JPMorgan Still a Buy
The market recorded another gain yesterday as the indices continued to consolidate after the big open to start the week. Volume levels eased a bit over the past few sessions, but low volume is expected during a consolidation phase. The SPX has gone higher for eight of the past 10 days, and I would expect more consolidation will be needed for the bulls to overtake 1301 lateral resistance.
In addition to the gains in the major indices, financials once again moved higher yesterday. The index was up only 0.4%, but that still managed to outpace most other sectors. Financials are already up almost 10% for the year , but they too are up against a heavy resistance level.
Additionally, JPMorgan (NYSE: JPM) reported financial results today. JPMorgan is the second biggest U.S. bank based on a market cap of $140 billion. Wells Fargo (NYSE: WFC) is the first at $156 billion and Citigroup (NYSE: C) a distant third at $92 billion.
When the second biggest bank talks, investors listen. And before the market opened, JPMorgan reported its fourth quarter results. It will take some time to cull through the results, but that data disappointed. And shares of JPM immediately pushed down by 4%.
JPMorgan reported EPS of $0.90 for the quarter from net income of $3.7 billion, which is down from $4.8 billion or $1.12 per share in the same quarter last year. Despite the huge decline from 2010, most analysts expected net income to decline. But analysts were more optimistic about revenues and JPMorgan missed those estimates by $1 billion and reported $22 billion.
Although the bank missed estimates, it maintained a solid balance sheet and has a Basel I tier one ratio of 10% and Basel III tier one ratio of 7.9%. The high ratio allowed JPMorgan to repurchase nearly $1 billion of its stock last quarter and maintain its dividend. Additionally, deposits increased 21% to $1.1 trillion.
Even though JPMorgan did not meet analysts' estimates, the bank is healthy. And while shares may decline today and into next week, I tend to doubt that these numbers will keep the stock depressed for any extended time.
Of course, Wells and Citi report next week. And if they too miss estimates then the market may be headed for a more prolonged decline. But as for today, I view any weakness as another opportunity to buy and part of a decline (consolidation) that I expect will take SPX back to at least 1280, likely 1250 again before the index challenges resistance at 1301.
Where do you think big bank stocks like Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) are headed next year? Please drop me a line sometime today at marketforecast@wyattresearch.com.
