MarketView for October 13

 

 

Summary

 

There was a bit of a pull back on with regard to both the Dow Jones Industrial Average and the S&P 500 indexes on Thursday after JPMorgan's earnings and China's soft trade data once again revived worries about the impact of slower growth on profits. The declines put an end to three straight days of gains that capped off a 12 percent increase in the S&P 500 since hitting a low on October 4. The Nasdaq stayed in positive territory, helped by semiconductor shares.

 

The small retrenchment we saw on Thursday would be in keeping with normal market activity,  given the S&P 500's recent advance. The benchmark S&P 500 has had its largest seven-day rise since March 2009 on growing optimism that European leaders will find a way to contain the region's debt problems.

 

JPMorgan Chase, the second-largest domestic bank, closed down 4.8 percent to $31.60 making it the largest drag on the Dow after the bank reported a drop in its third-quarter net profit. JPMorgan indicated that its earnings were lower as a result of the European debt crisis that sent its investment banking clients to the sidelines.

 

After the bell, shares of Google rose 6 percent to $592.43 on news that the company’s reported revenue exceeded Street expectations.

 

China's trade surplus narrowed for a second straight month in September as both imports and exports were lower than expected, pointing to cooling domestic and global economic demand.

 

Meanwhile, the Labor Department reported that new claims for jobless benefits were little changed last week and the trade deficit narrowed marginally in August, indicating a modest improvement in the economy.

 

Vertex Pharmaceuticals rose 9.1 percent to $43.88 after IMS Health said it was revising estimates of the number of prescriptions written in late September for Vertex's hepatitis C drug.

 

About 7 billion shares changed hands on the major equity exchanges on Thursday, a number that was well below the year's daily average of about 8 billion shares.

 

Economic Data Shows Improvement

 

The number of new claims for unemployment benefits was steady last week and the trade deficit narrowed slightly in August, indicating a mild improvement in the economy. According to a report by the Labor Department released Thursday morning, initial claims for state unemployment benefits dipped 1,000 to a seasonally adjusted 404,000.

 

A separate report from the Commerce Department on the trade balance confirmed the economy avoided a recession in the third quarter, with the growth pace expected to have accelerated from the April-June period's anemic 1.3 percent rate.

 

Reports ranging from manufacturing to employment suggest the economy continues to plod along, but Europe's inability to get to grips with its debt crisis poses a threat and analysts warn it could drag the United States into a new recession.

 

While payrolls last month were lifted by the return of 45,000 Verizon Communications workers, key measures of labor market health showed some improvement.

 

The good news was that our trade deficit edged down to $45.61 billion in August from $45.63 billion the prior month. Economists said trade could add as much 0.4 percentage point to third-quarter gross domestic product.

 

Estimates for third-quarter growth range between 1.5 percent and 2.5 percent. Weak growth has left the Federal Reserve searching for more ways to boost output, having already cut overnight lending rates to near zero and pumped more than $2 trillion into the economy.

 

Trade supported growth in the second quarter and the Obama administration wants exports to play a central role in the economy, but China's currency policy is seen as an obstacle. Meanwhile, the trade report showed the trade gap with China widened to a record high $29.0 billion in August, which could hand Congress ammunition as it considers legislation to penalize China for its trade and currency practices.

 

The Senate this week approved a controversial bill aimed at forcing China to raise the value of the yuan in an effort to save American jobs, sending it to the House of Representatives where its fate is uncertain.

 

Boosting exports would help to address the stubbornly weak labor market, which has kept the unemployment rate at 9.1 percent for three straight months.

 

Meanwhile, there is reason to be somewhat optimistic that job creation will gather momentum, pointing to the moderation in layoffs. Initial jobless claims have circled around the 400,000 mark usually associated with some improvement in the jobs market for three weeks. In addition, the four-week moving average, considered a better measure of labor market trends, fell 7,000 to 408,000 last week.

 

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 55,000 to 3.67 million in the week ended October 1.

 

Earnings Down at JP Morgan Chase

 

JPMorgan Chase saw its quarterly earnings fall 25 percent, excluding an accounting gain, as the European debt crisis pushed investment banking clients to the sidelines.

 

The results are the first for the third quarter from a major domestic bank and underscore how market turmoil has clobbered underwriting and merger advisory fees. JPMorgan shares were down 5.5 percent in midday trading Thursday, pulling down other big bank stocks.

 

JPMorgan Chief Executive Jamie Dimon said the company will cut 1,000 jobs in its investment bank over the next 18 months. Banks globally are laying off staff as new regulations squeeze potential profits and as stock and corporate credit markets weaken. But Dimon said JPMorgan's cuts are mainly due to increased use of automation.

 

The bank did post 1 percent loan growth, which Dimon said was a positive for the economy. The bank's return on equity, a measure of profitability, was 9 percent, close to the 10 percent that some analysts view as a likely long-term average for major banks under new regulations and capital rules.

 

JPMorgan posted quarterly earnings of $4.3 billion, or $1.02 per share, down from $4.4 billion, or $1.01 per share, in the same quarter last year.

 

The results were muddied by adjustments for the market value of the bank's debt, which gave it a $1.9 billion pre-tax gain. When the bank's debt weakens relative to U.S. Treasuries, it can record an accounting gain because it could profit from buying back debt.

 

Despite the weak environment in investment banking, JPMorgan bought back $4.4 billion of stock during the quarter, and its diluted outstanding shares fell about 3 percent. At the same time, Dimon has complained publicly and in private meetings with regulators that capital surcharges for the biggest banks are unfair and will stymie lending and economic growth.

 

JPMorgan took a valuation adjustment for its widening bond spreads that amounted to 29 cents a share after taxes in the third quarter, it said. Given the company's share count, that amounts to $1.1 billion. Stripping out that figure from the quarterly earnings shows a profit decline of 25 percent from a year earlier.

 

Further complicating the calculation, the bank generated losses from this same item in last year's third quarter.

 

The third quarter was rough for investment banks, as the U.S. stock market, as measured by the S&P 500 index, dropped 14 percent. Investment-grade corporate bond spreads widened by more than 50 percent, according to Bank of America Merrill Lynch indexes, an eye-popping move.

 

With markets gyrating that much, many companies are reluctant to acquire rivals or issue securities. JPMorgan said its fees for underwriting and merger advisory were down 31 percent from a year earlier to $1 billion in the quarter. Revenue from stock and bond trading was down 14 percent, not counting the accounting gain.

 

"Obviously, the worse Europe gets, the worse it is for us, but we think it is something we can handle, just like we handled 2008," Dimon said.

 

Staffing in the investment bank fell to 26,615 in the quarter from 27,716 in the second quarter. Dimon said many of the coming job cuts in the investment bank would be from attrition.

 

The bank reported a private equity loss of $347 million during the quarter, compared with net income of $344 million a year earlier, and $1 billion of litigation expense, mainly for mortgage-related items, down from $1.3 billion last year.