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Why Republicans should listen to Jamie Dimon: trader

When Jamie Dimon speaks, everyone listens

By David Nelson, CFA

Banks released their second round of earnings today, as Goldman Sachs (GS) and Bank of America (BAC) reported second quarter results. They largely echoed the first round of earnings released last Friday when JPMorgan (JPM) and Wells Fargo (WFC) reported. That day, the headline beat from came on the back of higher fees and lower credit costs. The shocker was a surprise lecture from JPM CEO Jamie Dimon, which is especially relevant today, as the Republicans’ vow to replace Obamacare hit a dead end, leaving only the repeal option on the table.

Jamie Dimon launched an all-out attack on Washington gridlock, incensed by the partisan divide he feels has held back the economy. He all but demanded Congress get to work and pass legislation that will lift the economy from a tepid 1.5% GDP that has lasted eight years.

Source: Bloomberg

In wasn’t that long ago that Dimon called the bottom in not just JPMorgan but also US markets. His purchase of $26.6 million in company shares in February of 2016 came on the heels of a long slide in financials (XLF) and a miserable start for the market that year. Investors who followed his call are up over 80% in the largest US banks and up 35% in the S&P 500 (^GSPC, SPY).

At the top of his list of concerns is corporate taxes, which he says (and I’m paraphrasing) are uncompetitive and a drag on the US economy. Both sides of the aisle will twist his speech to their advantage, but Jamie’s comments probably echo people in much of the country who believe Washington cares only about getting elected in a political back drop of “I win, you lose” politics.

Sitting back and watching the Washington circus is entertaining, but for investors, it’s time to get back to work and focus on second quarter earnings and what it implies about the look-forward to Q3 and beyond.

We won’t get fooled again

Earnings season can be an emotional time for investors, as stocks often make big moves in response to a positive or negative surprise. The initial stock performance is really a report card on just how good or bad analysts were at getting the number right. It will likely justify or not the recent price action, but it is the guidance that sets the stage for the look forward. Beware of back-end loaded calls where CEO’s give tepid guidance on the upcoming quarter, saying they’ll make it up in the back half of the year.

Despite the slight headline beat, analysts had it right on JPMorgan, as estimates barely budged following the call. While the stock traded down close to 3% intraday, it steadily climbed higher with the market toward day-end, which is probably a better tell as to institutional sentiment on the shares.

As a long-time portfolio manager, I try to never trade pre- and post-market. I prefer looking to square positions later in the day after emotions run their course. Given the run in the stock as well as financials as a sector, it’s not surprising some decided to take money off the table.

Often, initial price performance is an overreaction providing an opportunity for traders to get long or dump shares. Like most things in life, the devil is in the details, so always read the full release and examine the earnings call transcript before making a decision to buy or sell.

What to watch for this quarter

According to FactSet, earnings growth for the S&P 500 should come in just shy of 7%. It’s hard to believe that energy stocks (down over 12% year-to-date) are a big driver this quarter, but Wall Street pegs S&P earnings at only 4% without the sector.

Source: Bloomberg

Early in June, the OECD raised global growth forecasts, so maybe it isn’t surprising that Goldman Sachs’ (GS) strategy baskets, followed by many institutions, are being led by S&P 500 stocks with high international sales. Add the fact that the US dollar is approaching one-year lows, and you get a pretty good set-up for US multinationals. All eyes this week will be on names like Microsoft (MSFT), Honeywell (HON) and General Electric (GE). Investors will focus on sales overseas, looking for color surrounding the global economy and what it means for the rest of the year.

* At the time of this article some funds managed by David Nelson were long SPY.


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