"My retirement date, every time you ask me that, I'm going to say five years. I don't want to retire." -- Jamie Dimon
Ever play sports? Or do anything that you had to get yourself fired up about? Then you know how I feel this morning. I am sure, whatever your background, that somewhere along the way big events woke you up early. Poof, you're ready to rock. Today is "go time". We have already seen some quarterly earnings results trickle in this week. Now that Alcoa (AA) no longer bats lead off, the first day of big financial sector earnings has become, at least for me, when "earnings season" unofficially gets under way. Tape on the foil. So it is that the banks bat lead off together. This morning, we'll hear from the likes of Citigroup (C) , JP Morgan Chase (JPM) , Wells Fargo (WFC) and PNC Financial (PNC) . Next week, the ball keeps rolling, as Bank of America (BAC) , Goldman Sachs (GS) , Morgan Stanley (MS) , US Bancorp (USB) , Signature Bank (SBNY) and KeyCorp (KEY) all go to the tape with their results. We'll also hear from some tech, the railroads, and even some oil next week. It is the financials, however that really take the temperature of not of the marketplace, but of the entire economy itself, so let's dig in a little bit. I hope you brought your e-tool.
I have often said that should the spread gapping the yields between two-year Treasuries and 10-year Treasuries approach 1%, I would strengthen my long position in the banks. It has (currently standing at 0.961%, which is actually down from earlier this week), and I have. So, I come into this earnings Friday longer the banking space than I have been in a couple of months now, but not nearly so long as I was earlier in the year, when we thought things would be far easier for this group in the wake of last year's election.
Still, the wider the gap between short term and long-term rates, that's how money is made in traditional banking. That's how margin is created. There is a catch, though. The loans have to be there. While the Fed has done their part by this group, creating a better-looking landscape for home equity lines of credit, for credit cards (revolving credit), and for all types of loans in general, it looks like demand for credit on the consumer side has withered somewhat throughout the quarter. Oh, there's still growth in the space, but it has slowed. The banks know this. So do the analysts, and it will not come as a surprise, but this will impact forward-looking guidance. That will be so very important today, as going into the later part of this year, the year-over-year earnings comps will become that much tougher.
Why has the growth of front demand for credit slowed? Think about it. If you run a small business, or any business for that matter, if you even just run a household, are you going to stick your neck out ahead of uncertainties regarding health care reform, tax reform, a potential infrastructure build? The answer is as little as possible. Loan performance could also be an issue. Where are we seeing defaults? That uncertainty, too, will hamper the ability to guide forward.
Another potential danger zone will be trading revenue today. While the numbers here overall will likely look better than they have over the last several years, they will not look pretty compared to the last couple of quarters. This has been a recent area of strength for C and JPM, but I think you'll see them have to explain things today, like drops in trading volumes across the industry, particularly for municipal bonds, and mortgage backed securities. To cover any drop here, you may see improved data regarding investment banking that will be spotty, and not likely a strength for everyone. To be sure, guidance will matter to investors as much, if not more than anything else today. For some, the recently announced dividend increases and corporate repurchase announcements across the industry may end up being exactly what the (good) doctor ordered.