Sell JPMorgan Chase (JPM)

Bank stocks look cheap on a historical basis. Unless, of course, revenue and earnings growth have ground to a halt in the sector. That, unfortunately, is exactly what happened last quarter as loan demand grew not at all at most banks and earnings improvements came pretty much solely from the reduction of reserves against bad loans. And it’s an increasingly consensus view of what banks will report for the second quarter too.

I think we’re seeing a shift in investor attitudes from optimism at the improvement in earnings from improving bank reserves against bad loans to dismay at a lack of revenue and earnings growth from traditional bank businesses. Partly that’s a result of reports that show a slowing in the U.S. economy—bank revenues would be hit by any slowing in economic activity. And partly it’s a worry about changes to U.S. and international banking regulations that promise to cut the revenue that banks can make from things like debit card transactions (which could go into effect as early as July 21 or suffer a six-month delay according to proposed Senate legislation) and that threaten to raise capital requirements so that the biggest banks have to keep more cash on hand. (The Fed is arguing for a 3 percentage point extra reserve requirement for the biggest banks.)

Take a look at JPMorgan Chase (JPM). In the long-term I think this is one of the best growth stories in the U.S. big bank sector. The bank took relatively little damage from the global financial crisis and that has given it the ability to expand into new markets—Asia for example—while competitors are still struggling to clean up their balance sheets.

From that long-term perspective the bank’s current price-to-earnings ratio of just 8.8 on trailing 12-month earnings looks very cheap.

From a near-term perspective of say, 2011 and into 2012, the P/E ratio may be about right, however. Read more

I’m suggesting that you think about lightening up on your exposure to financials. I don’t think you need to sell all your bank stocks, but the sector is showing signs of breaking down with another 10% drop in the cards. The sector showed a decent little bounce yesterday on JPMorgan Chase (JPM) CEO Jamie Dimon’s presentation at the company’s shareholder meeting, but it’s back on the downside again today.

The question is not just whether to sell, but also what to sell. Today I’m selling Citigroup (C) out of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/

Another 10% correction in this sector isn’t so big a correction that investors can’t sit still through it. But what troubles me is the good possibility that some of the biggest names in this sector aren’t going much of anywhere very quickly when the correction is over. Read more

Tomorrow’s Bank of America earnings release spooks bank stocks today

Be afraid. Be very afraid.

Of Bank of America’s (BAC) earnings report for the first quarter of 2011 scheduled for release tomorrow, April 15, before the market opens in New York.

Worries about what the bank will say tomorrow are, in my opinion, what sent bank stocks down in today’s session. Today JPMorgan Chase (JPM) dropped 2.8%. Wells Fargo (WFC) fell 1.7%. And Bank of America itself was down 1.1%.

Wall Street analysts are expecting the bank to report net income of $2.87 billion for the quarter. That would be up very slightly from the $2.83 billion in net income in the first quarter of 2010.

I think, as with JPMorgan Chase, that Bank of America could actually beat on the earnings line thanks to the release of reserves against bad loans.

But the likelihood is that the revenue line will be ugly. Really ugly. Read more

Update JPMorgan Chase (JPM)

So how did investors react to getting their hopes and fears confirmed by JPMorgan Chase’s (JPM) first quarter earnings, reported before the market open in New York on April 13?

Not all that well, it turns out. The stock was down nine cents a share the day of the earnings announcement but is down almost 2.3% for the day as I post this on April 14.

The bank, the second largest in the United States by assets, reported earnings of $1.28 a share for the first quarter. That was an increase of 73% from the first quarter of 2010 and 12 cents a share better than Wall Street had projected. Wall Street had been expecting an increase in earnings on lower levels of reserves against bad debt and that’s exactly what it got on the bottom line.

On the other hand, revenue fell 8.5% from the first quarter of 2010 to $25.79 billion. That was slightly above the $25.27 billion in revenue projected by Wall Street analysts. Wall Street had been expecting a drop in revenue on weakness in the investment banking and trading units.

Initially, if I can judge from pre-market open trading, investors seem inclined to buy based on the earnings numbers, figuring, I suspect, that earnings will climb even more once revenue starts to grow again. Read more

Update JPMorgan Chase (JPM)

“We lose money on every sale but make it up on volume” wasn’t quite the motto for investment banks in 2010, but with fees for investment banking deals falling to rock bottom levels, volume is the key to profits in the sector.

And if a bank wants to do volume, it better have the Asia’s emerging financial markets dead in its sights. Three of the five biggest markets for IPOs (initial public offerings) in 2010, for example, were Hong Kong at $57 billion, Shenzhen at $47 billion, and Shanghai at $27 billion.

So who’s going to be the dominant investment-banking player in Asia? Read more