Banks: the bottom line is not really...the bottom line. Bank earnings reports are more complicated than any other sector report, simply because there are more places money can be moved, lost or taxed.
Look at Bank of America, which reported earnings of $0.27, above expectations of $0.22.
Traders and analysts are unhappy with the report (shares were down 4 percent pre-open) because:
1) $0.12 of the earnings appears to be from sales of stock or subsidiaries;
2) credit did improve — a positive — but not nearly as great as shown by JPMorgan;
3) trading — particularly on fixed income — was down as expected, but the decline was greater than that for JPMorgan;
3) the tax rate was lower than expected;
4) net interest margin is compressing because the yield curve is flatter;
5) no loan growth.
No loan growth may be the most important point. This is true for all the major banks that have reported. The book of business for the major banks is rolling off, and they are not able to place new loans. What are they left with? A lot of cash that they can invest...at lower rates.
Citigroup was a bit better but similar — credit improves, net interest income was down, trading revenues were weak.
"There's nothing to pull me into these stocks," said one bank stock trader who owns NO bank stocks going into earnings season for the banks. "Rates will stay low, demand for loans is low, and the economy is not growing much."
Elsewhere:
1) Euro strength continues — hits $1.30 for the first time since May.
2) General Electric falls 2 percent despite beating Q2 earnings estimates ($0.30 vs. $0.27 consensus) due to stronger order trends and margins. However, revenues for the conglomerate (and CNBC parent) were short of estimates ($37.44 billion vs. $38.37 billion).
Lower losses at GE Capital helped that division's performance, and CEO Jeff Immelt noted that "losses have peaked and earnings are rebounding." Meanwhile, in the industrial space, equipment orders rose 17 percent and margins improved to 17.1 percent.
3) Mattel falls 5 percent on a disappointing Q2 report. Earnings missed estimates by a penny despite better margins and inline sales. Hurting the bottom line was the toymaker's struggles to control costs as expense rose more than the Street expected.
Sales in the U.S. jumped 17 percent — boosted by "stellar contribution" from its Toy Story 3 products. However, international sales only rose 9 percent, weighed down by the then-weakness in the euro.
4) JPMorgan cuts Potash earnings estimates on expectations of lower shipments to China and lower nitrogen prices. JPMorgan's Q2 estimate is still slightly ahead of the Street ($1.26 vs. $1.22 consensus), but its new 2010 forecast of $5.10 lies below consensus of $5.29. Previously, JPMorgan had forecasted earnings of $1.53 in the second quarter and $5.50 on the year for the fertilizer company.
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