By Marek Fuchs
Update, July 12
JPMorgan (JPM) and Wells Fargo (WFC) reported earnings on Friday morning and, as predicted in the column below, there could not have been less of a through-line between Alcoa (AA) and what the banks set forth. Technically, the results were up to scratch. They even exceeded analyst expectations. But the banks were hardly a greased wheel. Their results were a swirl of decent performances in certain divisions, as well loan-loss gimmickry and foreboding signs about the economy, particularly in housing.
JPMorgan reported net income of $1.60 a share versus $1.21 a share a year earlier, but 15 cents a share was a product of loan-loss reserve releases. Loan demand — their lasting lifeblood — proved anemic, but JPM shares were up in mid-morning trading on Friday, in part because investment banking appeared resilient. Wells Fargo was a similarly complex picture and it, too, was up in mid-morning trading. The upshot?
The banks are a more complicated picture than Kass and his ilk imply with their Alcoa-induced "good-equals-bad-and-bad-good" formulations. Are the banks nearly inoperative, as they were in 2008? Of course not. Are they totally reconditioned? Hardly.
As we look toward the coming reports in the banking sector, you'd be well-served by a chronic mistrust for anyone peddling simple parallels between today's megabanks and aluminum.
Let's have a moment of silent prayer for the financials.
JPMorgan and Wells Fargo report Friday, with Citigroup (C), Goldman Sachs (GS), Bank of America (BAC) and the rest to follow next week. According to the conventional wisdom that is the media’s specialty, Alcoa’s decent — if unspectacular — report is cause for a grand round of handwringing.
Before this week’s handwringing becomes next week’s article of faith, let’s slow down a bit. First on the slow-down list: a brief review of the handwringing.
A CNBC segment this week entitled Doug Kass: Watch Out for Earnings was fairly representative. Responding to a question about Alcoa’s earnings, Kass, a noted bear, allowed that normally “bad news is bad and good news is good,” before referencing the singer Robert Palmer to frame the economy as “addicted to lower interest rates,” which, apparently, turns his bad news/good news maxim on its head. Might as well face it: Alcoa’s good news is the economy’s bad. Got that?
The reasoning is as common as it is convoluted.
Not good enough for bad tidings
Nevermind that earnings seasons should rarely be seen through the eyes of Alcoa. Alcoa’s beat – 7 cents versus a 6 cents consensus that had been chipped down in the prelude to the earnings, all on unimpressive revenues – was so technical in nature that it could hardly be termed good enough to bring about bad tidings such as higher interest rates.
Though the financials, up nearly 25% on the year and boasting a string of outperforming quarters, held steady in terms of stock performance during the week, the media, which frequently tends toward boosterism, instead stretched nerves thin. All Is Not Well for Citigroup, said Motley Fool. Not to be outdone, Seeking Alpha weighed in with 4 Reasons To Sell Bank of America Shares Before the July 17 Earnings Report.
There was positive coverage too, but some of it was faulty. JPMorgan a Favorite Ahead Of Financials’ Second Quarter Earnings, wrote Barron’s in an article that chronicled a Keefe, Bruyette & Woods analyst who reiterated an “outperform” on the stock.
His earnings estimate, however, stood at $1.36, one of the lowest on Wall Street and well below FactSet’s consensus view of $1.44. This is less an analyst “favorite” than the typical Wall Street tact of an analyst trying to have it both ways: If earnings exceed, he has it pegged as an outperform. If earnings lag, he is also correct.
The complex machinery
Beyond coy analysts, though, we need to see banks as the complex pieces of machinery they are – not harnessed to a mood set by false prophets such as Alcoa.
There are obviously myriad variables within the economy at large, what with $105 oil, China and emerging market trouble, and taper talk.Bernanke's most recent utterances seemed designed to tamp down worry about tapering, and Wall Street saw record highs again on Thursday following his remarks, though his larger strategy seems to be to send out mixed signals in order to let the market absorb the news of tapering slowly. One week the Federal Reserve seems to be leaning that way — the next week a bit of rowback. Again: unsettling.
Within the banking sphere itself there are also issues aplenty. Regulations and higher capital requirements, even the strange prospect of Wall Street scourge and disgraced governor Elliot Spitzer serving as New York City comptroller, all stand to influence the banks in a big way.
Regulatory risk also abounds. Democrats and Republicans hardly get together for anything, but they did on Thursday for what was probably a just-for-show introduction of legislation to break up megabanks, effectively selling them for parts. The 21st Century Glass-Steagall Act appears to stand little chance at passing, but there is no telling what might come in its stead. Its introduction is also indicative of a public environment that is, at best, highly unpredictable.
Moreover, for all their strength to date, the banks have not necessarily been trading in sync with the economy. Cost cutting and reserve releases have generally been determining factors in earnings. Dividends and buybacks have also drawn traders in droves, but will bank balance sheets allow the government to allow the financials to dole out even more?
The answer to that question is open-ended and definitely can’t be found in Alcoa’s earnings report.
And what of financials? Don’t fall for the temptation to see them as a stark block. Citigroup, for example, has a considerable portion of international exposure. If you are worried about developing-nation degradation, be particularly weary there. If liquidity is your worry, JP Morgan, in comparatively good shape in that regard, is probably your bank. Delinquency rates and foreclosures your pet peeve? Wells Fargo, expected by FactSet to earn 92 cents on $21.17 billion in revenue, should likely be your fave.
From reputation to exposure to regulation, regional banks – too often an afterthought in the public square and not automatically included in talk of financials – may seem more desirable than their bigger brethren. M&T Bank (MTB), First Niagara (FNFG) or Hudson City (HCBK) might be worth a look.
In the end, don’t sew up the banks simply. That’s the easy temptation and, in the wake of Alcoa’s earnings, the direction in which public opinion appears to be heading.
So skip that moment of prayer for financials, felled by Alcoa’s inverse impact. Engage, instead, in a moment of contemplation about each individual bank.
Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.