish enthusiasm. More than 37% of all Rydex sector assets were invested in the biotech fund at its recent peak. This mirrors the general sentiment toward biotech stocks quite nicely. The sector has been a veritable magnet for capital.
Major crime scene: the Nasdaq Biotechnology Index - click to enlarge. Below is a chart showing the enormous growth in assets of the above mentioned Rxdex biotechnology fund over the past two years. Partly this growth was of course due to the rise in the fund's value. However, there have also been steady cash inflows, and early investors held on for the bulk of the ride. Recently assets have of course retreated, but in a putative worst case scenario there may be a lot still left to go:
At its recent peak, the Rydex biotech fund had attracted huge amounts of money and represented over 37% of all bullishly positioned Rydex sector assets – click to enlarge. A Look At Production Index RatiosLong time readers know that we often look at the ratio of capital goods vs. consumer goods production. While one must take all such statistical data with a grain of salt, they can often be useful as long as they are consistent over time. In this particular case, we are trying to determine whether an expected effect of monetary pumping can be discerned in the data on production – namely, the above mentioned redirection of factors of production into higher stages of the capital structure (capital goods) to the detriment of lower stages (i.e., consumer goods). If this shift is not supported by a commensurate increase in real voluntary savings, a production structure that ties up more and more consumer goods while releasing fewer and fewer of them results, without a concomitant change in society-wide investment-consumption preferences. The suppression of interest rates by means of monetary pumping distorts relative prices and therefore falsifies economic calculation. It signals that there are more real savings available than there really are. Such a production structure is inherently unsustainable and the situation invariably leads to an economic bust, usually when monetary policy begins to be tightened.
The ratio of capital to consumer goods production has recently begun to stall out at a historically extremely high level – click to enlarge. In addition to the chart above, we have also made a chart of the annual rate of change of the ratio. As can be seen, it too tends to drift down shortly before recessions and it is currently clearly in 'red alert' territory:
Capital to consumer goods production ratio, annual rate of change. It exhibited a lag in 2008 and may well exhibit a lead this time around. In any case, it is close to a level that normally indicates an economic bust is not too far away – click to enlarge. Clearly this amounts to yet another warning sign, and if we put it into context with the recent plunge in biotechnology stocks (with many companies in the sector active in a very high stage of the economy's capital structure) it becomes potentially even more relevant. There is however one caveat to consider: while y/y money supply growth has slowed down quite a bit, it is still at a very high level historically. It may yet re-accelerate, depending on upcoming monetary policy decisions, private sector credit demand and the lending decisions of commercial banks. However, if the economy's pool of real funding has sustained severe damage, it is conceivable that even a re-acceleration in monetary pumping won't help. We will have to wait and see what transpires, since we obviously have no means of 'measuring' the economy's pool of real funding. We can only make tentative inferences from the available data. Also, many other indicators that normally serve as leading indicators of recession are not flashing red just yet. Keep in mind however that when an artificial inflationary boom comes to an end, there is often a very sudden change in conditions. At times this is presaged by a sharp decline in the stock market, sometimes the market only declines once the economy's difficulties are fairly obvious (in recent years the latter has actually occurred more frequently). Businessmen often describe the end of the boom with expressions such as 'it was as though someone had suddenly thrown a light switch'. In other words, it is possible that there will be very little warning – the economy could well move from mild expansion to contraction very quickly when the time is ripe. The Citigroup 'economic surprise index' is very volatile and certainly not a reliable recession indicator, but it is one of the data series currently indicating that the stock market is not reflecting economic conditions properly; this is to say, it incorporates very optimistic expectations, while the same optimistic consensus expectations held by economists have recently been continually disappointed by the release of 'weaker than expected data':
Citi's 'economic surprise index' is at its most negative level since mid 2012, and has diverged rather noticeably from the stock market recently – click to enlarge. Conclusion:Contrary to those eager to 'catch falling knives', we would suggest it is actually a good time to be cautious, short term bounce possibilities in 'oversold' sectors notwithstanding. Risk remains very high. Addendum: 'Abe Bliss' Likely to Wane FurtherShinzo Abe is probably on the phone with Mr. Kuroda already, urging even more excessive monetary pumping measures. He cannot be very happy about recent market moves, as 'Abe bliss' is likely to nosedive right along with the stock market:
The Nikkei violates a short term support level. Is the Abenomics mini-bubble already expiring? - click to enlarge. |
Yield to Yields
by Marketanthropology
| 10-year yields slid into their skipped-stone support from the breakout range they have meandered in since last summer. They then broke through mid-morning, accelerating the downside reversal in the equity markets yesterday and a strengthening bid beneath the yen.
What we do know is that while correlations may be strengthening in some corners of the market, the indiscriminate tightness we witnessed across assets in 2011 as the Fed last attempted to step away, or 2008 as the Fed rushed to the accident scene - are not present. It really has become a market-picker's market in 2014. CRB +1.78% Gold +1.21% FXI +2.98% (SSEC + 4.43%) As the banks (already down ~ 4.0% for the week) get hit once again this morning on the back of considerably weaker then expected quarterly profits from JP Morgan, the downside catalyst will only reinforce the trend and negative divergence that long-term yields had pointed towards in the financial sector over the past few weeks.
|
Vladimir, he wrote me a letter!
By Phil FLynn
| While the stock market corrects, oil hangs in there on geopolitical risk after Vladimir Putin wrote the EU a letter. While I don’t have an exact copy it went something like this. Dear EU, I am here to write to you to try to lay out the case for me to cut natural gas supply to the Ukraine and ultimately the rest of you as well. You see it was not very nice of you to try to destroy the love the Ukrainian people had for me and trying to entice them to join your little Union as opposed to my Russian Federation. Now I will make you pay by increasing prices to what is left of the Ukraine. Ultimately either gives me the entire country or I will make you pay through the nose for your gas as well as theirs. You will have to write a pretty big check to keep bailing out Ukraine’s pathetic little economy; if you think my economy is bad just wait till you see what I do to Ukraine’s after I cut off the gas. I thought the EU was supposed to bail out the Ukraine? I am not seeing it and now if you want Ukraine you will really have to pay up! Sorry I missed you at the G whatever summit! Stay warm and I hope to see you all soon. Love, Vladimir Mr. Putin’s letter sent to the leaders of Germany, France, Italy, Austria, Hungary, the Czech Republic, Poland, Slovakia, Slovenia, Croatia, Serbia, Bosnia, Bulgaria, Romania, Macedonia, Greece, Turkey and Moldova ( soon to be a Russian republic) kept the oil from falling despite some optimistic news surrounding Libyan oil exports. Libya’s National Oil Co. lifted a force majeure on a crude export terminal recovered from rebel hands as the army took control of Al-Hariga and Zueitina ports under a deal to end a crippling nine-month blockade by rebels seeking autonomy in the country’s east. Yet a report that OPEC oil production dropped by over 500,000 barrel per day, the falling below 30 million barrels a day, the lowest level this year. The drop to 29.6 million barrels a day was partially in response to weaker demand and problems with production in Iraq. U.S. oil reserves continue to rise but natural gas may need higher prices to keep producers interested. The Energy Information Administration reported that “U.S. crude oil proved reserves rose for the fourth consecutive year in 2012, increasing by 15% to 33 billion barrels, according to the U.S. Crude Oil and Natural Gas Proved Reserves (2012) report released April 10 by the U.S. Energy Information Administration (EIA). U.S. crude oil and lease condensate proved reserves were the highest since 1976, and the 2012 increase of 4.5 billion barrels was the largest annual increase since 1970, when 10 billion barrels of Alaskan crude oil were added to U.S. proved reserves. Contributing factors to higher crude oil reserves include increased exploration for liquid hydrocarbons, improved technology for developing tight oil plays, and sustained high historical crude oil prices.” The EIA’s natural gas report was very bullish as the U.S. supply situation is looking very tight. The EIA reported that supply only increased by 4 bcf leaving supply at 826.00 billion cubic feet and a whopping 54% below the five year average. If the number continues to disappoint like this, natural; gas will make a major upside move. Get Ready. The EIA also reported that U.S. proved reserves of natural gas(NYMEX:NGM14) declined in 2012 because of low natural gas prices. The average reference price of natural gas companies use to estimate reserves declined 34% between 2011 and 2012. Natural gas prices began to decline in the latter part of 2011 and continued to drop through spring 2012. This prompted large downward net revisions of 45.6 trillion cubic feet to the proved reserves of existing gas fields — enough to cancel out almost all the gains from total discoveries in 2012. That should rebound but not unless we see prices rise! Increased geopolitical risk and talk of QE everywhere helped support gold. China data and a failed bond auction along with a weaker dollar should keep gold strong. The FT reported that “The Chinese government was unable to sell all the bonds offered at an auction on Friday; its first such failure in nearly a year amid concerns about slowing growth in the world’s second-largest economy. The failed bond auction raises the stakes for Beijing as it tries to rein in debt levels, illustrating that even the state will have to pay a higher cost for funding as banks focus more on investment risks and demand improved yields. Traders said there was strong appetite for the government bond but only at rates above what the finance ministry was willing to pay to borrow money. The bond failure followed inflation data that showed prices fell in China last month, reinforcing the picture of a sluggish economy weighed down in part by government efforts to squeeze leverage out of the financial system. Consumer prices fell 0.5% in March from the previous month, while producer prices remained mired in deflationary territory for a 25th consecutive month, according to figures published by the national bureau of statistics on Friday according to the FT. Orange Juice(NYBOT:OJK14) continues its assault on two-year highs after the USDA showed just how bad the Citrus Greening disease is. The U.S. Department of Agriculture cut its estimate for the crop year ending September in a monthly report released Wednesday. The USDA expects Florida to produce 110 million 90-pound boxes of oranges for the crop year ending September, down 12% from its original estimate of 125 million boxes in November and the smallest crop since the 1984-85 crop year according to Dow Jones. |
ECB Action: Just a Question of Time?
| The Managing Director of the IMF and the chief economist are making no bones about it. More action by the ECB is inevitable. It is "just a question of timing," says Lagarde and "sooner was better than later", chimed Blanchard, the chief economist. The market is less sanguine. A recent Bloomberg poll found only about 2/3 of the economists surveyed expected the ECB to ease policy in June. The remainder appear roughly divided between those expecting a May move and those who do expect it to stand pat. The Bloomberg survey found more economists expect the ECB to suspended the sterilization of the liquidity generated by the bonds purchased under Trichet's SMP program or a new long-term lending facility than QE or negative rates. A fifth of those survey expect a the end of the liquidity absorption efforts, which actually have been relatively smoothly conducted now for several weeks. Another fifth expect new lending facility. The survey found 16% expect QE and another 16% expect a rate cut. The euro is firm, having trading above $1.39 briefly today, for the first time since March 19 and the backing up of US rates after the FOMC meeting and Yellen's faux pas of defining "a considerable period". EONIA remains elevated above 20 bp, about twice the year ago level (while effective Fed funds at at 8 bp, half of what they were a year ago). The rise in EONIA comes despite the rise in excess liquidity in the Eurosystem of more than 20 bln euros over the past week. ECB officials continue to play down the generalized risk of deflation in region and claim that inflation expectations remain anchored. However, the real take away is that the ECB is decidedly split about taking more action. An anticipated bounce in the April CPI, for which a preliminary estimate will be made at the end of the month, is expected to buy time for Draghi to forge a broad agreement. A consensus is sought for such an important decision. Much of the official talk has focused on quantitative easing and ECB officials, including Draghi have signaled a preference for some private sector assets, which the US and the BOE did not do in their QE exercise. In particular, the officials have been talking more about asset backed securities (ABS). The ECB and BOE published a joint paper today urging regulators to support and promote a revival of the ABS market, which Draghi had called "dead". In particular, they wanted "prudently designed" high quality product. The point though is that the current ABS market seems too small for any serious QE program. Industry data indicate that total European issuance of securitized assets were about 251 bln euros in 2012 and the equivalent of 1.55 trillion euros in the US. In the first half of last year, Europe generated 83.5 bln of ABS, while the US packaged the equivalent of 880 bln euros. Some of the European ABS are being used already for collateral for borrowing from the ECB, which means they cannot be included in the universe of securities the ECB could consider buying under QE. All told, the ABS that are eligible as collateral at the ECB have almost been halved from the 2010 peak. To be sure, there is no shortage of debt and can be used for the creation of asset-backed securities. Total lending in the euro area is estimated at around 17 trillion euros. Earlier on in the crisis, the ECB did buy (~80 bln euros) of covered bonds, which are similar to ABS except that the issuing bank retains the risk on their balance sheets and are more favored by regulators. Many investors and, perhaps, policy makers well, expect that if the ECB would to adopt QE the euro would decline. While understanding the argument, we are less sanguine. Our argument is not based first principles and deduced from the idea that QE expands the supply of a currency and therefore, ceteris paribus, the currency should depreciate. Instead, oour approach is more modest. It is through induction.
First, the most aggressive QE presently is the BOJ. Since the yen put in its low against the dollar on January 2, it has appreciated by more than 3.25% even while the BOJ has bought more than $225 bln of assets. Second, we note that the US dollar, on the Federal Reserve's real broad trade-weighted index,bottomed almost 3 years ago (July 2011). At the end of last month, it was about 6.5% above that trough. Third, we recall that the large scale QE by the Swiss National Bank did not prove effective, and officials responded by resorted to imposing a cap on the franc. A QE operation, a new lending facility, or a rate cut could also induce more buying of the periphery European bonds as the chase for yield intensifies. Most of the decline, say in Spanish bonds, for example, can be accounted for by the drop in inflation. Consider that since October 2012, Spanish harmonized inflation has fallen from 3.5% to -0.2%. The nominal yield of the 10- year bond yield has fallen from almost 6% to about 3.15%. There is room for a further decline in real yields just to match what they were a year and a half ago. |
E-mini S&P correction?
By Erik Tatje
| E-mini S&P 500 (CME:ESM14) Following one of the biggest, if not, the biggest down day of the year, all eyes are on the U.S. Indices and whether or not the recent weakness in price will materialize into a larger correction. Price action is currently at a very important structural pivot on the chart. The 1823.25 level represents an area of support that has supported price on multiple occasions, most recently on 3/16. If price begins to fall below this level, it will represent a relatively lower low on the chart, calling into question the previously bullish intermediate-term bias. This would certainly change the landscape of this market, as the general consensus has been extremely bullish for some time now. As would be expected following such a forceful move lower, the 20-period SMA (on a 30-minute chart) is below the 50-period, highlighting the negative momentum in the S&P 500. Furthermore, the recent bounce off the 1823.25 pivot corresponded with a 20 reading in the RSI, representing the “oversold” level in a bearish market. Near-term momentum would likely be categorized as negative at this point with intermediate term sentiment remaining neutral to slightly positive until a breakdown below 1823.25 occurs. If the negative pressure is going to continue to exert itself on this market, look for corrective rallies to fail below the 1842.00 pivot. Any strength above this level could very well produce positive follow through and erase some of, if not all of yesterday’s losses.
E-mini S&P 500, 30-minute Bar Chart (eSignal) U.S. Dollar Index (NYBOT:DXH14) The Dollar has taken some serious heat over the past week and now finds itself grasping support around the previous swing low around 79.373. Some traders could very-well find value in the Dollar at these low prices with the market currently pressing into new contact lows. Near-term momentum in this market is negative; however, if there is a level of structural support that could put an end to that negative momentum and turn prices around, the 79.373 bottom would have to be recognized as a valid canidate. Along the same lines, the RSI appears to be diverging slightly with price down at these low levels, which could support an argument for a potetnial reversal off support down here. All things considered, buying dips into the previously mentioned support level at 79.373 is a counter-trend opportunity. Traders should also be aware of the fact that there is not much technical support below 79.373 and there will likely be a good number of stops below this pivot, so any weakness below this pivot could quickly gain momentum. If the market is indeed going to gather itself here and make new moves higher, the intial target for price to overcome would be around yesterday’s structure at 79.648. Above here, the next structurally signfincant area of resistance can be seen around the 79.830 area on the chart. Given the extent of the recent sell-off, there does appear to be valid trading opportuntiies on both sides of the market with trend-following strategies favoring bearish position. The key to today’s session will likely be if price action can hold this 79.373 support pivot.
|
JPM Misses Top And Bottom Line, Slammed By Collapse In Mortgage Origination, Slide In Fixed Income Trading
by Tyler Durden
| So much for the infallible Mr. Dimon. Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows:
However, recall that as Zero Hedge first reported last quarter, JPM recently jumped on the FVA bandwagon, to wit:
... which means one has to look at revenue on both a GAAP and non-GAAP basis. Sure enough, the company's non-GAAP revenue, reported quietly in the footnotes, was $1.1 billion less than the non-GAAP print.
Fine, revenue you can't fudge as easily. But what about EPS - after all the firm should be quite able to boost "earnings" by taking out another abnormally sized loan loss reserve release. It is here that we observe something curious: while last quarter JPM generated $1.3 billion in "bottom line earnings" from loan reserve releases, this quarter the number was down to a far smaller print, as JPM took only $417MM in releases, down substantially from $1.2 billion a year ago. Considering JPM still has a total reserve of $15.8 billion it was strange why it didn't take out more - it is almost as if Jamie Dimon wanted to miss the bottom line!
Going back to the firm's actual operations, here is where the bulk of the pain came from: mortgages, or rather the lack thereof.
Of note here: Mortgage Production was a disaster with mortgage related revenue of only $292 million, and net loss of $58 million. As JPM says, "Revenue 76% lower YoY, primarily on lower volumes; originations down 68% YoY and 27% QoQ" Nothing better in the servicing division: "Mortgage Servicing pretax loss of $270mm, down $169mm YoY" The culprit: mortgage originations, which tumbled from $52.7 bn in Q1 2013, and $23.3bn in Q4 2013, to just $17.0 billion as the US consumer continues to not want to buy houses on credit. Which also means that as JPM further writes, "Headcount down ~14,000, or ~30% since the beginning of 2013, and ~3,000 QoQ." Oh well, at least those "all cash" Chinese and Russian buyers are happy, if not so much JPM's soon to be terminated mortgage bankers. Tied with this is the fact that as we expected, JPM's market-based Net Interest Margin continues to decline, hitting a new record low of just 0.84%. The recent uber flattening in the yield curve will certainly not help.
And then, looking at the Investment Bank, things are just as bad if not worse:
Yup - fixed income markets, that key profit center for every bank - crashed by $1 billion Y/Y to only $3.8 billion as even equity market revenue dropped by $45 million to $1.3 billion. Also note the average VaR which tumbled from $62mm to only $42mm - as if Jamie is telling the traders to take zero risk. Which ties in with the last slide - remember the London Whale operation, the CIO, which was a revenue and income goldmine for so long until it blew up? So much for that.
Full earnings presentation below. So much for the infallible Mr. Dimon. Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows:
However, recall that as Zero Hedge first reported last quarter, JPM recently jumped on the FVA bandwagon, to wit:
... which means one has to look at revenue on both a GAAP and non-GAAP basis. Sure enough, the company's non-GAAP revenue, reported quietly in the footnotes, was $1.1 billion less than the non-GAAP print.
Fine, revenue you can't fudge as easily. But what about EPS - after all the firm should be quite able to boost "earnings" by taking out another abnormally sized loan loss reserve release. It is here that we observe something curious: while last quarter JPM generated $1.3 billion in "bottom line earnings" from loan reserve releases, this quarter the number was down to a far smaller print, as JPM took only $417MM in releases, down substantially from $1.2 billion a year ago. Considering JPM still has a total reserve of $15.8 billion it was strange why it didn't take out more - it is almost as if Jamie Dimon wanted to miss the bottom line!
Going back to the firm's actual operations, here is where the bulk of the pain came from: mortgages, or rather the lack thereof.
Of note here: Mortgage Production was a disaster with mortgage related revenue of only $292 million, and net loss of $58 million. As JPM says, "Revenue 76% lower YoY, primarily on lower volumes; originations down 68% YoY and 27% QoQ" Nothing better in the servicing division: "Mortgage Servicing pretax loss of $270mm, down $169mm YoY" The culprit: mortgage originations, which tumbled from $52.7 bn in Q1 2013, and $23.3bn in Q4 2013, to just $17.0 billion as the US consumer continues to not want to buy houses on credit. Which also means that as JPM further writes, "Headcount down ~14,000, or ~30% since the beginning of 2013, and ~3,000 QoQ." Oh well, at least those "all cash" Chinese and Russian buyers are happy, if not so much JPM's soon to be terminated mortgage bankers. Tied with this is the fact that as we expected, JPM's market-based Net Interest Margin continues to decline, hitting a new record low of just 0.84%. The recent uber flattening in the yield curve will certainly not help.
And then, looking at the Investment Bank, things are just as bad if not worse:
Yup - fixed income markets, that key profit center for every bank - crashed by $1 billion Y/Y to only $3.8 billion as even equity market revenue dropped by $45 million to $1.3 billion. Also note the average VaR which tumbled from $62mm to only $42mm - as if Jamie is telling the traders to take zero risk. Which ties in with the last slide - remember the London Whale operation, the CIO, which was a revenue and income goldmine for so long until it blew up? So much for that.
Full earnings presentation below. So much for the infallible Mr. Dimon. Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows:
However, recall that as Zero Hedge first reported last quarter, JPM recently jumped on the FVA bandwagon, to wit:
... which means one has to look at revenue on both a GAAP and non-GAAP basis. Sure enough, the company's non-GAAP revenue, reported quietly in the footnotes, was $1.1 billion less than the non-GAAP print.
Fine, revenue you can't fudge as easily. But what about EPS - after all the firm should be quite able to boost "earnings" by taking out another abnormally sized loan loss reserve release. It is here that we observe something curious: while last quarter JPM generated $1.3 billion in "bottom line earnings" from loan reserve releases, this quarter the number was down to a far smaller print, as JPM took only $417MM in releases, down substantially from $1.2 billion a year ago. Considering JPM still has a total reserve of $15.8 billion it was strange why it didn't take out more - it is almost as if Jamie Dimon wanted to miss the bottom line!
Going back to the firm's actual operations, here is where the bulk of the pain came from: mortgages, or rather the lack thereof.
Of note here: Mortgage Production was a disaster with mortgage related revenue of only $292 million, and net loss of $58 million. As JPM says, "Revenue 76% lower YoY, primarily on lower volumes; originations down 68% YoY and 27% QoQ" Nothing better in the servicing division: "Mortgage Servicing pretax loss of $270mm, down $169mm YoY" The culprit: mortgage originations, which tumbled from $52.7 bn in Q1 2013, and $23.3bn in Q4 2013, to just $17.0 billion as the US consumer continues to not want to buy houses on credit. Which also means that as JPM further writes, "Headcount down ~14,000, or ~30% since the beginning of 2013, and ~3,000 QoQ." Oh well, at least those "all cash" Chinese and Russian buyers are happy, if not so much JPM's soon to be terminated mortgage bankers. Tied with this is the fact that as we expected, JPM's market-based Net Interest Margin continues to decline, hitting a new record low of just 0.84%. The recent uber flattening in the yield curve will certainly not help.
And then, looking at the Investment Bank, things are just as bad if not worse:
Yup - fixed income markets, that key profit center for every bank - crashed by $1 billion Y/Y to only $3.8 billion as even equity market revenue dropped by $45 million to $1.3 billion. Also note the average VaR which tumbled from $62mm to only $42mm - as if Jamie is telling the traders to take zero risk. Which ties in with the last slide - remember the London Whale operation, the CIO, which was a revenue and income goldmine for so long until it blew up? So much for that.
Full earnings presentation below.
So much for the infallible Mr. Dimon. Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows:
However, recall that as Zero Hedge first reported last quarter, JPM recently jumped on the FVA bandwagon, to wit:
... which means one has to look at revenue on both a GAAP and non-GAAP basis. Sure enough, the company's non-GAAP revenue, reported quietly in the footnotes, was $1.1 billion less than the non-GAAP print.
Fine, revenue you can't fudge as easily. But what about EPS - after all the firm should be quite able to boost "earnings" by taking out another abnormally sized loan loss reserve release. It is here that we observe something curious: while last quarter JPM generated $1.3 billion in "bottom line earnings" from loan reserve releases, this quarter the number was down to a far smaller print, as JPM took only $417MM in releases, down substantially from $1.2 billion a year ago. Considering JPM still has a total reserve of $15.8 billion it was strange why it didn't take out more - it is almost as if Jamie Dimon wanted to miss the bottom line!
Going back to the firm's actual operations, here is where the bulk of the pain came from: mortgages, or rather the lack thereof.
Of note here: Mortgage Production was a disaster with mortgage related revenue of only $292 million, and net loss of $58 million. As JPM says, "Revenue 76% lower YoY, primarily on lower volumes; originations down 68% YoY and 27% QoQ" Nothing better in the servicing division: "Mortgage Servicing pretax loss of $270mm, down $169mm YoY" The culprit: mortgage originations, which tumbled from $52.7 bn in Q1 2013, and $23.3bn in Q4 2013, to just $17.0 billion as the US consumer continues to not want to buy houses on credit. Which also means that as JPM further writes, "Headcount down ~14,000, or ~30% since the beginning of 2013, and ~3,000 QoQ." Oh well, at least those "all cash" Chinese and Russian buyers are happy, if not so much JPM's soon to be terminated mortgage bankers. Tied with this is the fact that as we expected, JPM's market-based Net Interest Margin continues to decline, hitting a new record low of just 0.84%. The recent uber flattening in the yield curve will certainly not help.
And then, looking at the Investment Bank, things are just as bad if not worse:
Yup - fixed income markets, that key profit center for every bank - crashed by $1 billion Y/Y to only $3.8 billion as even equity market revenue dropped by $45 million to $1.3 billion. Also note the average VaR which tumbled from $62mm to only $42mm - as if Jamie is telling the traders to take zero risk. Which ties in with the last slide - remember the London Whale operation, the CIO, which was a revenue and income goldmine for so long until it blew up? So much for that.
Full earnings presentation below. |
Subscribe to:
Posts (Atom)