Earnings news from J.P. Morgan and Intel seemed good, but I beleve Q3 will be the high water mark for these two companies. And, given how well they are managed and the fact that they are considered bellweathers for their sectors, Q3 is a higih water mark for profits in bankign and semiconductors.
J.P. Morgan (JPM) ostensibly beat expectations with earnings of $1.01 compared to estimates of ninety cents. Growth and profits came from the mortgage banking business – refinancings – and the investment banking business – underwriting bonds. Both growth rates are unsustainable as refinancings are slowing and corporate America is so cash rich bond offerings are also slowing. JPM’s core business – retail banking – continues to shrink. A core profit engine of most banks – the net interest margin, the profit difference between what they pay for money and what they charge for loans – also shrank. Revenue on what JPM calls “managed business” – stuff they control, not securities they buy – fell 15% year over year. JPM boosted profits by shrinking loan loss reserves, to my mind, faster than the recovery in credit quality has been slower than the rate they are pulling back on reserves. Chief Executive Jamie Dimon did say in a statement. "If economic conditions worsen, mortgage credit losses could trend higher." The economy is deteriorating according to ChangeWave Research and other survey data, so loan loss reserves are too low. Bottom line: the economy continues to shrink and that means Q3 will be the high water mark for JPM. And this out fit is arguably the best managed and best balanced big bank – their report presages weaker news from outfits such as Bank of America and Citigroup, so this is the high water mark for the entire banking segment.
Intel (INTC) also beat expectations, very slightly, in terms of revenue, profits and forecasts. But the numbers to my mind were weak going into what should be the strongest quarter for their customers. ChangeWave Research surveys indicate IT spending hit a wall in September, will keep hitting that wall in Q4 and this may not have filtered into Intel’s earnings or official forecasts. ChangeWave Corporate Sales surveys also indicate the entire semiconductor segment will also hit a wall in Q4. A quick look through Intel’s numbers showed their modest revenue growth was due growth in lower margin products – mobile microprocessors. Revenue in core personal computer products did not grow. Margins and profits were increased through cost reductions and limits to capital spending and are now near record highs of 66%. Bottom line: These results reflect weak demand for core personal computer products sold through to business and reflect overall weak demand for semiconductors in general. Q3 will also be a high water mark for margins and year over year growth and there is a good possibility they miss top line estimates in Q4.
Conclusions: the consumer is weakening, business spending is flat or weakening, and Q3 is the high water mark for corporate profits for these two outfits. Given that JPM and INTC are the best of the litter in their respective segments, Q3 is also the high water mark for the banking sector and for the semiconductor sector for the foreseeable future.