Positive earnings reports

Good morning everyone!

The third quarter earnings season is shifting gears and accelerating. Two bellwether companies have reported and the results look good. I am speaking about JP Morgan and Intel.

JP Morgan

Revenues were up 81% (!) to $26.6 billion. Profits were $3.59 billion vs. last year’s third quarter profit result of $527 million. These results exceeded analyst estimates of per share earnings by $0.30 and obviously are quite strong. It’s important to note that last year’s results included $4 billion in write downs from JP Morgan’s associated with acquiring Washington Mutual.

Mostly these results were driven by strong investment banking results, but results sensitive to the U.S. consumer were poor. For example, the net charge-off rate in JP Morgan’s consumer business (read: credit cards) was 6.29% vs. 3.39% a year ago; an 85.5% increase (!). This represents the number of consumer credit card accounts that have been “written off” by JP Morgan. Not surprisingly, the bank has set aside an additional $2 billion to cover current and anticipated future losses.

Important Point: CEO Jamie Dimon said that the costs of covering losses in its consumer and credit card operations will continue to be high “for the foreseeable future.” In other words, U.S. consumers, 70% of GDP, remain embroiled in the recession and will be more a long while more.

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Intel
Revenues were $9.39 billion vs. $10.22 billion a year ago, or a 8.1% decline. Profits were $1.86 billion vs. $2.01 billion last year, a 7.5% decline.

Important Point: The company’s results were even ahead of optimistic projections issued less than a month ago. That means that back-to-school sales of laptops were likely very robust. The important point here is that technology is a leading indicator of burgeoning economic health. This compares to the lagging indicator of credit card defaults that JP Morgan (see above) represents.

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Conclusion: The economy has likely weakly emerged from recession. Much of the growth that is occurring is from businesses making big investments to acquire rivals or new technologies – as represented by JP Morgan’s strong investment banking results. However, the U.S. consumer, the backbone of the economy, is not confident and still reeling from high unemployment and low personal income growth. These facts are mostly priced into stock prices already.

Jason