Dow 10,000 for the 26th Time
Today JPMorgan Chase (JPM) reported quarterly earnings of 82 cents a share, up from nine cents for the same period last year. Even the most optimistic analysts had expected no more than 65 cents for the quarter. Needless to say, shares in JPM and its peers rose nicely on the news. Pundits who were forecasting the death of Wall Street just a few months ago are now re-thinking that prediction.
We do not find the JPM news so surprising. As we have said before, it is very difficult for a bank not to make huge profits when its cost of funds is almost zero. JPM finds itself in such a happy place thanks to a variety of Treasury and Federal Reserve bailout programs. More interesting is the fact that JPM is reserving 38% of revenue for employee compensation, a figure that is actually conservative compared to competitors like Goldman Sachs (GS), which set aside 49% of first-half revenue for compensation, and the 71% booked by Morgan Stanley (MS). This raises an interesting question: Does money-center banking look like an industry that needs to be rescued? No. But rescued it was, which is the only reason anyone on the payroll is getting anything at all this year.
Wait, some will say. Banks are still in a precarious position, given the need to reserve capital for potential loan losses in this weak economy. True enough. That being the case, then why is this precious capital being expended so generously? According to a study published by the Wall Street Journal today, major U.S. banks and securities firms are on pace to pay their employees a total of $140 billion this year – even more than they paid out in the boom year of 2007. One might respond that the bank workers are making profits for shareholders, although stock prices are still less than 50% of 2007 levels on average. This is also true but simply exposes the circularity of the argument: Banks need to be bailed out because they are so dangerously unstable, but they can pay billions to executives and traders because they are so insanely profitable. While this may make sense on some planets, we are talking about Earth here.
The Federal Reserve shows no signs of changing the free-money-for-favored-banks policy that has been in place all year. In the minutes of their September meeting, released today, members discussed purchasing even more mortgage-backed securities. Their ostensible reason was to boost the economy, but it is more than a happy coincidence that the securities in question are owned mainly by (surprise!) banks like Goldman Sachs, which of course will be happy to unload them to the Fed. Treasury rates remain in a short-term uptrend with the ten-year yield ending at 3.423% today. Resistance is not far ahead, so this trend might turn out to have run its course for now.
Gold appears to be taking a break from the rally that began last week. Some consolidation will be healthy and provide a better foundation for further gains. Today the Dow broke through the 10,000 level for the 26th time while the U.S. Dollar Index plumbed its lowest level since summer of 2008. These are two other trends that could use a little consolidation. October is not generally thought of as a friendly month for stock investors, but we’re almost halfway through and it hasn’t been so bad. Cross your fingers.
Nine of the ten sectors we track increased their momentum scores in the last week. Materials remained at the top and widened its lead, helped by the rally in gold and other commodities. Energy jumped four rungs up the ladder to #3 as crude oil advanced to $75. Telecom was the only sector to lose momentum and is still struggling to surpass the 2009 peak it set in May. Along with Telecom, the defensive sectors of Utilities, Health Care, and Consumer Staples are bringing up the rear.
All Styles got a boost this week. Value is still favored over Growth at all capitalization levels, though not by a wide margin. Mid Cap is doing better than Small Cap, while Small Cap is outperforming Large Cap. Mega Cap is the worst of all. The picture adds up to one of increasing risk appetite among equity buyers. How long the trend can continue is still an open question. The answer is probably “longer than we think.”
Markets around the globe showed improvement in the last five days. Latin America is still in the top spot thanks to the surge in commodities and maybe some residual Olympics euphoria. Australian shares rose for similar commodity-related reasons, providing a boost to Pacific-Ex-Japan benchmarks. Canada, another resource-rich nation, climbed in the rankings. Japan remains the weakest major world market but was nonetheless able to flip its momentum reading from slightly negative to slightly positive this week.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“It is a toxic instrument, and if people want to forget it, I think they’ll regret it.”
George Soros, speaking about the stock market
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