On May 10th, I was in the car when I heard that JPMorgan (JPM) had announced a huge trading loss after the bell. The Dow Jones Industrial Average (DIA) had already fallen 500 points off the high set a week or so earlier, and I figured we were going to go even lower. We have. The JP Morgan news, combined with more troubles out of Europe, have sparked the next leg down. The Dow now sits at its lowest close since late December. For the markets to start rallying back, we need financials to bottom and start heading higher. We saw a small rise in financials on Tuesday, but it was just one day. Those gains could be lost and then some on Wednesday. We need a longer time frame. If this was a dance, the financials need to lead it.
JPMorgan has led the decline, falling from $40.74 to $32 since the trading loss news came out, a decline of more than 21%. Going back to May 1st, the stock is down nearly 28%. It is thus not surprising that the Financial Sector SPDR (XLF), of which JPMorgan was the second-largest holding at the end of April, is now down 9.3% since the trading loss news and 13.5% since the May 1st high. JPMorgan is now the third-largest holding in the ETF thanks to its decline.
JPMorgan isn't the only name struggling. Morgan Stanley (MS) is down almost as much since its May 1st high, thanks to problems in Europe and issues with the Facebook (FB) IPO. Even Goldman Sachs (GS) and Citigroup (C) are down more than 20% since then. Bank of America (BAC) has held up the best, but that's not very comforting. The following table shows the performance of these five since the news of the trading loss came out (May 10th) and their May 1st highs.
| Performance | JPM | MS | GS | BAC | C |
| May 10th Close | -21.48% | -17.50% | -12.86% | -7.54% | -16.02% |
| May 1st High | -27.69% | -27.21% | -20.47% | -15.26% | -24.07% |
Now since the trading loss, analysts have taken down their earnings estimates on JPMorgan. For the 2nd quarter, estimates have come down from $1.24 to $0.88, and full year numbers for 2012 have been reduced from $4.98 to $4.42. In fact, all of these names, except for Morgan Stanley, have seen 2012 earnings estimates cut in the last 30 days, although not to the extent we have seen with JPMorgan. All five have seen 2013 earnings estimates reduced as well. While estimates have come down, they haven't seen as dramatic a decrease as stock prices have. Here's where current estimates stand for 2012 and 2013 revenue and earnings per share growth for these names. Some of these estimates are getting taken down almost daily.
| Growth | JPM | MS | GS | BAC | C |
| 2012 Revs | -2.1% | -3.0% | 14.7% | -0.7% | 2.3% |
| 2013 Revs | 3.9% | 9.8% | 4.4% | 2.3% | 3.8% |
| 2012 EPS | -1.3% | 14.3% | 159.4% | 5700.0% | 12.7% |
| 2013 EPS | 21.9% | 59.7% | 12.1% | 75.9% | 13.9% |
Other than Goldman Sachs, revenue growth this year is expected to be sluggish or negative for the group. Next year isn't going to be that much better. Earnings growth is currently expected to be higher than revenue growth, but I'm sure if things in Europe worsen estimates will come down even further.
While listening to CNBC on Monday, I heard some traders discussing the possibility that JPMorgan shares find a bottom at $30. That's $2 below where things closed on Tuesday, and just about $2 above the 52-week low of $27.85. These five names only make up 20% of the weighting Financial Sector SPDR ETF, but their actual presence has a much larger weight on the sector, and the markets.
The Dow is down 5.7% and the S&P 500 (SPY) is down 5.3% since we got the JPMorgan trading loss news. The Financial Sector ETF is down almost double that, at 9.3%. JPMorgan and the rest are down even more since then, and some of these names are off almost 30% since their May 1st highs. These names may not have the market caps they used to, so their weightings in certain indices may not be as much anymore, but their importance in this market is still tremendous. For this market to bottom and go higher, we need financials to turn around. Tuesday's rise was a start, but just a small one. A decent rebound will take several weeks or months to occur.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
