April 13, 2018

Stocks gapped up at the open but quickly gave way. The Dow is currently down 39 pts and the SPX is flat. Defensive sectors are showing some strength today, as well as energy. But financials (especially banks) are down after some key earnings announcements. Despite that, the VIX Index is down around 17.8. WTI crude oil is up yet again, around $67.409/barrel, to new 3-year highs. The headlines cite rising geopolitical tensions, but whatever the reason, it can’t be supported by fundamentals. Bonds are mostly unchanged today. The 5-year Treasury yield is hovering around 2.67% and the 10-year yield is trading at 2.82%. However, the 2-year Treasury yield continues to rise and at 2.36% is the highest since 2008. The yield curve continues to flatten. 

Yesterday, stocks surged on better than expected earnings announcements. And, as Jim Cramer put it, “The absence of fiery Tweets is a real positive for the stock market.” Today, investors are a little more concerned about President Trump’s rants and controversies (i.e. ex-FBI Director Comey; Russia & Syria; attorney Michael Cohen; China trade tensions). 

Earnings season kicked off yesterday with asset management company Blackrock (BLK). Both revenue and earnings-per-share modestly beat Wall Street forecasts. Growth was pretty strong; revenue rose 27% from year-ago levels and earnings-per-share surged 37%. Assets under management surged to $6.3 trillion. This came despite the fact that inflows of new investment dollars really slowed down. The stock rose 2% yesterday but gave back half of that today.

Delta Airlines (DAL) reported first quarter results roughly in line with expectations. Earnings (i.e. profits) were down from year-ago levels due to higher fuel costs and winter storms. But management surprised analysts with higher average fares and increased passenger traffic—both for personal and business travel. And they forecast 4-6% revenue growth this year. Investors responded positively, sending shares up 2.9% yesterday. 

Costco (COST) posted 11% y/y revenue growth, in line with expectations. US same-store-sales soared 8.3% (or 6.7% excluding gasoline) beating analysts forecasts. Customer traffic was strong during the quarter. The company is poised to achieve the highest revenue growth in 6 years. The stock rose 2.2% yesterday. 

This morning, JP Morgan (JPM) reported much better than expected first quarter results. Revenue rose 11% from year-ago levels and earnings were up nearly 50%. The bank’s return on equity (ROE)—a key measure of profitability—climbed to 15%. That’s great news. As for the bank’s main operating units, investment banking revenue fell 7%, trading revenue rose 7%, and the wealth management division’s assets under management grew 9%. As for banking, net interest income rose 9% y/y as interest rates increased during the quarter. Analysts were a little disappointed that loan growth stalled; CEO Jamie Dimon cited intense competition among lenders. Management’s 2018 guidance was solid: 6-7% loan growth and a tax rate falling to 20%. The stock is down 2.9% at the moment. 

PNC Financial Services Group (PNC) reported 5% revenue growth and 18% earnings growth during the first quarter. Those metrics were in line with Wall Street estimates. The good news: net interest income rose 9% and loans were up 4%. But unlike JPM, PNC saw higher expenses and higher loan loss reserves in the quarter. And second quarter guidance was less than stellar: loan growth modest; net interest income up low single digits. In addition, the CEO says the real estate market is “tightening” and growth in mortgage lending will slow. The stock is down 4% today. 

Wells Fargo (WFC) also reported first quarter results, sort of. The bank reported a 2% y/y decline in revenue and 14% growth in earnings-per-share. Loans declined in the quarter. But results may change pending a large settlement with regulators. Wells’ legal troubles, well documented over the last year, make this earnings announcement a throw-away, but institutional investors are still interested in what the bank says about consumer financial trends. The mortgage business is slowing a bit as rates rise, and competition is depressing lender profitability. 

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