Market Wrap-up: market dives after JP Morgan's disappointing earnings call

2010-01-15

The market took its cue from Financials with disappointing news from JP Morgan - JPM and as a result the Dow was down 100 points on its worst one-day performance year-to-date.  Even though JP Morgan beat analysts' earnings, the beat was considered low-quality because it was driven by low compensation, trading gains, and tax benefits.  Excluding these items, earnings were in line with consensus.  Despite meeting guidance, maintaining the same outlook from the prior quarter, and showing credit quality stability, investors were disappointed because JP Morgan's CEO, Jamie Dimon, could not offer constructive evidence of a turnaround in the economy, nor did he address expectations of a dividend raise. 

The signal was that JP Morgan is not confident enough in the economy to make a statement about it nor to release any capital to shareholders.  The sector took a dive and lost more than 1.5% for the day.  The disappointing news was met with a rally in bonds, which drove yields down, since the economy may be on a weaker footing than previously expected and the government will be forced to keep interest rates low for a prolonged period.  JP Morgan was down 2.3%, but Bank of America - BAC, Wells Fargo - WFC, and Citigroup - C fared worse, down 2.6 - 3.3% each, as they are considered to be weaker banks.  Regardless, investors have been buying these stocks for their enormous earnings power.  As Jamie Dimon pointed out in the earnings call, he may not know when the economy will turn (he is no fortune teller), but he knows that when it does, banks will generate a lot of earnings.

Well-known investor Bill Ackman of Pershing Square Capital demonstrated his confidence in Kraft's - KFT stock by purchasing a 2% stake in the company (valued at more than $900mm) and urging it to use more cash instead of stock in its bid for Cadbury - CBY.  Ackman said that he thinks very highly of the company, its management, and management's plan to improve margins, which have been lagging those of the industry by a wide margin.  This is a classic Nelson Peltz situation (Peltz acquired Wendy's to improve its margins to industry averages), only the target is a much larger company so Ackman cannot actively help improve margins, but can support management and provide some direction.  Kraft was up only 1.6% for the day, but outperformed the market by 2.7% and was up 4.1% from a weak open.

Billionaire investor Wilbur Ross says we are nowhere close to a full economic rebound and that we may need another cash-for-clunkers program to bail out the auto industry because demand is not picking up substantially.  He bought Bank United from the FDIC back in May 2009 and has been very happy with the transaction.  On talk that GMAC may be looking to sell its mortgage servicing business to Warren Buffett, he only said that he is a player in the field and will naturally look at all available deals. (video link: http://bit.ly/5UiMjJ)

On economic news, the Consumer Price Index (CPI) came in line with consensus estimates with headline consumer price inflation easing from 0.4% in November to 0.1% in December.  Industrial Production grew by 0.6%, again in line with expectations, though the manufacturing component of the index posted a red flag, falling 0.1% after growing 0.9% in November.  Finally, the University of Michigan consumer sentiment survey, which is directly related to consumer spending, was weaker than expected and came in at the low end of the consensus range.  December overall has been a mild disappointment from a much more positive November in terms of employment and consumer spending data.

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