Wall Street Turned ‘Sour’ on JPM, WFC

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When I came in this morning, I was encouraged by what I saw from Wells Fargo and JP Morgan , not just the bottom line beat but the relative strength in two key areas: mortgage activity and trading.

It's hard to underestimate how important WFC and JPM are to the mortgage business in the U.S. WFC is a monster, accounting for perhaps 30 percent of the mortgage origination business; JPM probably has about half that, but together we are talking about two companies that originate almost 50 percent of the mortgages.

But the Street quickly decided not to focus on those areas of the business and instead looked at the more traditional loan business outside of mortgages, i.e. personal loans, commercial loans, etc.

And here, the picture was not so pretty. Lackluster. Flat.

The thinking is, if loan activity is still not picking up, and investors have driven up bank stocks this quarter in hopes of higher economic activity and loan growth in the second half of the year, and we are not yet seeing an appreciable lift-off, then perhaps our assumptions for loan growth and profits is too high.

There's a bigger problem for regional banks: they do not have the trading operations that the big banks have, so there is not a big offset. True, they have mortgage operations, but it looks like the biggest guys might be taking market share.

For WFC, mortgage originations were up 7.5 percent in the last quarter, expenses were higher, likely because they might be paying more to their people to pull in loans. That suggests a market share grab.

Throw in continuing worries about legal exposure to legacy mortgages, and it's no wonder regionals like SunTrust and Fifth Third are weak.

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