Wednesday, July 16, 2014

Second quarter earnings have few surprises of note; comments on JPM, YHOO, and BAC.

As second quarter earnings continue to be announced, the season so far has been unremarkable overall.  There have been some disappointments and positive surprises as always but there has been nothing earthshaking one way or the other.  There are three companies followed here closely that were of interest.

JPMorgan Chase had a solid quarter, and one that was encouraging for the economy as a whole.  From reading the media reports and listening to the news blatherers and professional pundits at first, a casual listener would have thought that the quarter was a big disappointment.  It was not.  The one area with the big drop in revenues was trading related, not outright risk taking trading but trading to facilitate trades in foreign exchange, derivatives, stocks, and bonds.  Market activity was down, so revenues were going to be down.  Dunderheads thought that this was a big negative.  It was not, and the stock went up.

The issue forever with trading businesses is that when a company does well some securities analysts  will say that they are not going to put any multiple on that because it is not a reliable revenue stream.  Then when trading is weak, they say what a big disappointment and penalize the company.  Fortunately most investors who know how to make money can see through that.  The good news in the quarter was that small business loans were up significantly, 43% I think, and large corporate loans were up as well, 11%.  JPMorgan is a, or the, market leader and does not need to take added risk to get business.  That they are putting on these loans means that both they and their customers are now seeing good opportunities to invest.  That is the best economic news to come out of this earnings season to date.

Yahoo had a so so quarter.  The ongoing focus on Alibaba was ongoing, repetition intended, but if one person said it a hundred did, "the underlying business is still weak and under pressure".  It is always interesting when almost every commentator and analyst says the exact same thing about a company.  Rarely is such unanimity entirely accurate.  Here the thought has been that CEO Marissa Mayer had a huge job ahead of her when she took over two years ago and it would not be easy or quick.  Revenues have been slow to show the results of her efforts so far, but there is still faith here.  She still has the client eyeballs reach of Yahoo globally, but apparently not the attention and focus of quality advertisers.  She still is behind in mobile.  The belief here has been that there will be a change in that, but that belief has been shaken here recently.

Since a timely entry into the stock two year's ago, for research and observation purposes Yahoo's home page became the default page on the internet when logged into on my desktop.  I had been seeing significant progress in both news choices and to some extent advertising until recently, but it now seems to have stagnated or even regressed.  Over the last four days for instance, among the top six news items, almost all of the time, on the home page has been a Michelle Wie putting exercise, a Tom Watson comment on Tiger, and details of Johnny Manziel's summer.  Why?  Are these getting lots of attention from their base and therefore are viewed as popular.  If they are listening to their base they are making a big mistake. If this is meant to be tailored to interests here, they better check their algorithms. They need to expand and build an attractive client base, and they need to be creative and fresh with their stories.  I have no idea what is happening there now and but I am not giving up on a belief in Mayer's efforts, so will hold onto the gains here for now but will not step up for more despite the recent decline.

Bank of America continues to get creamed by regulators for their mortgage business based on both events that happened five to eight years ago and based on some failed efforts to work through the recovery and foreclosure issues related to their existing retained mortgage book from that period.  Brian Moynihan, the CEO, has done everything its seems to accommodate and be cooperative with the government short of serving Eric Holder's tea in the morning.  Over and over again the regulators come back for more.  This time the number may be huge.  If BofA has offered $13 billion, one can guess that it will be more.  For the quarter this most explicitly showed up in legal costs of $4 billion, much higher than expected.  Otherwise the quarter was decent with no surprises, but not up to the standard set by JPM  for 2Q.

More to come as the news will continue to come in this week and next. 


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