Hopes of a Washington deal and decent-looking earnings reports
) provide the backdrop for today's trading action. The extent of
the follow-through from Thursday's massive rally will depend on
further details of the emerging DC deal.
The expectation appears to be that the debt-ceiling issue gets
taken off the table through a six-week extension, giving the
parties enough space to negotiate the rest of the budget issues
while the government remains shutdown. This isn't a perfect a
solution, but it's better than the logjam we were facing a couple
of days back.
On the earnings front, you are justified in being surprised at
the market's positive reaction, in the pre-open at least, to J.P.
Morgan's big bath that wiped out its quarterly earnings, and then
some. The bank has lately been infected with the disease that
Bank of America
) has been suffering from for a while - regulatory and litigation
disease. They set aside more than $9 billion to meet
contingencies related to its ongoing legal troubles, hoping that
this would be the end of it.
Excluding the massive charge, J.P. Morgan's 17 cents per share
loss becomes a better than expected EPS of $1.47 vs. the Zacks
Consensus Estimate of $1.28 and $1.40 in the same period last
year. Strength in the bank's commercial and investment banking
operations appears to have driven the positive surprise.
Importantly, the litigation charge is unlikely to damage the
bank's strong balance sheet, with capital ratios comfortably
above mandated levels.
Wells Fargo also came out with results and while the bank managed
to modestly beat on EPS, it came just short on the top-line. The
bottom line result for Wells is impressive, but investors may
find it less convincing as it came largely from expense
management and reserve releases. In the core business, the
mortgage business struggled as expected with originations down
big, net interest margin under pressure and anemic loan growth.
We get into the heart of the Q3 earnings season next week, with
the rest of the Finance sector and many other companies reporting
results. The JPM and WFC results give us a good preview of what
to expect from other banks. Net interest margins are under
pressure, the mortgage business is in decline, capital markets
were at best ok, and we are unlikely to see much improvement in
demand for loans. To varying degrees, we will hear about these
trends in the results from
), Bank of America,
) and others next week.
Let's hope that we are past the Washington gridlock come Monday
morning, enabling us to evaluate the Q3 earnings without any
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