1) earnings season is upon us, finally. Alcoa which will announce after-the-bell, is still the first company in the S&P 500 to report that has its quarter ending in September.
Alcoa has long since being a bellweather, but I will be curious to see if they maintain or raise their aluminum guidance. In July, they affirmed expectations of a seven percent increase in global aluminum demand. The aluminum industry has underperformed the Materials sector, which underperformed the S&P, for some time now. Any change in that estimate will move the group up. Materials are up 11 percent this year, while the S&P up 17 percent.
However, the emphasis is on JP Morgan and Wells Fargo on Friday. I noted last week that we have seen lower mortgage production, weaker fixed income trading, and a likely increase in provision for legal settlements. Commercial and Industrial loan growth appears to be slower than previous quarters.
One other problem: While credit quality remains good, banks are slowly running out of reserves that can be released. Offsetting weaker fixed income trading should be better investment banking (initial public offering and secondary markets--watch Morgan Stanley in the event of that happening).
All this is well-known, and that is the primary reason banks have underperformed recently. More recently, it has dawned on everyone that short-term interest rates are likely to remain low longer than anticipated. A flat yield curve is not great for banks. That will be a drag on earnings.
My point is that fourth quarter bank earnings, and even 2014 numbers, are likely too high.
Oddly, JP Morgan, which other than Bank of America has the most complex of bank reports, may have fewer surprises since management has already provided abundant details on the quarter's results. One question that remains is whether legal reserves will be hiked.
Normally, banks will begin trading down as earnings season starts.