The covert bailout of JP Morgan continues unabated along with those of Fannie Mae, Freddie Mac and the rest of the financial sector. Naturally, this is all cloaked under the fog of Morgan’s second quarter 2008 earnings report.
After carefully releasing estimates to analysts, the bank easily outpaced those expectations this morning. The financial media would have investors believe this is responsible for today’s rise in the stock and the overall sector.
JPMorgan posted a 53% plunge in second-quarter net income Thursday morning. Credit-loss provisions more than doubled, and its investment bank cut the value of leveraged-loan and mortgage-related securities by an additional $1.1 billion.
However, JPMorgan’s earnings per share, at 54 cents, beat analysts’ average expectations of 44 cents, as calculated by Thomson Reuters. Revenue of $18.4 billion for the quarter exceeded expectations of $16.55 billion. JPMorgan’s stock was up 10% in morning trading.
The jump in the share prices of JPMorgan Chase and other bank stocks was likely a reaction to “the lack of doomsday outcomes,” David Trone, an analyst with Fox-Pitt Kelton Cochran Caronia Waller wrote in a research report. But he warned, “we remain somewhat cautious about calms before storms, as consumer and commercial losses will likely increase into early 2009, if not longer.”
Not likely at all David! The jump in the share prices of JPMorgan Chase and other bank stocks was likely a reaction to the SEC’s restrictions of short selling on all but two stocks in the sector and the socialization of Fannie Mae and Freddie Mac, the sector’s favorite toxic mortgage dumping grounds.
I have news for Bernanke and the SEC. This won’t work. China had short sale restrictions on and it did not stop the Shanghai index from falling over 50%. Insolvency cannot be cured by short sale restrictions and many of those companies are insolvent.
If you really think Morgan has turned the corner, just consider the things that have to happen before the bottom can be called. These things are begging to happen, to JPMorgan.
J.P. Morgan Chase said on Thursday that losses on its $47 billion portfolio of prime mortgages could triple in coming quarters because of the slump in house prices in previously hot markets such as California, Florida and Arizona.
A complete freeze on short sales won’t save The House of Morgan when those PRIME loans begin to default. Todays stock spike was pure short covering. Once the market sees the implosions in Morgan’s prime mortgage, commercial real estate and credit card portfolios, it will take more than an act of Congress to stop the sacrifices of first-born sons that it will take to bring new longs into the stock.
When all the hype is finally spun, the only thing share holders will have is a precious 53 percent cliff dive in second-quarter net income; loan loss provisions of $3.5B that have more than doubled over the last year; a return on equity crashing to 6 percent from 14 percent a year ago; and the certain knowledge that a lot more went wrong in the quarter than went right.
Don’t get your hopes up. The company can’t rely on the broader economy to save it either:
- Investment banking swung to a $785 million loss, dropping 67 percent after it wrote down $1.1 billion in unsold buyout loans and complex mortgage related securities. Trading revenue was weak in both the equities and fixed-income divisions.
- Chase Card Services, the bank’s big credit card arm, saw second-quarter profit fall 67 percent, to a $509 million loss as charge-offs continued rising. Its loss rate climbed to about 5 percent in the second quarter.
- Chase Retail Services, the bank’s consumer unit, reported a $179 million loss after a 23 percent drop in profit. The division was mired by losses on home equity loans as well as mortgages as more borrowers stopped making their monthly payments.
- The asset management division booked a $395 million profit, down 20 percent from last year, despite a influx of new money. Revenue of $2.1 billion was down 3 percent because of lower performance fees.
and let’s not overlook this:
Chase’s auto finance arm also had higher loan losses, as more consumers find their budgets stretched by higher gas and food prices.
The reality is that JPMorgan would not exist today if not for the fraudulent Federal Reserve-engineered bail out of Morgan last March by guaranteeing $29B disguised as a loan to facilitate the buyout of Bear Stearns. The fact that the bank was bailed out once and its CEO is a FED board member are the only points insuring the company’s future.
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