January 18, 2010
January 17, 2010 by admin
The roller coaster ride returned to the market last week, thanks in large part to JP Morgan Chase on Friday, sending the financial sector lower. The company which is considered “Too Big Too Fail” and a Supermarket Bank, meaning they offer every product and service reported net earnings in excess of three billion dollars for the fourth quarter to 2009, surpassing expectations from almost every analyst in the industry. The surprisingly strong quarter, was a reflection on the improvement in the stock market during the second half of last year and record earnings in the companies investment brokerage divisions.
The initial reaction to almost everyone should be that the companies record earnings are great news and a signal that the economy is heading in the right direction, followed by a solid jump in the DOW. Unfortunately, it was the dialogue relating to the health of the economy, the companies position to stay firm with their present dividends and the increase in loan loss reserves that send the stock market lower. Chase was one of the best managed companies over the past decade and did a great job in avoiding large investments in sub prime mortgage loans, and completely avoided playing roulette in the derivative markets. The companies conservative risk management approach helped it ride out the worst economic downturn in the past twenty years, while still churning out a healthy annual profit. The market moved lower, as the company cautioned that they remain concerned over the health of the U.S. economy in the near term. The major concern with the economy in 2010 is the lack of job growth and stabilization in the employment markets. The fact that the economy shed almost 100,000 jobs in December of last year, had to be a key factor in the companies bearish stance for near term improvement. Increasing the companies loan loss reserves reflects the challenges that still remain in the U.S. housing markets, despite better than expected home sales for most of the second half of 2009. Home foreclosures remain problematic for large banks that have been slow to modify and refinance mortgages for troubled home owners. This could become a larger issue in the coming months as the tax rebates and interest rate subsidies are coming to an end.
Mortgage interest rates have started the year by gaining ground and moving lower. Yields on the closely followed ten year Treasury bond have dropped by over ten basis points, sending fixed rate loans back into the 5.25% range or lower for thirty year mortgages. Interest rates have moved up sharply over the past sixty days, as fears of inflation were creeping into the minds of investors. The dismal numbers from the labor market, and pull back in equities have helped to push more money back into the bond market, assisting with dropping long term mortgage rates. The week ahead features a number of major earnings releases from companies such as Google and Citigroup, so there is likely to be continued volatility in both stocks and bonds in the near future.