Jamie Dimon didn't become the Prince of Wall Street just because of his tough guy charisma. Since he was named CEO, JPMorgan Chase (JPM) has never posted a losing quarter. For seven full years and the first two quarters of 2013 Dimon managed to navigate the jumbo bank through the financial meltdown, Great Recession and even the London whale crisis and never posted a quarterly loss.
Dimon and JPMorgan's 30 quarter winning streak came to an end this morning when the bank reported a surprise loss of 17-cents per share on revenues of $23.9 billion. According to Bloomberg, analysts had been expecting the bank to earn $1.28 per share on $24 billion in revenue.
The loss came with an asterisk. Apologists were quick to dismiss legal costs of $7.2 billion (after tax). Not counting those expenses and certain reserve releases, JPMorgan would have earned $1.42 a share. With JPMorgan reportedly on the hook for at least another $11 billion in fines this quarter, after they already racked up an estimated $27 billion in fines and fees over the last few years, the practice of calling these outlays "one-time charges" is a ludicrous exercise in semantics.
On the other side of the country Wells Fargo (WFC) reported earnings of 99-cents on $20.5 billion in revenue. The bank's outlook for the current quarter may or may not be impacted by NY suing Wells for "flouting" the terms of a prior settlement. Wells Fargo controls as much as 1/3 of the U.S. mortgage market making it a likely target for endless litigation. To combat these fees, the bank announced in March that it would dramatically expand its in-house legal team.,
Trader David Lutz, Head of ETF trading at Stifel Nicolaus, says investors aren't oblivious to the litigation issues, regardless of how the banks spin the story. Noting that JPMorgan and Wells are just two of the financial stocks underperforming over the last three months, Lutz says investor sentiment is being hit by the endless waves of litigation."The problem is it seems that every time they put out one legal fire another starts to erupt," Lutz notes in the attached video. "Given the fact that Wells Fargo is 35% of the overall U.S. mortgage market, you know there's going to be a fair amount of litigation they're going to have to deal with."
Even without the legal problems the banks are vulnerable to a flattening of the legal curve if and when the Fed ever gets around to letting short-term rates rise to a natural level.
With their sheer size and endless crosscurrents, companies like Wells Fargo and JPMorgan can report almost anything they want from quarter to quarter. As investments they are driven by economic factors and sentiment, neither of which is on their side at the moment. The sector may be set to outperform after months of marking time, but there are plenty of appealing sectors without the legal and cultural overhang.
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