Wednesday, July 19, 2006

What's an Investment Bank gotta do??

J.P. Morgan posted earnings this morning. EPS from continuing ops was $0.98 vs. analysts estimates of $0.87, and 253.6% higher than 4 quarters ago. Not bad for a business that's supposed to be struggling amidst a choppy market. In all, we've had 5 of the largest brokerage firms report earnings in June and July. Here is the percentage change in diluted EPS over the same quarter last year.

6/12 -- Lehman Brothers, +49.6%
6/13 -- Goldman Sachs, +179.5%
6/15 -- Bear Stearns, +78.0%
6/21 -- Morgan Stanley, +116.3%
7/19 -- J.P. Morgan, +253.6%

The S&P 500 Investment Bank & Brokerage index is up almost 22% in the 12-months ending 7/18/06 (S&P 500 up 3.21%), but is down 13.93% since hitting a peak on 4/20 (S&P down 5.25%). Here we have 5 companies with extremely impressive growth rates, strong balance sheets, ample liquidity, diversified revenue streams, long histories of surviving tough times, and declining P/E ratios. It looks like the inverted yield curve and (possibly) burgeoning bear market for stocks is causing selling of these companies. But keep in mind, the 2-10 year slope has been 30bp or less since last July, and has been 20bp or less since September. Somehow Wall Street keeps finding a way to make money. I wouldn't bet against them.