Wednesday, 16 July 2014

Bank Earnings Surprise on Pickup in Trading


Two of the biggest U.S. banks posted better-than-expected quarterly results on Tuesday, driven by a June uptick in some of the same trading businesses that have dragged down Wall Street results over the past year.

Investors sent shares of J.P. Morgan Chase JPM +3.52%  & Co. and Goldman Sachs Group Inc. GS +1.30%  higher after the reports, even though bank executives warned that a sustained recovery in Wall Street's biggest business wasn't imminent.

Trading has slumped for the past year as markets muddled through an unusually slow stretch. J.P. Morgan lowered investors' expectations further in May when it predicted its quarterly trading revenue would drop by 20%. Later that month, Goldman President Gary Cohn warned that conditions remained difficult.

Yet on Tuesday, J.P. Morgan and Goldman reported that some clients had turned more active in the quarter's final weeks, helping the banks avoid a steeper drop. Both banks still posted double-digit trading-revenue declines, and neither offered investors much comfort that the June pickup would continue.

"It's not something we should do cartwheels over, but something we can stand up and cheer" about, said Tom Jalics, a senior investment analyst for Cleveland-based Key Private Bank, which manages J.P. Morgan and Goldman shares. "We should take note today but should be cautious about trading results going forward as well."

For at least one day, however, bank investors could exhale. J.P. Morgan's shares rose 3.5% to $58.27 in 4 p.m. New York Stock Exchange composite trading, while Goldman climbed 1.3% to $169.17. Other bank stocks, including those of Citigroup Inc., C +1.80%  Bank of America Corp. BAC +1.54%  and Morgan Stanley, MS +0.60%  also rose.

Bank of America reports second-quarter results on Wednesday, while Morgan Stanley reports on Thursday.

Goldman became the first big U.S. bank to boast higher quarterly revenue than it reported for a year earlier. The New York firm said total revenue climbed 6% to $9.13 billion, while net income rose 5.5% to $2.04 billion, or $4.10 a share. Analysts polled by Thomson Reuters expected per-share earnings of $3.05 on revenue of $7.97 billion.

Goldman leaned heavily on other businesses to offset the trading decline. Its investment-banking arm reported revenue of $1.78 billion, up 15% from a year ago. The firm had a record quarter in underwriting revenue, and merger-advisory revenue climbed 4.1%. Goldman's own portfolio of equity and debt investments surged in value.

Goldman, which hadn't offered a specific forecast earlier, reported that trading revenue in fixed income, currencies and commodities, or FICC, fell 8.6% from a year earlier to $2.22 billion. Citigroup on Monday reported its own FICC revenue had dropped 12%.

Wall Street usually slows during the summer months, meaning investors might have to wait until fall for signs of a trading recovery, said Jeffrey Harte, an analyst with Sandler O'Neill + Partners LP. Bank traders usually benefit when markets turn choppier, giving them more opportunities to profit from swings in the prices of securities.

"The market will want to see volatility picking up," Mr. Harte said. "I don't think that's something you hear in August."

During a conference call with analysts, Goldman Chief Financial Officer Harvey Schwartz noted that client trading activity improved as investors geared up for European Central Bank policy decisions. But when asked about July, he said it was "too early to tell."

Goldman's operating expenses rose 5.6% to $6.3 billion. The firm set aside $3.92 billion for employee pay and benefits, or 43% of revenue, matching the firm's so-called compensation ratio in the first quarter.

J.P. Morgan, the largest U.S. bank by assets, posted net income of $5.99 billion, or $1.46 a share, for the second quarter, compared with $6.5 billion, or $1.60 a share, a year earlier. Revenue declined 3% to $24.45 billion, but both figures beat analysts' projections as tracked by Thomson Reuters of $1.29 a share in earnings and revenue of $23.76 billion.

Revenue from fixed-income markets fell 15% from the previous year on what the bank said was "historically low levels of volatility and lower client activity across products."

"Our operating assumption is that it will stay at low levels for a while," James Dimon, J.P. Morgan's chairman and chief executive, said during a conference call with analysts, adding that the next two quarters are expected to have low activity compared with the second half of 2013.

J.P. Morgan finance chief Marianne Lake added that June brought "generally higher levels of activity." But that momentum hasn't carried into July so far, she said.

J.P. Morgan's latest results came about two weeks after Mr. Dimon revealed publicly that he has throat cancer. On a call with reporters, the 58-year-old CEO said the treatable cancer hasn't spread and that doctors have spent the past few weeks completing his treatment plan. "I'm hoping the next time I talk about this at all, in eight weeks or something, I'll tell you it's complete and the prognosis is very good," he said.

Few large banks associate their image with a single leader as much as J.P. Morgan, where Mr. Dimon has been both chairman and CEO since the end of 2006. Mr. Dimon's diagnosis has raised questions about the bank's succession plan as well as the extent to which the CEO will have to pull back from regular duties while undergoing treatment.

Mr. Dimon on Tuesday added that he still expects to be involved in the business during the treatment whether in the office, on the phone or by video conference. He said he would take "a few weeks of rest" after the treatment, as advised by his doctors.

Like other banks, J.P. Morgan reported that its investment bankers are picking up some of the slack for trading desks that are dealing with a sluggish environment. The bank's equity-underwriting revenue jumped about 4%, and advisory revenue jumped 31%.

The New York bank again showed weakness in its mortgage business as it, like its peers, continues to reel from a sharp slowdown in refinancing. Mortgage originations of $16.8 billion fell 66% from the previous year.

But the weakness doesn't suggest that consumers and businesses are on their heels. Average loan balances in the commercial-banking unit were $140.8 billion, up 7% from a year earlier and 2% from the previous quarter.





Updated July 15, 2014 8:50 p.m. ET

Thursday, 10 July 2014

How to Stay Out of Debt: Warren Buffett - Financial Future of American Youth (1999)

Here is an interesting video featuring the esteemed investor Warren Buffet. He talks about how to get the value out of your earning power. Its from 1999 but still contains some relevant principles.

What is your view ? Leave a comment.


Monday, 7 July 2014

INVESTMENT FOCUS-Euro stragglers may be tempted to borrow their troubles away


Reuters) - If, faced with a turbulent decade for family finances, you could fix the interest rate on your massive mortgage debt at 3.5-4 percent for the next 10 years, you might well be tempted to grab it with both hands.

In some senses this is the choice facing debt managers for the euro zone's vulnerable southern members after six months in which long-term interest rates have fallen to implausibly low levels, the likes of which they may not see again.

Why not issue hundreds of billions of euros of long-term debt at current rates and pass the whole problem on to the next generation?

It may be just a tempting mirage, and likely only to remain that given the structure of the bond market, politics and the inherently conservative nature of national debt managers. But it underlines the nature of this golden moment for debt managers in places like Italy and Spain, and begs the question of whether they should take more advantage of it now to avoid another Greek-style default in years to come.

"If I were an issuer - public sector or private sector - and someone said you can wait to pay a chunk of your debt for a generation at record low interest rates, I would be willing to pay slightly above current market prices now," said HÃ¥kan Wohlin, global head of debt origination at Deutsche Bank.

Wohlin and other senior figures at the world's biggest banks are the experts advising debt managers in Rome, Madrid and other capitals on where to go from here. The consensus is firmly in favour of arresting, and if possible, reversing a slide in the average duration of the loans countries have taken from global markets over the last five years.

That is happening slowly. Spain and Italy both issued their first 30-year bonds since 2009 last year, and this week Ireland offered investors the chance to switch out of shorter-dated bonds for longer-dated ones - an exercise which is becoming routine for the bloc's most indebted states.

But having just emerged from a crisis where cautious investors were only prepared to trust them over short horizons, many of the euro zone's most fragile states are still faced with a mountain of debt repayments in the coming years.

Almost half of Spain and Italy's combined 2.7 trillion euros in public debt has to be refinanced over the next five years. With debt-to-national output ratios still very high and prospects for growth and a rise in prices that would reduce the value of the debt still uncertain, there is no guarantee that refinancing will be easy - or, at least, as cheap as it is now.

"Some public sector borrowers may not be able to repay a significant part of their debt load in the near term," Wohlin says. "Economists don't see sufficient growth for them to do it. Where is the cash going to come from? Perhaps monetization of dormant state assets, but still..."


One big barrier is the suspicion that current market pricing of the relevant governments' debt would not hold under the pressure of an avalanche of new bond sales.

"On one hand someone who's rational would want to issue debt for as long as possible, at the lowest interest rates," said Alessandro Tentori, global head of rates strategy at U.S. bank Citi. "But on the other hand you need to have demand."

Norway's huge national oil fund - one of the largest bond investors in the world - voted with its feet last month, saying it would steadily scale back the share of its holdings in bonds in traditional markets in Europe.

It says its expectations of both nominal and real - adjusted for inflation - returns are much higher than those now on offer.

"We have a 4 percent real return expectation from the government. If you add in 2 percent inflation, then that's a 6 percent nominal return," chief executive Yngve Slyngstad told Reuters last week. "You will not get that in the bond market in the foreseeable future ... We now have a real return in the bond market that is uncomfortably close to zero."

German 10-year bond yields currently yield around 1.27 percent, but with year-on-year inflation of around 1 percent, real returns are scant. In Spain, where inflation is zero, 10-year yields of 2.7 percent look a bit more palatable - but not enough to tempt the Norwegians.


There is also the problem that unlike a mortgage, raising a surplus of funding for on-going needs can come at a cost.

If a country borrows more money than it needs to finance the state budget or pay back redemptions, then it has to re-invest that cash somewhere else until it is ready to spend it. Given the inherently conservative nature of debt managers, this is likely to be in short-term money market instruments that offer meagre returns - and a net loss.

"It can't just sit there making bigger and bigger losses," said Allegra Berman, global head of public sector banking at HSBC, pointing instead to the very low cost of borrowing over the short term for all these countries.

Any added cost is also a hard sell politically, and carries with it risks to already stretched debt-to-GDP ratios and budget targets being closely watched by Brussels.

"In the periphery, credit curves are still quite steep, and governments will not be prepared to pay up that much (for longer-term money)," Berman said.





By John Geddie and Patrick Graham

Thursday, 3 July 2014

Watch High-Speed Trading in Action

Trading has become increasingly automated in the larger financial institutions. Citadel Group, a high-frequency trading firm located in Chicago, trades more stocks each day than the floor of the NYSE.

Would you prefer to work out your own trades or rely on computer algorithms ?

Tuesday, 1 July 2014

FTSE falls as broker's downgrade hits easyJet


Chief Executive Officer of easyJet Carolyn McCall poses after a media conference announcing expansion plans in Italy with the opening of a new base, in Naples March 27, 2014. REUTERS-Ciro De Luca

Chief Executive Officer of easyJet Carolyn McCall poses after a media conference announcing expansion plans in Italy with the opening of a new base, in Naples March 27, 2014.


(Reuters) - Britain's top equity index slipped lower on Monday, with budget airline easyJet (EZJ.L) the worst-performing stock as it felt the effect of a broker downgrade.

The blue-chip FTSE 100 index .FTSE ended down by 0.2 percent, or 13.83 points, at 6,743.94 points - down more than 2 percent from its 2014 peak of 6,894.88 in May, which marked its highest level since December 1999.

EasyJet fell 6.4 percent, making it the worst-performing FTSE100 stock in percentage terms, after Bank of America Merrill Lynch cut its rating on the stock to "underperform" from "neutral."

Bank of America Merrill Lynch said earnings headwinds were expected to put pressure on easyJet's shares, and easyJet also dragged down rival International Consolidated Airlines Group (ICAG.L), which fell 3.5 percent.

Richard Griffiths, associate director at Berkeley Futures, expected the FTSE to make little progress in the near term, partly because interest rates are expected to rise soon, which would lead to bigger interest payments for companies and a cooling of the housing market.

"We might just drift a little bit lower on the FTSE from here," he said.

Gold and silver mining company Fresnillo (FRES.L) closed up 2 percent, the best FTSE stock in percentage terms, as it benefited from the price of gold XAU= staying near a 2-month high.

Drinks group Diageo (DGE.L) also bucked the weaker market to rise 1 percent on speculation of a possible tie-up with SAB Miller (SAB.L).

Most traders and investors expect the FTSE 100 to reach a record-high 7,000 points in 2014, on expectations of a further strengthening in the British economy, better corporate results and more corporate takeover activity.

However, the FTSE has failed to break through the 6,900 barrier so far, and has underperformed rivals such as Germany's DAX .GDAXI and the U.S. S&P .SPX, which have both climbed to record highs.

Lex Van Dam, a hedge fund manager at Hampstead Capital, said that a rise in sterling GBP, which would hit exporters, and the prospect of higher rates meant he was in no hurry to place big bets on the FTSE for now.

"I would not be in a rush to buy, with the next move in rates up and a strong sterling hurting exporters," he said.







(Additional reporting by Tricia Wright; Editing by Mark Trevelyan)