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JPM: QUICK TAKE ON 3Q12 RESULTS

Takeaway: $JPM 3Q12 results were solid. A few hiccups (nonaccruals, NIM and loan growth), won't derail growth in tangible and improved returns.

This note was originally published October 12, 2012 at 07:59 in Financials

JPM's 3Q12 Results - Moving in the Right Direction

Overall, we found the JPM 3Q numbers solid. The company earned $1.40 vs. expectations for $1.21. We estimate core earnings were closer to $1.25, which adjusts for all of JPM's itemized one-time items except for their suggested litigation reserve add-back of 11 cents, which we regard as a recurring item until it isn't. 

 

Importantly, this quarter's results weren't driven as significantly by reserve release as we had expected, making it tougher for critics (like ourselves) to decry them as low quality results. Reserve release came in at 17-18 cents vs consensus expectations for 14 cents. As such, the core $1.25 number looks like $1.21 on an apples to apples basis. Given the apprehension that investors had going into the quarter we think an in-line to slightly better than expected result will be enough to keep the stock going higher through the election.

 

The three negatives in the quarter were that non-accruals ticked up 18 bps QoQ, NIM fell 4 bps (vs 1 bp expectations), and loans declined sequentially by $5.5bn (77 bps) vs. expectations for 1.5% growth.

 

The bottom line is that tangible book value per share improved again this quarter, growing by 5% sequentially. Return on capital (tangible), meanwhile, ticked up to 15.7% from 13.9%. Growing tangible and improving returns should support further multiple expansion.

 

We highlight the key takeaways, as well as our macro team's levels on JPM, in the three charts below.

 

JPM: QUICK TAKE ON 3Q12 RESULTS - JPM tang vs stock px

 

JPM: QUICK TAKE ON 3Q12 RESULTS - jpm earnings template

 

JPM: QUICK TAKE ON 3Q12 RESULTS - JPM Macro Chart

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Robert Belsky

203-562-6500

rbelsky@hedgeye.com


Last Night's Debate

LAST NIGHT’S DEBATE

 

 

CLIENT TALKING POINTS

 

LAST NIGHT’S DEBATE

Last night’s debate was a fierce battle between Joe Biden and Paul Ryan over myriad issues. We may not be ready to declare a “winner” just yet, but one thing is certain: Biden laughed. He laughed, laughed and laughed some more. Keith sums it up best: Ryan looks like a rookie and Biden looks like a snake. There has been no material change on InTrade with Obama vs Romney, so the kid held his own.

 

 

EARNINGS GAME

#EarningsSlowing continues as companies like Norfolk Southern (NSC) and FedEx (FDX) get rocked when they offer lower guidance. JP Morgan (JPM) and Wells Fargo (WFC) were able to beat this morning, but keep in mind that earnings are peakish for a lot of names out there. Not everyone can pull a JPM and beat the Street. 

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                UP

 

U.S. Equities:   DOWN

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: Flat  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

BRINKER INTL (EAT)

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

HCA HOLDINGS (HCA)

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TRADE:  NEUTRAL
  • TREND:  LONG
  • TAIL:      LONG

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“If u just read the top/bottom line beats for these bailed out banks, you're being regressive - may as well use a walkman” -@KeithMcCullough

 

 

QUOTE OF THE DAY

“A lot of fellows nowadays have a B.A., M.D., or Ph.D. Unfortunately, they don't have a J.O.B.” -Fats Domino

                       

 

STAT OF THE DAY

JPM Earnings: Top & Bottom line beats. $1.40 includes 18 cents reserve release vs. expectations for 14 cents

 

 

 


COMMODITY CHARTBOOK

Takeaway: Commodity price action over the last week has strengthened our conviction in remaining bearish on $TXRH.

Coffee prices continue to lead to the downside as the majority of the agricultural commodities – that we track as part of our process – declined as the dollar index strengthened.  Beef and dairy prices remain the ones to watch for the restaurant industry in 4Q.  The strength in beef prices is negative for TXRH, BLMN, WEN, JACK, CMG and others. 

 

Summary View

 

Beef prices gained 1.3% over the last week.  The USDA’s WASDE report, released yesterday, was bullish for beef prices as lower expected cattle placements in the third quarter is expected to translate into lower supplies of fed cattle next year.   Importantly for beef prices, and proteins more broadly, corn prices surged yesterday as the USDA reported that global inventories are expected to drop more than expected as the U.S. drought cuts output

 

Coffee prices continue to show weakness as coffee producers in Brazil are reportedly waiting for better prices.  According to Bloomberg, the Brazilian Coffee Council is also concerned with low government inventories of the product and is proposing an auction for as many as 6 million bags of Arabica coffee.  The continuing weakness in coffee prices is a positive for SBUX, PEET, DNKN, THI, CBOU, GMCR and other coffee retailers. 

 

COMMODITY CHARTBOOK - commod

 

 

Gasoline Prices

 

Gas prices are up 12% year-over-year and we believe that this will have an impact on spending growth.  On a regional basis, it is important to note that this impact is likely to be greater in some areas than others; in California gas prices are up 22% year-over-year and could have a significant impact on discretionary spending.   Following a peak last week of over $5 per gallon in Southern California, recent prices now seem to be subsiding.

 

COMMODITY CHARTBOOK - gasolien

 

 

Correlation

 

COMMODITY CHARTBOOK - correl

 

 

Charts

 

 

COMMODITY CHARTBOOK - crb foodstuffs

 

COMMODITY CHARTBOOK - corn

 

COMMODITY CHARTBOOK - wheat

 

COMMODITY CHARTBOOK - soybeans

 

COMMODITY CHARTBOOK - rough rice

 

COMMODITY CHARTBOOK - chicken whole breast

 

COMMODITY CHARTBOOK - chicken broilers

 

COMMODITY CHARTBOOK - chicken wings

 

COMMODITY CHARTBOOK - coffee

 

COMMODITY CHARTBOOK - cheese

 

COMMODITY CHARTBOOK - milk

 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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Laughter

“Against the assault of laughter, nothing can stand.”

-Mark Twain

 

If there was one key takeaway from the Vice Presidential debate last night it was simply this: Biden laughed.  I took an unscientific poll on Twitter and people seem to be split on the actual winner.  Republicans lean towards Ryan and Democrats lean towards Biden.  I think my colleague Keith McCullough probably summed it up best this morning when he wrote to me:

 

“USA lost credibility as Ryan didn’t deliver in taking Biden’s old politics to task.  Ryan looked like a rookie and Biden looked like a snake.”

 

But you know Keith, he’s not really known to have an opinion on things …

 

From a quantitative perspective, the Intrade Presidential contract is basically trading at the same level as it was going into the debate.  According to Intrade, Obama has a 63% chance of retaining the Presidency and Romney is at 37%.  So there you have it, despite Biden’s best attempt at a Mark Twain laughter assault, the Px90 juiced whippersnapper Ryan held his own.

 

The next two debates will be held between Romney and Obama.  The first one is a town hall format and will be on Tuesday, October 16th and the final debate will be held on October 22nd, with a focus on foreign policy.  Given Obama’s weak performance in the first debate, these will be more closely watched than historical debates. The likelihood is that Obama will perform much better and they too will become non-events.

 

Even if the debate fireworks are behind us, the election itself is only heating up.  According to the national polls, this race is basically tied.  Based on the average of the last four key national polls, Romney is ahead on average by +0.7 points.  Interestingly, Rasmussen, who has been the most accurate pollster in the last two election cycles, actually now has Obama back ahead.  Undoubtedly the tightness of this race is no laughing matter for those with a party affiliation.

 

We will be joined with Neil Barofsky on November 7th, the morning after the election, to discuss the potential policy impact.  Neil was the former Special United States Treasury Department Inspector General that was appointed to oversee the Troubled Asset Relief Program, or TARP.  From an investment perspective, the election is critical because it lays the foundation for future fiscal and monetary policy.  In this respect, we think Neil will be the ideal person to discuss post election policy as he knows many of the key players.  If you are not currently an institutional subscriber and would like to become one to get access to the call, email

 

In the chart of the day, we’ve highlighted U.S. Federal government spending as a percentage of GDP going back to 1947.  The takeaway, which many of you know, is that federal spending has been going up and to the right for almost seven decades.  As we’ve been told by some key Republican insiders, this will be Romney’s primary focus if he is elected. That is, he will look to dramatically shrink the size of the government.

 

From an economic and investment perspective this could, perversely, be a real negative for economic growth in the short run.  Ultimately though, putting capital back in the hands of capitalists and getting the U.S. fiscal house in order should be positive for the U.S. dollar and economic growth in the long run.  Canada in the mid-90s is a prime example of a modern economy that took its pain, but then rebounded in a meaningful way.

 

Another positive related to the election is that when it is over, at least it will relieve the uncertainty among decision makers.  This uncertainty is manifested in many ways with a key way being an unwillingness of executives to invest in their businesses. 

 

My colleague Hesham Shaaban forwarded me an article this morning that encapsulated this point well.  According to this article from Bloomberg, the number of companies saying “profits will trail estimates compares to those who are saying they will exceed them climbed to 4.3:1”.  In a nutshell, when 4 out of every 5 companies in America think the future will be worse than the past, you can not expect hiring to accelerate.

 

#Earningsslowing is one of our three themes this quarter and clearly is already starting to play out.  At a point, of course, this all gets priced in, but we would just recommend treading carefully in that regard until the end of earnings season as there is stock specific risk associated with the fact that earnings in corporate America are peak-ish.

 

Speaking of stock specific risk, our retail team will be hosting a conference call on Carter’s, Inc (CRI) this coming Monday.  This won’t be your typical old Wall Street initiation call.  In fact, this is going to be one of those new Wall Street 2.0 calls where we are actually going to tell you that Carter’s is a stock that you should short, or at the very least lighten up on.  Imagine that, a Wall Street research firm making a short call.  I mean, who does that?

 

Speaking of short ideas, a key one is the little retailer called J.C. Penney (JCP).  Needless to say, even though JCP seem to be getting back into the coupon business by sending $10 coupons to customers as gifts, we still think this is a name to avoid.  On the contrary, our financials team indicated yesterday they thought J.P. Morgan (JPM) would beat numbers this morning and, lo and behold, JPM beat by $0.18.  It seems the fat cat bankers on Wall Street are laughing, as well!

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.66-115.71, $79.26-80.07, $1.28-1.30, 1.64-1.71%, and 1, respectively.

 

Enjoy your weekend.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

 

Laughter - Chart of the Day

 

Laughter - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 12, 2012


As we look at today’s set up for the S&P 500, the range is 20 points or -0.48% downside to 1426 and 0.92% upside to 1446. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 10/11 NYSE 909.00
    • Increase versus the prior day’s trading of -737
  • VOLUME: on 10/11 NYSE 646.68
    • Increase versus prior day’s trading of 9.45%
  • VIX:  as of 10/11 was at 15.59
    • Decrease versus most recent day’s trading of -4.30%
    • Year-to-date decrease of -33.38%
  • SPX PUT/CALL RATIO: as of 10/11 closed at 1.72
    • Up from the day prior at 1.67

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 24.36
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.69%
    • Increase from prior day’s trading of 1.67%
  • YIELD CURVE: as of this morning 1.42
    • Up from prior day’s trading at 1.41

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Producer Price Index M/m, Sept. est. 0.8%
  • 8:30am: PPI Ex Food & Energy M/m, Sept. est. 0.2%
  • 9:55am: University of Michigan Consumer Sentiment, Oct. preliminary, est. 78.0 (prior 78.3)
  • 11am: Fed to buy $1.75n-$2.25b notes due 2/15/2036-8/15/2020
  • 12:35pm: Fed’s Lacker speaks in Charlottesville, Va.
  • 1pm: Baker Hughes rig count

GOVERNMENT:

    • Dodd-Frank rules take effect that require companies to begin tallying derivatives trades to determine whether they cross $8b threshold for being designated swap dealers subject to heightened capital and collateral standards; CFTC also will require companies to tally foreign-exchange swaps, forwards
    • Interior Secretary Ken Salazar, Senate Majority Leader Harry Reid, D-Nev., make announcement on renewable energy and public lands, 1:30pm
    • Education Secretary Duncan answers Twitter questions about federal student aid, tools available to help students, families make informed decisions about financing higher education, 4pm

WHAT TO WATCH:

  • Telefonica agreed to sell its Atento call-center division to Bain Capital, with enterprise value of EU1.04b, including debt
  • WellPoint reorganizes in interim CEO Cannon’s 1st major move
  • TPG withdraws A$694m offer for Billabong as talks end
  • Softbank shares fell as operator said it’s in talks to invest in Sprint Nextel, said to be seeking control
  • S&P put Softbank’s long-term outlook on creditwatch negative, citing announcement on Sprint Nextel talks
  • Kraft said to be putting its Breakstone’s sour cream, cottage cheese business up for sale, may be worth ~$400m
  • Gary Gensler, chairman of CFTC, said he’d be willing to serve 2nd term as head of the agency
  • Carlyle given another month to consider making Chemring bid
  • Family that controls Champion Technologies said to be seeking sale of the closely held company
  • Nasdaq, setting up derivatives trading system in London, will seek more than 10% market share in its first year of operation
  • JPMorgan expects investment-banking fees from U.S.-listed Chinese cos. to surge this year as they step up acquisitions
  • Pfizer appealed judge’s order that CEO Read testify in person at federal trial on claims against anti-smoking drug Chantix
  • Samsung Electronics won bid to continue selling newest Galaxy Nexus smartphone in U.S. during appeal
  • Apollo Global, Oaktree Capital said to have rejected Nine Entertainment’s debt restructuring proposal, countered by offering funds managed by Goldman a smaller stake in the co.
  • Honeywell expects to boost aerospace sales in Asia by 7% a year, double the pace in U.S.
  • VMware said partnership with Cisco will change after its $1.26b acquisition of Nicira
  • Answers Corp., which lost bid to buy About.com from New York Times in Aug., has other plans to grow through acquisitions
  • Morgan Stanley execs said to have told partner in Rhinebridge structured investment vehicle that mortgages underlying SIV may cause it to fail
  • Best Buy plans to match Amazon pricing in holiday season: WSJ
  • Presidential Debate, China GDP: Week Ahead Oct. 13-20

EARNINGS:

    • JPMorgan (JPM) 7am, $1.20 - Preview
    • IGate (IGTE) 7:03am, $0.38
    • Wells Fargo (WFC) 8am, $0.87 - Preview
    • Webster Financial (WBS) 8am, $0.46
    • DiamondRock Hospitality (DRH) 8am, $0.19

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Oil Heads for First Weekly Gain in Month on Middle East Tension
  • Copper Traders Most Bearish Since June on Economies: Commodities
  • Malaysia to Reduce Palm Oil Export Tax, Abolish Duty Free Quota
  • Copper Drops on Concern Demand Will Fade Amid Global Slowdown
  • Soybeans Drop as Global Supply Concerns Ease After USDA Report
  • Gold Seen Gaining in London as Weaker Dollar Spurs Investment
  • Sugar Declines on Speculation Demand Is Waning; Cocoa Advances
  • Sugar Cane Farmers Should Get 70% of Revenue, India Panel Says
  • Iron-Ore Forecast Lowered at HSBC on Weakening Chinese Demand
  • CO2 Storage May Aid Oil Company Revenue, Avoid Decommissioning
  • Oil May Fall as Rising Output Boosts Stockpiles, Survey Shows
  • Rubber in Shanghai Set to Extend Bull Rally: Technical Analysis
  • Twin-Peak Rally Seen Boosting Grains in First Quarter of 2013
  • Palm Oil Tumbles as Malaysia to Abolish Duty-Free Exports Quota

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

The Hedgeye Macro Team

 

 

 

 

 


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