Friday, January 12, 2018

Markets advance on strong retail sales and bank earnings

Dow soared 205, advancers over decliners 4-3 & NAZ rose 37.  The MLP index went up 1+ to the 299s.  Junk bond funds were flattish & Treasuries saw more selling.  Oil pulled back in the 63s & gold jumped up 9 to 1331.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil63.63

GC=FGold  1,328.00

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US retail sales increased in Dec for a 4th month, indicating strong consumer demand throughout the holiday season, according to Commerce Dept data.  Overall sales rose 0.4% (est 0.5%) after a revised 0.9% Nov gain (prev 0.8%).  Sales excluding motor-vehicle dealers also increased 0.4% after climbing an upwardly revised 1.3%.  Retail-control group sales, which are used to calculate GDP & exclude food services, auto dealers, building materials stores & gasoline stations, rose 0.3%, following an upwardly revised 1.4% advance that was largest since 2005.  9 of 13 major retail categories showed stronger results.  The gain in sales, which included increased receipts at non-store retailers, furniture outlets & building supply centers, capped a robust holiday-shopping season fueled by low unemployment, a more confident consumer, steady income growth & discounting.  The average gain in sales over the last 2 months was the strongest for any Nov & Dec since 2010.  The upward revision to retail sales excluding motor vehicles reflected a noted pickup at internet retailers.  Receipts within the retail-control group increased at an 8.9% annualized rate in Q4, up from the 3.4% pace in Q3.  Inflation-adjusted consumer spending on goods & services rose at a 2.2% annual rate in Q3, the latest GDP report showed & projections are that real household outlays advanced 3% in Q4.  Retail sales rose 4.2 percent last year, the most since 2014, while purchases excluding autos climbed 4.3%, the strongest since 2011.  Excluding automobiles & gasoline, sales rose 0.4% in Dec after a 1.2% jump the previous month.

The tax overhaul cost JPMorgan Chase (JPM), a Dow stock, $2.4B last year which is viewed as a down payment on a more profitable future.  The bank took accounting charges in Q4 tied mostly to levies on foreign earnings required under the new law, its effective tax rate will drop this year to 19% from 32%.  That means that if JPM generates the same pretax profit this year as it did in 2017, earnings will balloon by more than $3.5B.  It is the first big US bank to detail the windfall the industry will receive under the new tax regime.  Discussion about the ramifications of the changes is likely to dominate earnings season over the firms’ quarterly results.  CFO Marianne Lake has said that some of those gains will probably evaporate as banks compete with one another on pricing & services.  “The enactment of tax reform in the fourth quarter is a significant positive outcome for the country,” CEO Jamie Dimon said.  “U.S. companies will be more competitive globally, which will ultimately benefit all Americans.”  The bank is working on a long-term plan to use some of the windfall to benefit employees and customers, Dimon said.   Among potential changes could be improved pricing for low- & moderate-income borrowers in areas such as mortgages.  The firm's tax rate will likely rise above 20% within 2 years, Lake said.  The Q4 charge was largely driven by unremitted overseas earnings facing taxation under the tax overhaul.  The tax changes affected the firm’s trading results as revenue fell 26%  to $3.37B from a year earlier.  Fixed-income revenue dropped 34% to $2.22B, more than $500M lower than estimates for that business, fueled by placid markets, tighter credit spreads & the tax charge.  EPS was $1.07, versus $1.71, a year earlier.  Adjusted EPS was $1.76, beating the $1.69 estimate.  Excluding the impact of the tax changes, net income would have been $6.7B.  Provisions for loan losses increased 51% from a year earlier to $1.31B, lower than the $1.48B predicted.  Net revenue rose 5% to $25.5B, while noninterest expenses climbed by a similar percentage to $14.6B, driven largely by higher compensation costs & auto lease depreciations.  Profit in its commercial bank surged 39% to $957M, helped by higher revenue from deposit spreads & loan growth, as well as a $115M  benefit tied to the tax changes.  Wealth-management profit climbed 12% to $654M on rising markets & increasing interest income on deposits & loans.  Earnings from consumer banking increased 11% to $2.6B on higher deposit margins.  Net interest margin, the difference between what a bank pays depositors & charges borrowers, climbed 5 basis points to 2.42% from the previous qtr, exceeding the 2.39% estimate.  Interest income rose 11% from a year earlier to $13.35B, exceeding estimates.  The stock rose 1.26.
If you  would like to learn more about JPM, click on this link:

JPMorgan's Quarterly Tax Pain to Soon Give Way to 2018 Gains

Wells Fargo (WFC) Q4 earnings rose 17% from a year ago, as the consumer banking giant benefited from the recently passed tax bill, but incurred additional costs related to improper sales practices & other matters.  EPS was $1.16, versus 96¢ in the same period a year ago.  Analysts expected EPS of $1.23.  The bank recorded a $3.35B benefit in the qtr tied to the Trump tax bill.  The bank had $7B in deferred tax liabilities, basically taxes it may have owed in the future, & was able to write down some of those liabilities for a gain.  WFC now expects its effective annual tax rate to be 19%.  WFC is unique among the big banks in having deferred tax liabilities.  The bank also had $3.3B in charges due to pending litigation against the company, which includes the continuing investigation into the bank's unethical sales practices & an investigation into its mortgage business.  Lastly the bank had an $848M gain from selling its insurance unit.  WFC continues to try to shake off the fallout from its 2016 sales practices scandal & a subsequent scandal in mid-2017 where the bank sold car insurance policies to customers who didn't need it.  While profits in the consumer banking division rose to $3.67B compared to $2.73B in the same period a year ago, much of that growth was tied to the tax gain recorded this qtr.  Consumer loans fell to $956.8B from $967.6B a year earlier, notable in a period when higher economic growth & higher consumer confidence should have translated into more loans issued to consumers.  The bank's net interest margin also did not improve in the qtr, despite the Federal Reserve raising interest rates in the last year.  Overall, revenues were $22.1B compared with $21.6B in the same period a year earlier.  The stock fell 63¢.
If you  would like to learn more about WFC, click on this link:

Wells Fargo 4Q results rise 17 pct; posts gain from tax bill

The stock market is feeling very good after strong holiday retail sales & the first earnings reports from big banks.  These reports have a larger than usual maze of numbers, but the outlook for future bank earnings is being viewed as favorable.  Meanwhile DC is going from chaotic to much more chaotic & this must be kept in mind when bidding up stock prices, especially when gold keeps rising.

Dow Jones Industrials

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