• run with the bulls

    get your first month

    of hedgeye free



Takeaway: $JPM 4Q12 results were solid on multiple fronts, and the stock still looks undervalued by 16% to us.

JPM's 4Q12 Results - Steady Progress

Overall, we found the JPM 4Q numbers solid. The company earned $1.39 vs. expectations for $1.20. We estimate core earnings were closer to $1.16, which adjusts for all of JPM's itemized one-time items as well as its reserve release. 


Reserve release was 19 cents, which was slightly higher than the 14 cents the Street was looking for. Nevertheless, on an apples-to-apples basis, we think they earned $1.16 vs. expectations for core earnings of $1.06. As such, we think this number should be enough to sustain the momentum we've seen YTD. 


Credit metrics were notably improved this quarter as net charge offs declined 65 bps QoQ, NPAs fell 4 bps, NPLs dropped 11 bps and reserve coverage rose 4% (reserves/NPLs) to 204%.


NIM ticked down 3 bps, but came in in-line with estimates and was a far cry better than WFC, and marks the second consecutive quarter in which JPM has significantly outperformed peers on NIM.


The bottom line is that tangible book value per share improved again this quarter, growing by 3.3% sequentially. Return on capital (tangible), meanwhile, came in at 14.8%, down slightly from last quarter's 15.7%. Growing tangible and improving returns should support further multiple expansion.


As we show in the chart below, the stock is trading near the high end of the range over the last few years, but based on where returns are relative to cost of capital, the stock is still trading at a 16% discount to fair value of $53.89, as we show in the second chart.


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






JPM: QUICK TAKE ON 4Q12 RESULTS - jpm quadrantizer


JPM: QUICK TAKE ON 4Q12 RESULTS - jpm earnings template





Joshua Steiner, CFA


TODAY’S S&P 500 SET-UP – January 16, 2013

As we look at today's setup for the S&P 500, the range is 12 points or 0.50% downside to 1465 and 0.32% upside to 1477.           















  • YIELD CURVE: 1.56 from 1.49
  • VIX  closed at 13.55 1 day percent change of 0.22%
  • BONDS – the 10yr UST yield is bullish TRADE/TREND (1.71-1.81% support) and bearish TAIL (1.84% resistance) right now, which is perfectly confusing the market, as it should – any time we start to whip above/below the big duration lines, people get confused. We say you stay w/ the TREND = buy stocks on red, short t-bonds on green.

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:00am: MBA Mortgage Applications, Jan. 11 (prior 11.7%)
  • 8:30am: CPI, M/m, Dec., est. 0.0% (prior -0.3%)
  • 8:30am: CPI Ex Food/Energy, M/m, Dec., est. 0.2%
  • 9am: Net TIC Flows, Nov. (prior -$56.7b)
  • 9am: Net L-T TIC Flows, Nov., est. $25.3b (prior $1.3b)
  • 9:15am: Industrial Production, Dec., est. 0.3% (prior 1.1%)
  • 9:15am: Capacity Utilization, Dec., est. 78.5% (prior 78.4%)
  • 10am: NAHB Housing Market Index, Jan., est. 48 (prior 47)
  • 10am: Fed’s Kocherlakota speaks in Eden Prairie, Minn.
  • 10:30am: DoE inventories
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2042 sector
  • 2pm: Fed issues Beige Book business survey
  • 7pm: Fed’s Fisher speaks in Washington
  • 8pm: Fed’s Kocherlakota speaks in Minneapolis on policy


    • Senate not in session, House in session
    • SEC Commissioner Dan Gallagher gives 2013 outlook for agency
    • President Obama to unveil proposals to curb gun violence


  • All Nippon Airways, Japan Airlines grounded entire fleet of Boeing Dreamliners; will cancel all Dreamliner ops tomorrow
  • India regulator to check 6 Dreamliners in Air India’s fleet
  • World Bank cuts 2013 global growth forecast to 2.4%
  • AB InBev said in talks w/ U.S. on concessions for Modelo
  • Ford CFO forecasts greater than $1.5b European loss in 2013
  • Alibaba said to hire Credit Suisse, Goldman for $3b-$4b IPO
  • Apple introduced installment payment plans in China
  • Temasek, CPPIB may invest in Dell alongside Silver Lake: FT
  • Temasek spokesman declines to comment on report
  • TUI Travel in talks with Airbus, Boeing on potential $6b plane order: Reuters
  • European Dec. car sales fell 16%, demand at Ford, GM, Renault
  • Wausau Paper continuing talks w/ Starboard after co. declined offer to sign non-disclosure


    • Bank of New York Mellon (BK) 6:30am, $0.53
    • Comerica (CMA) 6:40am, $0.65
    • US Bancorp (USB) 6:45am, $0.75
    • First Republic Bank/CA (FRC) 7am, $0.73
    • JPMorgan Chase (JPM) 7am, $1.22 - Preview
    • Northern Trust (NTRS) 7:14am, $0.75
    • Goldman Sachs (GS) 7:30am, $3.66 - Preview
    • M&T Bank (MTB) 8:01am, $2.17
    • Charles Schwab (SCHW) 8:45am, $0.15
    • Kinder Morgan Energy Partners (KMP) 4:05pm, $0.63
    • Kinder Morgan (KMI) 4:05pm, $0.35
    • El Paso Pipeline (EPB) 4:07pm, $0.55
    • eBay (EBAY) 4:15pm, $0.69
    • SLM (SLM) 4:15pm, $0.53
    • Clarcor (CLC) 5:21pm, $0.70
    • HB Fuller Co (FUL) 5:49pm, $0.56
    • Bank of the Ozarks (OZRK) 6pm, $0.56
    • CVB Financial (CVBF) 6:45pm, $0.22


OIL – what we didn’t like about commodity reflation 24hrs ago, we like this morning – Oil, Gold, Copper all stopped going up again at lower-highs (Dollar Up), which is a bullish global #GrowthStabilizing signal. Brent’s TAIL risk line of $111.48 is what matters most.

  • Oil Trades Near One-Week Low as U.S. Crude Inventories Increase
  • Carrara Marble Peaks as Russians Follow Etruscans: Commodities
  • Bundesbank to Repatriate 674 Tons of Gold to Germany by 2020
  • Wheat Rises to Three-Week High as Dry Weather Threatens Crops
  • OPEC Cuts Oil Output to 14-Month Low Amid Economic Uncertainty
  • Copper Declines for Fourth Day Before U.S. Production Figures
  • NWR Selling Eurobonds as Yield on Coal Producer’s Debt Hits Low
  • Cocoa Slides on Demand as Crop Outlook Improves; Sugar Unchanged
  • Platinum Getting More Precious on Tight Supply: Chart of the Day
  • Goldman Sachs Prefers Copper, Palladium, Metallurgical Coal
  • U.S. Oil-Product Exports Exceed 2009 Imports to Drive Ship Surge
  • Icahn’s Transocean Buy Pushes Driller Toward Partnership: Energy
  • Louis Dreyfus Joins With Australia’s Namoi Cotton to Boost Sales
  • Gold Swings Between Gains and Declines on Debt, Growth Concerns




YEN – Currency War is on. After getting lit up like a Christmas tree, the Yen just bounced for 2-days (Nikkei down -2.6% overnight on that as Government Intervention ramps implied market volatility), so we’ll be looking to re-short the Yen inside of $88 (vs USD) if/when we get that signal today. This is just wild to watch.
















The Hedgeye Macro Team





As we wrote on 12/17, we would be more constructive on the stock closer to $250.  We think the bottoming process will take time for CMG.


CMG preannounced preliminary 4Q EPS miss of $1.92-1.97 vs. consensus of $2.09, ahead of its presentation at the ICR XChange Conference on Thursday.  SRS were essentially in line at 3.8% versus 3.2% consensus and total revenues were slightly better that estimates.


The company missing EPS was due to lower-than-expected margins

  • Food costs are expected to come in at 33.5% of sales versus consensus of 32.8%
  • Other operating costs increased sequentially due to increased marketing and promotional related costs (driving traffic becoming more expensive)
  • Restaurant level margins of 24.6% missed analyst expectations of 25.7%


We wrote on 12/17 that the CMG bottoming process could take time and that restaurant-level margins were the wild-card for 2013.  The company purchases its commodities on the spot market, which means that its restaurant level margins are vulnerable to swings in commodity prices.  This is especially true with LSD comps.  Inflation is currently running at low-single-digit levels, driven by higher dairy and protein prices.   The company claims to be confident of food inflation leveling off in 2013, with avocado costs flat versus 2012, but, as recent years have shown, weather can have a significant impact on protein and produce costs and we believe that there are likely more surprises – good or bad – in store for commodity prices this year.


We continue to believe that there is further downside risk to EBITDA and EPS estimates, even after today’s announcement.  Bottoms are processes, not points.


A press release with final, fourth quarter and full year 2012 financial results will be issued at approximately 4:00 PM Eastern time on February 5th


Howard Penney

Managing Director


Rory Green

Senior Analyst


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Consensus War

“The time had come for the Anglo-Americans to fight; to not fight was to lose the war…”

-William Manchester, The Last Lion


In the summer of 1942, Hitler “finally moved fourteen divisions against Sevastopol… and took the city in twenty-three days.” Since Sevastopol was the “largest Soviet naval fortress on the Black Sea” (The Last Lion, pg 546), this mattered to the Americans, big time.


Big is as big does, and the world’s Currency War (Rickards) is getting big. While I am not trying to equate the human devastation of WWII with what’s being driven by economic central planners today, I think it’s fair to use historical metaphors that draw on global conflict. In today’s case, every country’s politicians are fighting for themselves.


Whether these academic bureaucrats want to admit the scope of their experimentation or not, Keynesian Policies To Inflate via sovereign Currency Debauchery are both causal in their intentions and correlated in their impacts on real-time market prices.


Back to the Global Macro Grind


This morning I woke up to one of those aha moments where the German enemy was on the ground (snow in CT) and the Russians were coming. Well, sort of. I actually love all types of snow, other than the yellow kind.


What the Italians and Russians don’t like is their currency going straight up into the right. South Koreans don’t like it either. Maybe the only country that loves it is Canada – maybe that’s because they are one of the few that recognizes it as winning.


Russian Central Bank First Deputy Chairman (fancy titles over there), Alexei Ulyukayev, explicitly called this a “Currency War” today in Moscow and went on to add that “Japan is weakening the Yen and other countries may follow.”


Ya think?


This isn’t new. It’s going to be a new global consensus however. And I think that’s what makes 2013 as exciting (and trade-able) a year as I can remember. If you don’t have a multi-factor process that incorporates countries, currencies, policies, etc. built into your process however, you might think I am right out to lunch.


Well, if you trade currencies and bonds like you trade stocks, your lunch might get eaten too. These markets are much more glacial than the high-frequency insider trading networks that have developed in small cap equities. Maybe that’s why some of the largest macro hedge fund gurus have retired. The Global Macro game of risk doesn’t really have the inside trade anymore.


When it comes to leveling the playing field and democratizing access to market edge that is legal, I am all in. What is your edge today isn’t what it was 5, 10, and 30 years ago. I think today’s market edges live and breathe at the intersection of Behavioral Economics and Chaos Theory (math).


How do we risk manage this?

  1. The process starts and ends with Embracing Uncertainty – anything can happen, literally, any hour of the day
  2. We let the signal (market price/volume/volatility) tell us where to swing at high probability pitches
  3. We then either confirm or disconfirm the quantitative signal amidst #OldWall’s qualitative research noise

Any hour of the day? Yes, of course. If you have half of America begging for centrally-planned markets, what kind of market do you expect? So don’t whine about it – understand it, and play the game that’s in front of you.


Yesterday’s intraday signal (on the selloff to the lowest intraday price we have seen in a week) was to cover shorts and buy Best Ideas on the long side. So this is what we did on the cover/buy front:

  1. We bought Apple (AAPL) at immediate-term TRADE oversold
  2. We covered Metals (XME) at immediate-term TRADE oversold
  3. We covered Phillip Morris (PM) at immediate-term TRADE oversold
  4. We bought Singapore (EWS) at immediate-term TRADE oversold

That doesn’t mean we love Apple (AAPL) long-term here (see chart). It just means what it means – we are at war with consensus and our quantitative process was signaling immediate-term exhaustion on the sell side of a stock that we risk manage like an ETF.


Before I get AAPL geniuses in a heat about that, here are the last 3 big signals our process has delivered:

  1. June 1, 2012 at $571.86 = BUY  
  2. September 28, 2012 at $677.74 = SELL
  3. December 17,2012 at $502.50 = BUY

No research. Just math, and some behavioral context.


How many people in our profession thought/think that it’s their own unique, non-inside info, qualitative research edge that made them “smart” being long AAPL? I don’t know. All I know is that a lot of hedge funds have gone away for doing the inside info thing, and a lot more research-only funds that don’t have a quantitative risk management overlay get mad at me.


That’s progress.


So is fighting for something you believe in. I believe in evolving this profession. I believe in playing by the rules. I believe in transparency, accountability, and trust.


Keep fighting the good fight.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1 (Gold fails at TRADE resistance), $109.33-111.48 (Oil broke its TAIL line again), $79.29-80.08 (USD holds TAIL support again), 1.31-1.34, $88.06-89.88 (Yen oversold), 1.81-1.85% (Treasuries overbought), and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Consensus War - Chart of the Day


Consensus War - Virtual Portfolio

What Keith's Reading

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.