The two big events for this morning were Chinese GDP and JPM's earnings. These investment banks are huge black boxes with so many levers being pulled, so how anyone can analyze these companies is beyond me – but we discovered today that apparently someone in the company was taking "mark to market" to a whole different level. Indeed to a level of fraud. Considering this is the "most respected investment bank on the planet" one can only wonder what is going on elsewhere. It also speaks to a lack of internal controls and the whole idea that in less liquid instruments the pricing is far more "arbitrary" than say in a stock.
Outside of that revenue fell 16% year over year but "beat expectations" and EPS "beat expectations" but EPS in this type of bank is a series of adventures – i.e. if the credit default swaps (i.e. risk profile) of a bank rises, they actually make a "profit". Bottom line – this investment loss/fraud was a 'one time' event so does not impact day to day business and in a backwards way probably makes Jamie Dimon more safe from criticism because now he can say he was being lied to, rather than allowing a bad trade to spin out of control. However, it should give the stock less of a long term premium as we can now see that even the "most respected" firm in the banking sector has some dark nooks and crannies. The stock is all over the place in pre-market but as I type is up in the 1-2% range.
As for China, no surprise here in the official GDP data came in the slowest in a few years, at 7.6%. What the real number is – who knows? Based on how commodities have acted thus far in 2012, I'd say it's probably significantly lower than that, but what I think or you think does not matter. The main thing in the near term is no bombshells overnight and with the slack in reported inflation there is room for policy intervention to continue. Which seems to be the main drug markets thirst for. Other economic figures released overnight painted a similar picture:
- Retail sales in June were up 13.7 percent on a year ago versus May's 13.8 percent and industrial output was weaker than expected, growing 9.5 percent versus expectations of 9.8 percent, while power output was flat.
We have had six down days in a row now – although some of them were minor. (Keep in mind the indexes were wildly overbought a week and a half ago) But some sectors and headline stocks have taken immense beatings of late – the IBMs, Intels, Caterpillar's, Las Vegas Sands'. Many of these are index related so when they at least dead cat bounce it should lead to some upside. These are obviously the global multinational type with lots of exposure to China and Europe and the U.S. dollar – all of which are moving in the direction that hurts their bottom lines. So the market is in the process of "pricing it in".
So while the market itself is oversold, it is not extremely so – but a lot of these names that are part of the indexes are very much oversold and prone to a bounce relatively soon. It's not too often we see these type of headline names fall below their lower Bollinger Band when the markets are not putting in -2% or -3% type of days. With the Chinese news out, let's see if there is a "breath of relief" today that can last for more than a few hours.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog