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Earnings from financials lead the market modestly lower–more of the same from the sector tomorrow?

posted on January 16, 2014 at 7:37 pm
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Not surprising that the financial sector led the U.S. market down today. The Standard & Poor’s 500 stock index closed down 0.13% on January 16 as the Financial Select Sector SPDR (XLF) dropped 0.63%.

Today’s villain was a big miss by Citigroup (C) before the open. Tomorrow doesn’t look a whole lot better for the sector because, after the close on January 16, American Express (AXP), Capital One (COF), and Sallie Mae (SLM) all reported significant earnings misses. American Express came in with fourth quarter earnings of $1.21 a share versus a consensus projection of $1.25. Capital One reported $1.45 a share instead of $1.57. And student loan company Sallie Mae announced 61 cents a share versus the analyst consensus of 73 cents a share.

The three stocks were down 0.14%, 2.21%, and 5.08% in after-hours trading

American Express was the victim of expectations that were a bit too heady. The company just about matched Wall Street’s projected revenue number at $8.54 billion (just shy of consensus at $8.55 billion) and came in just a few pennies short on earnings per share despite solid cuts to operating expenses (down 8%), an increase of 8% in spending by card members, and a drop in reserves for loan losses of 17% from the fourth quarter of 2012. Wall Street wanted more after the 59.3% return for the stock in 2013.

On the other hand, Capital One reported the kind of bad news we’ve heard from banks such as JPMorgan Chase (JPM) and Citigroup (C). Revenue dropped 1.4% from the fourth quarter of 2012. Loan growth was worse than piddling with auto loans falling by 3% and home loans declining by 4%. Net interest margins declined 16 basis points and provision for credit losses increased 13%.

These results, unfortunately for the sector, echoed Citigroup’s earnings report before the open today. The bank reported 85 cents a share in earnings when Wall Street was looking for 99 cents (or 95 cents depending on what consensus counter you follow.) The culprits were weaker than expected revenue, higher than expected provisions for loan losses, and greater than expected expenses. (Citigroup is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

The good news for the sector and the market is that tomorrow’s financial reporting from banks is dominated by regionals and that group has been doing better than the big money center banks. For example, PNC Financial Services (PNC), which reported today January 16, beat the consensus earnings estimate of $1.63 by 22 cents a share. Revenue also came in higher than expected at $4.07 billion versus the consensus of $3.83 billion.

“Better” is a relative term, of course. Things are tough even for the regionals. Loans at PNC, for example, grew by just 1% in the quarter. And the bank did tell Wall Street to expect that revenue for the 2014 fiscal year would be lower than in fiscal 2013.

Tomorrow’s financial service sector reports include regionals Sun Trust Bank (STI) and Comerica (CMA) plus Wall Street’s Morgan Stanley (MS).

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund, see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

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One comment

  • dxia on 17 January 2014

    Bad! This is the only word that can be used to describe the earning reports we’ve seen so far. However, market is always forward looking. So never ignore the forward guidance. It could be volatile in the coming sessions. Get ready for it!

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