Stocks stayed weak today after JPMorgan Chase (JPM) reported disappointing results. CEO Jamie Dimon’s annual shareholder letter quoted A Tale of Two Cities to describe last year: The best of times, the worst of times.
Meanwhile, on the other coast, Wells Fargo (WFC)didn’t need literary allusions to describe the banking environment. For them, the times have been good.
Success in modern banking depends on a few big-picture decisions made at the top, like capital allocation and lending standards. Executives at JPM and WFC made different decisions the last few years — and they’re getting different results.
How different? Here is how Bloomberg characterized today’s news.
JPM: “Profits fell 19% on lower fixed-income trading and mortgage revenue.“
WFC: “Profits rose 14% as fewer customers missed loan payments.“
Those two sentences are all you need to know. JPMorgan decided to allocate its capital to trading instead of lending. You don’t get mortgage revenue unless you sell mortgages to qualified borrowers.
Wells Fargo, which does relatively little trading, took a chance on the consumers JPMorgan decided were too risky. The bet seems to have worked for Wells Fargo.
To be clear, mortgage revenue fell at both banks. The difference is that WFC made more loans to creditworthy homeowners who are now making their payments. That translates into profits for WFC — and losses for JPM.
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Jamie Dimon issued a long annual letter (PDF file) to JPM shareholders with today’s results. He tried to sound hopeful about the U.S. economic recovery, but I’m not sure he succeeded.
Here is a quote from page 25 of Dimon’s letter.
“Consumers are in increasingly good financial shape. Over 6 million more Americans are working since the depths of the financial crisis. The amount of consumer income that they spend to service their debt is the lowest it has been since it has been recorded, dating back to 1980. And Americans’ net worth has been increasing, along with stock market prices and the value of homes.“
That all sounds great. Dimon continues:
Capital markets are wide open — credit, for the most part, is flowing freely. (The only exception I see here is that it still is too hard to get a mortgage for many people.)
Yes, it is “still too hard“ for many people to get a mortgage, but why? Maybe bankers like Jamie Dimon should lend money to these consumers he says are in “good financial shape.“
He apparently chose otherwise.
Dimon’s choice could yet prove correct, of course, but he can’t have it both ways. If he thinks consumers are doing so well, he should be aggressively lending money to them. That’s what well-managed banks do.
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Another part of Dimon’s letter makes more sense. On page 18, he writes about competitive threatsto JPM’s business, breaking them into three categories.
Large, global Chinese banks: “Today there are four very large and rapidly growing Chinese banks … They have begun their global expansion and, over time, they will become tough global competitors.“
Technological obsolescence: “Many companies are working on new payment systems, trading has become increasingly electronic, customers want more and more mobile services … and companies are starting to handle lending online.“
Increasingly sophisticated shadow banks: “Non-bank financial competitors will look at every product we price, and if they can do it cheaper with their set of capital providers, they will.“
This is a good list and Dimon is wise to keep them in mind. On the shadow banks, however, his main idea is to impose more government regulations on the competition.
“[R]egulators should — and will — be looking at how all financial companies (including non-bank competitors] need to be regulated and will be evaluating what is better to be done by banks vs. non-banks.“
Does this sound like a veiled threat to you, too? How does Dimon know what regulators “will“ be looking at? He almost seems to be issuing orders here.
Dimon has great connections in Washington. He had a chance last year to personally plead his mortgage fraud case to Attorney General Eric Holder. Smaller competitors rarely get that kind of privilege.
Banks aren’t unique here. In most industries, government regulation works mainly to protect large, established players from smaller competitors. The big guys usually describe it more discreetly than this. Maybe Dimon thinks people wouldn’t read this far into his letter.
He was wrong on that, too.
Today JPM shares ended down 3.7%, while WFC gained 0.8%.
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I’m still getting reader feedback on our multi-day climate change discussion. Here is one that came in today.
Reader Henry D. says: “While weather is chaotic and extremely difficult to predict long term, ocean acidification is straightforward, has few if any detractors and likely to have just as devastating impact on human society as climate change. I think ocean acidification should be included in the conversation.“
Brad: Thanks for the note, Henry. Ocean acidification is another aspect of the larger climate change issue. Living in Florida, I see the Atlantic Ocean every day. I go diving and sailing as often as I can, so I want to make sure the ocean stays clean and that marine life can flourish.
Exactly how we accomplish this is a different question, but I think most people agree on the goal. I know there are various projections about variables like CO2 levels, temperature and water vapor. I’m not a climate scientist but this topic is interesting to me. I’d like to see more research.
If you want to discuss these issues, there’s a lively conversation on my Scientists Face Off on Climate Change blog post. Just follow the link and you can add comments at the bottom of the page.
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Not everyone lives by the ocean, but most people use a bank. Am I being too hard on JPMorgan Chase? Does Jamie Dimon have a better strategy that I’m missing? If so, why are shareholders so eager to sell?
Click here to send me your thoughts via e-mail.
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Stocks had another rough day following the JPM news, but not as bad as Thursday. Here are the headlines as we go into the weekend…
The “internal correction“ continued as money flowed out of the hot social media and biotechnology sectors and into less-exciting but steadier value names.
Dow stocks in the green today included Chevron (CVX), Johnson & Johnson (JNJ), Merck (MRK), and Travelers (TRV).
Facebook (FB) dropped 1.1% and Twitter (TWTR) shed 3.1%.
The University of Michigan’s preliminary April Consumer Confidence Index jumped sharply from last month. The news is hopeful, but this index has had trouble sustaining such gains in recent years. Let’s see if it lasts.
Vladimir Putin is again threatening to cut off natural gas shipments unless Ukraine pays its overdue energy bill. Armed Russian bill collectors have assembled near the border.
Good luck and happy investing,
Brad Hoppmann
Publisher
Uncommon Wisdom Daily
P.S. Today we released Part II of our exciting “Ultimate Gold & Energy Portfolio“ trading series. James DiGeorgia revealed the 18-digit code that unlocks a “Secret Gold Account“ hidden in most online brokers‘ websites.
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Brad Hoppmann is the publisher of Uncommon Wisdom Daily.