JP Morgan (JPM): There are Cracks but the Foundation is Strong

InvestorGuide Stock of the Day Stock Analysis Let's evaluate the two competing arguments. The pro-JPM case rests on CEO Jamie Dimon and how he has been very effective in managing risk at the bank. JPM made the same mistakes as the rest of Wall Street when it came to the quality of mortgage assets on their book but the magnitude of exposure to residential real estate was much lower and better hedged. This meant the firm was able to take advantage of cheap acquisition opportunities in the form of Bear Stearns and Washington Mutual. Dimon has also gotten much better at lobbying Washington where government officials mostly like him and see him as a very competent leader. Additionally, there is much reduced competition on the street and that along with the upward sloping yield curve makes this a profitable trading environment for the firms that survived 2008. JP Morgan's two chief commercial banking competitors -- Bank of America (BAC: Charts, News, Offers) and Citigroup (C: Charts, News, Offers) -- have lost a lot of leverage with customers and regulators -- as they are both seen as wards of the state. This backdrop led JP Morgan to record a 36% jump in net income (to $2.7 billion) on a 39% year-over-year increase in revenue which rose to a record level of $27.7 billion. With short-term interest rates being close to zero, JPM was able to make $4.9 billion in revenue by exploiting wide credit spreads. JPM also took in a lot of equity underwriting business as the ranks of investment banks, with deep balance sheets to offer to clients, have dwindled. The investment banking division accounted for $1.5 billion of the $2.7 billion profit number. The case against JP Morgan uses these very same numbers. Yes, the second quarter was very profitable but let's remember JP Morgan is a commercial bank after all. It's not a hedge fund so don't count on that kind of fixed income trading performance again (plus spreads will narrow too) and it has never brought home the bacon consistently by operating as a white-shoe bulge bracket investment bank, so don't plan again on a quarter in which JPM outshines everybody (including Goldman) on the investment banking deal-making league tables. Therefore, for JPM to consistently perform well in the future, it will have to continue to rely on its bread-butter business of consumer and business banking. And that's where there are serious problems now and in the future. For example, JPM made only $15 million from retail banking this quarter as compared to $474 million last quarter and losses at the consumer lending division rose to $955 million from $389 million. And despite all the talk of an improving economy, housing loans continue to deteriorate with a $1.31 billion charge-off in this segment, up 4.61%. So the argument here is simple, JP Morgan's core business of lending continues to hemorrhage blood and with the unemployment rate slated to cross 10%, things will only get worse. Additionally, JPM will have to suffer more pain thanks to its commercial real estate portfolio which has yet to take major hits. So which of these two arguments carry more merit? Time (and the future course of the economy) will tell but we lean towards the first position because a) JP Morgan has set aside about $29 billion in loss reserves (or 5% of loans outstanding) providing it with a much bigger cushion than its competitors to deal with future losses and b) it may be time to start thinking of JP Morgan as more than just a commercial bank. The departure of Lehman and Merrill has probably created a void that needs to be filled by a blue-chip investment bank. JP Morgan could play that role well especially with Bear Stearns in its fold. Also, Bear was a powerhouse in the area of bond trading, something that JPM is finding very profitable.

Do We Cheer Banks’ Earnings?

By Zacks Investment Research on July 20, 2009 More Posts By Zacks Investment Research Author's Website Last week, after a round of “positive surprises” delivered by some of the major banks, we had “not so surprising” news of closure of five more banks, bringing to 57 the number of federally insured banks closed this year। It appears that the divide in the banking landscape between the “haves” and “have-nots” is increasing। Even among the big banks, there is now a clear two-tier system. On one hand, we have Goldman Sachs (GS: 158।31 -1.72 -1.07%) and JP Morgan (JPM: 36.80 -0.18 -0.49%), which delivered record profits from their trading and investment banking revenues. There is no doubt that these two managed their affairs well, have increased their market share after the collapse of Lehman and Bear Stearns and also have benefitted tremendously from the various programs by the Treasury and the regulators. And, we should not forget the generous AIG (AIG: 13.42 -0.04 -0.30%) payout to Goldman. On the other hand, the second-quarter profits of Bank of America (BAC: 12।01 -0.23 -1.88%) and Citigroup (C: 2.6703 -0.1197 -4.29%) were reliant on several one-time gains, resulting from asset sales etc, while weaknesses in some businesses and continued credit deterioration showed that there is more pain to come. Bank of America’s credit-card unit lost $1।6 billion amid rising delinquencies, compared with a year-ago profit of $582 million. Its home-loan and insurance unit lost $725 million. The bank reported $8.7 billion in credit losses, up from $3.6 billion in the year-ago quarter. Its nonperforming loans jumped to 3.3%, up from 1.1% a year ago. Like Goldman and JP Morgan, Bank of America’s results were aided by strong investment-banking and trading income following the merger with Merrill Lynch। But Citigroup saw decline in investment banking profits and it appears to be losing market share to stronger rivals. Citigroup reported $8।4 billion in net credit losses, nearly double the loss from a year ago. Incidentally, the CEO of Citigroup — after the bank had posted a sixth quarter of loss ($2.4 billion net loss on operational basis) in the last seven quarters — sounded most optimistic during the conference call, saying “the rate of growth in these consumer losses may be moderating.” Obviously he was trying to put on a brave face as the bank still faces an uncertain future. With spiking unemployment, these banks will face increasing credit card losses। Housing and Commercial Real Estate prices are still on a downward spiral and will cause more losses in the coming quarters. On the other hand, mortgage refinancing, which was one of the main reasons for supporting the revenues in the last two quarters, is expected to taper off as the rates are creeping up now. The smaller banks that do not enjoy the privilege of being “too big to fail” continue to struggle. The regulators shut two banks in California and two smaller banks in Georgia and South Dakota on Friday (something that has become the rule rather than the exception for Fridays). The 57 bank failures this year compare with 25 last year and just three in 2007. The latest round of failures is expected to cause a loss of $1.1 billion to the FDIC and bring the total cost of failures this year to $13.4 billion. And unfortunately, this trend is expected to continue for some time.

Hitachi Expanding Hybrid Cap

By Zacks Investment Research on July 4, 2009 More Posts By Zacks Investment Research Author's Website
Hitachi Ltd. (HIT: 31.44 +0.45 +1.45%), a Tokyo-based global conglomerate, is expected to supply advanced lithium-ion batteries to General Motors (GMGMQ.PK: 0.82 -0.0875 -9.64%) in 2010 for use in its gasoline hybrid-electric vehicles (HEV). The deal with GM will increase Hitachi’s production capacity for lithium-ion and expand its business in the automotive-related field. It will also meet rising demand for gas-electric cars.

Hitachi expects the global market for HEVs to expand from 690,000 units in 2007 to 1.5 million units in 2010. As a result, Hitachi estimates the demand for HEV lithium-ion batteries to overtake that of the current mainstream nickel metal hydride batteries by 2015. Toyota Motor (TM: 74.09 -1.21 -1.61%), which currently uses nickel-metal hydride batteries, will start using lithium-ion batteries for its plug-in hybrid cars for the first time.

The company has boosted capacity to handle demand. Currently, Hitachi produces 40,000 lithium-ion batteries per month and expects to increase production to 3,000,000 units. According to The Nikkei business daily, Hitachi will invest approximately ¥30 billion ($311 million) to raise production capacity.

Hitachi has declined to comment on the report. Hitachi’s lithium-ion battery systems will be installed annually in more than 100,000 hybrid-electric vehicles (HEV), which are scheduled for launch in the North American market in 2010.

The company was also recently awarded an order from U.S.-based Eaton Corporation (ETN: 42.99 -2.29 -5.06%) to supply motors, inverters, lithium-ion batteries and other components for Eaton’s hybrid power systems to be delivered through 2011. Plans call for commercial vehicles using Eaton’s hybrid system to be rolled out in markets in North America, Europe and Asia.
Hitachi plans to form a cross-business unit for lithium-ion industrial and automotive batteries and an R&D unit for next-generation batteries. In 2009, Hitachi converted Hitachi Koki, a manufacturer and seller of power tools into a consolidated subsidiary to foster increased research and development into lithium-ion battery-operated products.

Additionally, to develop and manufacture rechargeable lithium-ion batteries for hybrid electric vehicles and other applications, Hitachi merged Hitachi Unisia Automotive, Ltd. with TOKICO LTD., thereby forming Hitachi Vehicle Energy, Ltd. Through these structural reforms, we expect Hitachi to emerge as a leading supplier in the global automotive market.

Hitachi will be able to create more energy by producing lithium-ion batteries and help hybrid cars give greater mileage, but the company may face some technological barriers. Furthermore, globalization of some of its markets, commoditization of products and stagnation of industries may pose difficulty for the company to grow shareholder value.

Hitachi posted large revenue declines across all its segments in fiscal 2008, particularly in automotive-related products, due to a fall in demand. With a large amount of debt and low amount of cash on its balance sheet, Hitachi’s performance has been deteriorating over the past few years. We therefore maintain our Hold rating on Hitachi shares.

A Clear Picture On The US Debt Situation

More Posts By Michael Panzner Author's Website With all of the rhetoric, obfuscation, and spin coming out of Washington these days, some might find it hard to see just where our current policies are leading us. One look at the following chart of federal receipts, outlays, and borrowing, however, and the facts seem pretty clear.

Put that together with the following report from the Associated Press, “Mountain of Debt: Rising Debt May Be Next Crisis,” and it makes you wonder whether this year’s July 4th holiday should really be a time for celebration.

The Founding Fathers left one legacy not celebrated on Independence Day but which affects us all. It’s the national debt.

The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.5 trillion - equivalent to over $37,000 for each and every American. And it’s expanding by over $1 trillion a year.

The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Federal Reserve Chairman Ben Bernanke recently told Congress.

Higher taxes, or reduced federal benefits and services - or a combination of both - may be the inevitable consequences.

The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.

Interest payments on the debt alone cost $452 billion last year - the largest federal spending category after Medicare-Medicaid, Social Security and defense. It’s quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders. The United States went into the red the first time in 1790 when it assumed $75 million in the war debts of the Continental Congress.

Alexander Hamilton, the first treasury secretary, said, “A national debt, if not excessive, will be to us a national blessing.” Some blessing.

Since then, the nation has only been free of debt once, in 1834-1835. The national debt has expanded during times of war and usually contracted in times of peace, while staying on a generally upward trajectory. Over the past several decades, it has climbed sharply - except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy. The debt soared with the wars in Iraq and Afghanistan and economic stimulus spending under President George W. Bush and now Obama.

The odometer-style “debt clock” near Times Square - put in place in 1989 when the debt was a mere $2.7 trillion - ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008.

The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds.

The debt gap is “something that keeps me awake at night,” Obama says. He pledged to cut the budget “deficit” roughly in half by the end of his first term. But “deficit” just means the difference between government receipts and spending in a single budget year. This year’s deficit is now estimated at about $1.85 trillion.

Deficits don’t reflect holdover indebtedness from previous years. Some spending items - such as emergency appropriations bills and receipts in the Social Security program - aren’t included, either, although they are part of the national debt.

The national debt is a broader, and more telling, way to look at the government’s balance sheets than glancing at deficits.

According to the Treasury Department, which updates the number “to the penny” every few days, the national debt was $11,518,472,742,288 on Wednesday.

The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.

By historical standards, it’s not proportionately as high as during World War II, when it briefly rose to 120 percent of GDP. But it’s still a huge liability.

Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs.

Where does the government borrow all this money from? The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world’s safest investments. That’s one of the rare upsides of U.S. government borrowing.

Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt.

But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities. And if major holders of U.S. debt were to flee, it would send shock waves through the global economy - and sharply force up U.S. interest rates.

As time goes by, demographics suggest things will get worse before they get better, even after the recession ends, as more baby boomers retire and begin collecting Social Security and Medicare benefits.

While the president remains personally popular, polls show there is rising public concern over his handling of the economy and the government’s mushrooming debt - and what it might mean for future generations.

If things can’t be turned around, including establishing a more efficient health care system, “We are on an utterly unsustainable fiscal course,” said the White House budget director, Peter Orszag.

Some budget-restraint activists claim even the debt understates the nation’s true liabilities. The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments. That would put the nation’s full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation. ___ On the Net: Peter G. Peterson Foundation independent assessment of the national debt: http://www.pgpf.org/