Yesterday’s second quarter earnings report from JPMorgan Chase (JPM) raised concern among investors. The bank reported falling revenue—just 6% it’s true—in its investment banking business. That seemed to confirm concerns that the Wall Street side—investment banking, trading, and the like—of the big banks was slowing.
But today’s earnings reports from Bank of America (BAC) and Citigroup (C) have escalated that concern to at least worry and maybe all the way to fear.
The banks didn’t just show the same revenue problems on the Wall Street side of their business, although that was bad enough. Bank of America, for example showed lower revenue in the second quarter from its trading unit, and Citigroup attributed its decline in second quarter revenue and net income from first quarter levels to lower revenue from parts of its investment banking and trading businesses.
No, the real problem was that both banks showed a decline in loan demand, a big enough decline that their loan portfolios contracted in the quarter.
You don’t get shrinking loan demand in a healthy economy. Consumers and businesses are sitting on the cash they have and not borrowing more because they’re afraid that the U.S. economy is going to slow.
It’s that negative read on the U.S. economy from earnings at these two banks that has sent stocks into a tailspin today. (It doesn’t help that it’s a Friday and no one wants to be long over the weekend.)
Total loans at Bank of America fell 2% in the quarter from levels in the first quarter. That resulted in a 6.2% drop in interest income at the largest U.S. lender.
At Citigroup, the country’s third largest lender, loans fell even more, declining by 4%. That took interest income down 3.6%.
The two banks have led the stock market downward today. As of 2 p.m. New York time Citigroup shares were down 4.8% and shares of Bank of America had dropped 8.6%. The Dow Jones Industrial Average was down 2.2% and the Standard & Poor’s 500 was down 2.5% at that time.
Congratulations guys for your gains! But on to the topic. I had 80K in credit card debt a year ago [ not bragging ], paid down half since then. Problem as I see it is, as I pay down debt, the card companys lower my credit limit, thus FICO scores do not improve, sometimes even get worse. Consumers have been denied credit so consistently we no longer bother trying. Demand is there, it just needs to be opened up. How are they not making money on almost 30% rates?
Perhaps many of their (former) customers so loathe the bail-out that they decided not to do business with the poster-boys of TARP. I know that people are choosing to buy Ford over GM because they didn’t take our money. No surprise if that shows up on their bottom-line.
Fact- Bernake knows full well the Japanese story and will attempt to avoid it. Jobs is the key for almost everything as people who have jobs can buy millions of foreclosed houses and the banks will lend. It’s the uncertainty that has made business and Banks unwilling to invest and borrow and lend.
Confidence in the future will alleviate all these problems. Japanese correctly saw no future in their demographic,economic and political future and have stayed mired for 24 years as DEADBEATS! What we perceive will shape us in the years ahead with the banks and economy
Please note that it is a fall in loans made,not in loan demand. Banks did not report how many loans werer turned down, but how many they made. Thus, the problem might not be businesses are unwilling to borrow,but rather that banks are unwilling to lend. Being a bankruptcy and commercial lawyer for large companies, I am fairly certain that the “problem” is what is has been in my 30 plus years of practice. Baks go through the same cycle.To boost profits,they over lend,i.e. to borrows who are too large a risk, then they overcompensate by not lending to borrowers who are reasonable risks, and even to borrowerswho are truely AAA.
off subject perhaps; but i was looking today to the Euro and US$ and it looks like the Euro is strengthening again.
should’d this encourage exports (with a cheaper dollar) But everyone is brushing this as a side story. i do realize the impotence of the BOA number and the indications but many other companies operate internationally like Intel which lost all its gains from a very good results.
Great job DJ and STL. It is exciting to watch a fellow Jubak follower do well. Kudos. Have a great weekend.
DJ and Seaturtle,
Congrats on your gains and thanks for sharing!!
guess that’s the dow 1000 I’ve been reading about
DJBarber…
Thanks for sharing your success with us! I didn’t realize that I was hanging out here with the BIG boys! I did basically the same as you but with miniscule amounts. Sold 4 stocks early Monday morning for a net gain of $1400. Now where is Ed to help me figure out the % profit???
marr.bo…you are correct about the gambling part but I sure wanted to get out of the “red” bad enough to take that chance! 🙂
I agree. I had no intention of this being a short term trade.
I merely managed to pick a short term bottom, and get out with a profit, quite unusual for me.
What I wanted to do was pick a good entry and hold these for 12 -18 months.
You don’t read Jim Jubak if you hope to become a successful short term or day trader.
As Jim says…
“Buy and hold? Not really. Short-term trading? Not by a long shot. I try to go with the market’s momentum when the trend is strong and the risk isn’t too high, and I go against the herd when the bulls have turned piggy and the bears have lost all perspective.”
Only in this case, I believed that the bears had overdone themselves…. When they proved they still had more room to run, I hightailed it out of there just as fast as I could….
I may be dumb, but I’m not stupid…..
Deflation, deflation. Lack of jobs and people taking jobs that paid them less, coupled with housing problems means a lot less money to spend. Kind of a bad circle.
I’d love to see some inflation (3%+) but I don’t see it happening in the US for quite some time.
I completely disagree with you Ed, DJB, and creative. As I’ve said before, efficient economic theory shows short term trading (on the order of days or less that we’re discussing here) on anythnig other than fixed income is literally nothing more than gambling. Multiple studies have shown even experts can’t beat chance in the short term.
So my compliments to you on being on the right side of the coin flip this time, DJB.
DJBarber,
Kudos on your recent trading gains. What you call “blind freaking luck” is really adhering to the classic axiom “Buy low, Sell high”. It’s simple logic but oh so hard to do in practice (because ‘low’ and ‘high’ are so very relative). It’s also hard to do because it requires a good measure of “blind courage” to buck the trend. So, well done!
Also, thanks for your candid listing of your trades, although it wasn’t necessary on your part.
Amazing how low-level a discussion can be.. how about, instead, addressing the “Maestro latest lecture”?
I start by saying that “sitting on a pile of money” nation-wide smells like deflation to me. Isn’t that what the Japanese have been doing the last 15years or so?
In case it wasnt clear: when I said
“Two things went into these trades:
1.) An incredible ability to pick the correct stocks (90% of the process, that’s why I read Jim.)
I meant Jim’s incredible ability, not mine.
Fitch predict near-term base metals downside, but sector outlook stable:
http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=108063&sn=Detail&pid=102055
We can trace this back into the M3 contraction we were seeing a few months ago.
Ed been looking into your thoughts on shorting commodities…. Looks like a great play if you betting on developed, but I think developing will lend some support here…..
Jim,
I’m questioning why the loan demand is following. I think if we look at borrowing costs (plus the fact business can not get loans) we can see the reason.
Did your fall include small businesses loans? I think we are seeing the same things in consumer spending as well. People know the can’t get credit so they are not even trying. We are back to square one with the lending… The fed’s spending has been only thing to keep things moving. I think that is why you are seeing growth in manufacturing but other areas are struggling……
Still a banking crisis…. Just another stage because of the knee-jerk tightening. Hope your business is spinning off a lot of cash right now…..
Two things went into these trades:
1.) An incredible ability to pick the correct stocks (90% of the process, that’s why I read Jim.)
2.) Blind freaking luck (10% of the process, all my own.)
When the market went down so much on the 1st and 2nd, usually I run for the hills. This time I sucked it up and bought. (That’s the blind freaking luck portion…)
mopama-
Thanks for that… If drogala2 would have read the entire post he would have seen exactly my abilities of calling the right market moves (Lousy)…
The market sure didn’t go down the 80 points that I thought it would in the last 1/2 hour, and that tells you how accurate I am…
And I certainly don’t try to time the market, I am with Jim on that one, I am luck if I can tell the right time in my house (6 clocks all telling a different time) let alone the stock market (But I do know when I am comfortable and not comfortable with a market….)
And I am happy getting in and out when I notice one of the two, not sure if that makes me a market timer, or just skittish…
Drogala2 – at your request (From my e-trade account)
Theses trades were made in two of several E-trade accounts here is the 1st:
Date
Type
View Description Categories (hide)
Amount ($)
07/15/10 Sold 5,000 of FSUMF @ $3.60 (Order #4096)
17,992.70
07/15/10 Sold 3,500 of FSUMF @ $3.56 (Order #4100)
12,452.79
07/15/10 Sold 1,500 of FSUMF @ $3.60 (Order #4097)
5,392.91
07/15/10 Sold 1,600 of CEDC @ $24.6704 (Order #4103)
39,464.98
07/15/10 Sold 200 of CEDC @ $24.67 (Order #4102)
4,926.92
07/15/10 Bought 1,800 of CEDC @ $24.4696 (Order #4101)
-44,052.27
07/02/10 Bought 5,000 of FSUMF @ $3.47
-17,356.99
07/02/10 Bought 5,000 of FSUMF @ $3.47 (Order #4076)
-17,356.99
This is the second:
Date
Type
Description Categories (hide)
Amount ($)
07/14/10 Sold 490 of BRF @ $46.1506 (Order #273)
22,606.41
07/14/10 Sold 1,000 of CEDC @ $25.42 (Order #276)
25,412.58
07/02/10 Bought 490 of BRF @ $44.18 (Order #265)
-21,655.19
07/02/10 Bought 500 of CEDC @ $21.67 (Order #263)
-10,835.00
07/02/10 Bought 200 of CEDC @ $21.66
-4,332.00
07/02/10 Bought 200 of CEDC @ $21.64 (Order #262)
-4,334.99
07/02/10 Bought 100 of CEDC @ $21.655 (Order #263)
-2,172.49
______________________________________
Can’t do anything about the formatting, you can cut and paste in excel if you can’t read it…
As I said, 14 days, $6413.00 profit or about 7% of these two accounts.
drogala2,
Allow DJ his moment in the sun. Frankly, I am proud of him. Market timing is tough, but very satisfying when it’s done correctly.
Kudos DJ!
If you have a broker, here’s the best way to time the market. When he calls me to buy something, I not only don’t buy what he’s selling, I know it’s time to take other positions off the table. And when he doesn’t call for a while, I know it’s time to call him to buy. Sounds rediculous, but it’s been working for the last 8 years or so :-). I’ve nicknamed his phone call, “broker’s name bear market signal.”
The stress is on all of us. In these crazy times we all lose, it just varies on how much. Thank you for Jubak style of calm, deliberate, keep working, place safe investing to help me keep me cut my loss . Thanks again Jim! Ditto on PEACE!!
Timing is a fool’s game. Get out early, get back in late…that’s what J.P. Morgan did.
@ drogala2
It seems to me that you have not followed DJB. If you had, you wouldn’t react like you did. DJB have followed (like many others here) Mr. Jubak for as long we can’t remember. Probably for DJB this was one of the few times when he applied ALL the WISDOM he had gathered from Mr. Jubak making his own mind and, sure, I understand he was very proud of himself because of the success. What is wrong with that? PEACE!
Next thing we know the market will be up 500 points on Monday, and DJBarber’s post will be “boy glad I went all in at 2:59 PM on Friday”
DJBarber, it’s quite easy for anyone to say they sold just in time, if you’re such a great market timer why aren’t you a multi-millionaire with your own website? Go sign up at covestor, or stocktwits and show us your real-time trades so their is actually some credibility to your claims. I love how everyone on forums appears to be the greatest market timer in history…
7.2 % is closer to the mark…..
Sure glad I sold everything starting Wednesday and finished Thursday…
Sold my cedc, brf and fsumf. Held them for 14 days, made 9%.
Going out on a limb here (Just for kicks…) but
I think today we end below 10K again… That is another 80 points down in next 34 minutes… No last minute rally…
You don’t say!…