Is Trouble Brewing at the House of Morgan?

Hey There Income Hunters,

 

If you haven’t had a chance to watch “The Men Who Built America,” check it out on Amazon Prime. It’s an awesome tribute to the pioneers of industry from the Civil War to World War II. 

 

There are a couple of episodes on John Pierpont Morgan. J.P. Morgan was as ruthless as you can imagine. They all were back then … 

 

John D Rockefeller (oil), Andrew Carnegie (steel) and Cornelius Vanderbuilt (railroads) all single-handedly controlled an industry and battled each other to see who could be the richest man in America …

 

J.P. Morgan controlled finance. He wanted in on every new corporation that mattered. Morgan helped form U.S. Steel, International Harvester, General Electric and 21 railroads, just to name a few.

 

Plus, known as the greatest banker, he saved his most influential achievement for last … he planted the seeds that were to become the Federal Reserve in 1913 — and I guess the Fed has always felt they owed him one for that.

 

The question today is, will the Fed again have to come to the rescue of the bank that bears his name?

 

JPMorgan Chase (Ticker: JPM) appeared to announce blowout earnings last week however. However, all wasn’t as it seemed and the stock dropped over 3%.

 

Initial Headlines Broadcast a Blowout Performance

JPM’s announcement included these two notable bullets

        • First quarter profit of $14.3 billion, which equates to a $4.50 per share versus expectations of $3.10.
        • Increased revenue of $33.12 billion (that’s +14%, smoking expectations of $30.42 billion).

Hey, that looks great!

However, when you dig deeper, JPM only beat the estimates because they released $5.2 billion of loan reserves. Without that release they would have come in below the $3.10 expectation on EPS.

It didn’t take long for the market to see through the headlines with the stock falling over 3% on Friday …

Why Release Loan Reserves as Mortgage Demand Is Slipping? 

In the earnings release, CEO Jamie Dimon called loan demand “challenged” …

Plus, according to Bloomberg, investors may also be focusing on the warnings the banks have provided, namely home loan originations are expected to slow with the recent rise in interest rates.

This is more than just a mild concern with inflation expectations forecasted to be significantly higher in the next couple of months.

The Treasury is also ramping up it’s issuance of Treasury Bonds in May. All issuance across the curve will be increased by a total of $23 billion… Higher issuance can also cause interest rates to rise…

Let’s take a Look at the Technical Condition of JPM Stock 

The chart below illustrates the weekly price, volume and volatility for JPM …

For six weeks the stock has gone sideways and volatility has decreased while reaching a 52-week low …

 

 

Volume increased last week during the selloff, which is the reason for caution. We may see some buybacks in the weeks ahead that could reverse this dip, as they are a positive driver for bank stocks. However, there is a lot of good news already built into their valuations, so this sector may not continue to lead the overall market the way it has in the past few months.

Where Does Volatility Go From Here?

That is the question and Mark will answer it for us today. (So make sure you’ve signed up for the Volatility Edge program.)

Mark has traded options in every type of market environment and we are lucky to have him guiding us through a major change in volatility…

Power Income will stay on top of the macro forces at work. Watching the banks very closely during this time is extremely important.

Banks are buying more bonds and providing more loans through their introducing broker and prime brokerage businesses. That’s why I was surprised that JPM reduced it’s loan reserves by so much…

It may work out great for them, but I will be monitoring the risk in the banking system and will alert Power Income readers to any changes …

Bring It Home 

On Wednesday, the Option Pit team will also be hosting the second all-day Round Robin mentoring event.

I’m developing a presentation detailing how May is a critical month for interest rates and equities.

I think a bit of correction would be healthy for the market at this point — and it could happen anytime between now and mid-May …

Let’s be alert and follow Mark’s lead so we can make money in all markets!

Cheers and …

Live and Trade With Passion My Friends,

 

Griff

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