All the news this morning is about JPMorgan Chase & Co. (NYSE/JPM) reporting that it made $4.8 billion in profit in its fourth quarter of 2010, beating analyst expectations again.
Look at the chart of JPMorgan and you’ll see the stock has moved up from about $15.00 in early to 2009 to $45.00 today. With such positive earnings coming out of the banks, one needs to wonder if the bank stocks are a buy.
As I wrote yesterday, the Dow Jones U.S. Financial Index (primarily banks) is still down 50% from its February 2007 high. JPMorgan specifically, when I look at its price chart, has considerable price resistance at the $50.00 level. I don’t know if the extra $5.00 is worth the risk.
But I do think this:
Investment banking income at the big banks is actually on the decline (in the case of JPMorgan, down 21% in its latest quarter). The economy has improved, but the big deals have not come back yet.
The government wants America’s largest banks to be more conservative in respect to its capital base. Derivative trading has been a focus of the government. So have other bank operations.
Finally, interest rates, I believe, will rise this year. The more rates rise, the quicker banks need to be to move their lending rates up. Historically, there has been a lag time between when interest rates rise and bank loan rates rise to match rising interest rates. (I’d rather buy bank stocks when interest rates are falling as opposed to rising.)
JPMorgan was not as big a player in the mortgage fiasco compared to the activity of Bank of America Corporation (NYSE/BAC), Wells Fargo & Company (NYSE/WFC) and others. These banks still have serious problems with home mortgages they made that they cannot collect on. They’ve had to delay their home foreclosures pending government investigations of the foreclosure practices.
I’m a big believer in stock charts as leading indicators. When I see the Dow Jones Industrial hitting new two-year highs and the Dow Jones U.S. Financial Index struggling, I put the brakes on.
No, I do not think the bank stocks are a buy.
Michael’s Personal Notes:
I’m sorry, but I’m in a ranting mood this morning:
Last night, I sat down with my kids to watch their favorite show, Jersey Shore, for the first time. It was the biggest one-hour waste of time of my life. I would have rather spent the time stuck in traffic or waiting at an airport for a flight.
The series is about a group of friends (aged 21 to 28) that spend their summers together. The first season was filmed in August 2009. The second season, which premiered in the summer of 2010, made the series the highest-rated series in MTV’s history. According to U.S.A. Today (1/7/11), season three’s premiere episode on January 6, 2011, was seen by 8.45 million viewers.
I watch this show and wonder: what garbage are my kids watching? How productive is this? What are they learning from it? What is it doing to their minds?
It’s a big difference from the Leave it to Beaver series I used to watch as a kid. But each Leave it to Beaver episode ended with a message for the viewer. A message about what is right, what is wrong, what we should do in certain situations. It was clean fun.
Someone should start a “garbage gauge” to track these reality shows. I’m sure the gauge would be at record high.
Where the Market Stands; Where it’s Headed:
The bull market in stocks that started in March 9, 2009, is alive and well. I expect more immediate-term gains from the stock market. However, I’m turning bearish for 2011. My primary concern is still too many investors and advisors turning bearish and long-term interest rates pushing up.
What He Said:
“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. “A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on over-extended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.