The record high SPX can still be surpassed, but I think almost all the upside that we will see in this bull market has occurred already. I am cautious on 2019 outlook. If the S&P 500 is in the range of being up from 5% to 10%, I am neutral on stocks, says Don Kaufman.

The JP Morgan (JPM) conference call reported the trading division saw revenues increase 13% to $5.4 billion. The volatility in the market helped increase these revenues. It wasn’t a very volatile quarter, but last year’s trading was quiet, so there was an easy comparison.

Fixed income trading beat estimates by $320 million, coming in at $3.5 billion. Stock trading revenue beat by $300 million, coming in at $2 billion. Finally, investment banking revenue beat by $200 million, coming in at $1.9 billion.

Investors in JP Morgan must be asking what needs to be done to get the stock up since the results have been so good.

Part of this weakness is because of the yield curve. Another reason for weakness in the sector is weak loan growth. Q2 GDP growth might be near 4% which implies strong loan growth. However, JP Morgan’s loans were only up 4% to $948.4 billion, beating estimates for $944.5 billion. JP Morgan is taking share in most businesses which means loan growth should be amazing. However, there’s not much the company can do if that’s what the economy is demanding.

Another weak area in the traditional bank part of the business is yield on interest earning assets. The yield was 2.46% which met estimates and was down 2 basis points from last quarter.

Finally, the credit card division took a $330 million charge because customers took advantage of card rewards quicker than expected. Even though JP Morgan is the best well-run major bank and trading profits were up, it can’t fight the fact that the curve is flattening, and loan demand is weak. Bank profits are near their peak.

The great thing about JP Morgan’s stock is its 3.01% dividend which is higher than the other major banks. It’s the best of breed.

Citigroup reports weak earnings

Citigroup’s earnings were the “bad” part of the good, the bad, and the ugly trio of big bank earnings reports on Friday. Citigroup (C) beat EPS estimates for $1.56 as it reported EPS of $1.63. Revenues missed estimates coming in at $18.469 billion, below the consensus for $18.512 billion. Citigroup’s stock fell 2.2% on Friday after this poor report. At $67, the stock is very close to its 52-week low which is $64.38. Furthermore, it is 16.33% below its January 26 peak.

There’s not much to like about this quarter. Deposits were $996.7 billion which missed estimates for $1.009 trillion. Fixed income trading revenue was $3.08 billion which missed estimates for $3.11 billion. Equities trading revenue was $864 million which missed estimates for $1.1 billion. I won’t include the quote from CEO Michael Corbat. It’s not surprising that he’s optimistic and highlighted the positives, but the weak results differ strongly. I do not see the stock breaking its January 26 high in the next three months.

Sales from consumer banking were up 2% to $8.25 billion and sales to institutional clients were up 3% to $9.691 billion. Net income was up 16% to $4.49 billion which was driven by the decline its effective tax rate from 24% to 32%. Citigroup’s loan growth was 4% (5% excluding forex). It’s easy to avoid this name as the dividend yield is only 1.91%.

Wells Fargo reports another bad quarter

Wells Fargo’s quarter was the ugly one in the good, the bad, the ugly trio. Wells Fargo (WFC) is still reeling from the scandal where it opened fake accounts for customers. It’s not easy to shake off this issue when it’s very easy for customers to avoid the bank and go to JP Morgan.

This scandal won’t come close to putting the firm out of business, but it will prevent it from hitting a new record high anytime soon. The stock was down 1.2% on Friday and is down 16.03% from its record high on January 26.

Excluding one-time expenses, GAAP EPS was $1.08 which missed estimates by 4 cents. It was the only one in the trio to miss on EPS.

It has been very rare for firms to miss on EPS this quarter. Revenue also missed estimates coming in at $21.55 billion; Wall Street expected $21.677 billion. Net income even missed estimates, coming in at $5.19 billion as Wall Street expected $5.47 billion.

Community banking revenue was down 1.2% to $11.8 billion and profits were down 9.7% because of a state income tax charge. Corporate and wholesale banking revenues were down 3.8% and profits were down 3.9%. Wealth management revenue was down 6.5% and profits were down 37% because of an impairment charge.

Wells Fargo is a Strong Sell as it should underperform its peers based on these results. It has been two years since the lending scandal, yet in continues to underperform.

If the advertisements where the company admits it made a mistake and want to change aren’t working, then I don’t see how its public image will improve anytime soon. It’s possible that those ads are only reminding customers about the banks’ mistakes and spreading awareness about the error to those who never heard about the story. Personally, if Wells Fargo offered me a good rate on a loan or gave me some other good deal, I wouldn’t hesitate to do business with the firm. I just wouldn’t buy the stock.


The banks aren’t doing well, and their equity performance reflects this. The Bank of America (BAC) earnings report on Monday will probably show the same trends. I don’t think the Financial Select Sector SPDR ETF (XLF) will reach the high seen in January ever again in this cycle.

That doesn’t mean the S&P 500 (SPX) is an automatic sell. Tech stocks and consumer discretionary names will need to do the heavy lifting to push the index up.

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View a brief video interview with Don Kaufman on volatility for traders and investors here

Recorded at TradersExpo New York Feb. 25, 2018
Duration: 2:34.