JPMorgan Chase (NYSE: JPM) posted earnings Thursday. In a surprise to analysts, who had been expecting a break-even quarter, JPM reported earning 7 cents for the fourth quarter.
While the report showed a 76% decline from the previous year, the news pushed the stock to early gains in the face of a drop in the Dow.
Typical of the lack of conviction in the markets, JPM gave up early gains. Subsequent trading restored the stock to the positive column before it succumbed to a late-day sell-off that shaved more than 6% from its market value.
The mid-morning decline in JPM occurred as Bank of America (NYSE: BAC) plummeted to a new low at $7.50. BAC is sagging under the weight of absorbing Countrywide and Merrill Lynch, both of which have proven more difficult to digest than earlier thought.
Bank stocks in general are under heavy selling pressure after Federal Reserve Chairman Ben Bernanke declared Wednesday that billions more will be required to restore stability to the nation's (and the world's) banking system.
While JPM is performing somewhat better than other bank stocks, company chairman Jamie Dimon (a Sandy Weil protégé) has said that "the worst of the economic situation is not yet behind us." He warns of greater additional losses from consumer loans and credit card debts.
In the fourth-quarter earnings report, JPM added $4.1 billion in reserves to its balance sheet to prepare for these losses.
When viewing the wreckage in the credit markets of the last year, one is tempted to view with some nostalgia the wisdom of Senator Carter Glass and Representative Henry Bascom Steagall for their perspicacity in their 1933 legislation separating the banking functions of commercial banks from the capital raising functions of the investment banking industry.
Among the banking giants, JPMorgan Chase is performing better than its peers. In a 10-year stretch starting in 2001, Chase Manhattan Bank (founded by Aaron Burr), Chemical Bank and Manufacturers' Hanover were combined with JPMorgan. The combined institution acquired Bank One in 2004.
The acquisition of Bear Stearns in 2008 was a classic case of exploiting a weakness in a competitor, and the later acquisition of Washington Mutual was one of the few cases of activity in the banking sector in 2008 that did not require a federal bailout.
Strong leadership and effective, conservative management of the company's balance sheet make JPM one of the few attractive options for investing in the banking sector.
While tempting at the current price, a rational investor should wait for the next earnings report to assess the depth of the problems in the consumer credit sector before committing to the stock.
Jamie Dlugosch is a contributor to OptionsZone.com.
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