In this riveting episode of Capitalist Investor, "Bank-a-Balooza: Earning Season Starts," hosts Tony and Luke delve deep into the financial sector's kickoff to earnings season. They discuss the mixed reviews and performance outcomes from major players like JP Morgan and Bank of America, and Luke shares insights on the effects of acquisitions on bank earnings. Tony brings attention to the condition of credit quality and the risks posed to regional banks with exposure to commercial real estate in the evolving work landscape. Plus, they're not shy about addressing the elephant in the room – executive stock sales, particularly by JP Morgan's Jamie Dimon, and what this might indicate. The duo also unpacks the potential regulatory changes on the horizon and how consumer behavior and job market fluctuations could impact financial institutions. Tune in to catch all their sharp analysis of the biggest stories affecting banks and your bottom line. For any questions or comments about the show, reach out at info@connect.com.
1. The Kickoff of Earnings Season and Its Market Implications Earnings season is a key period for investors as it provides insights into corporate performance and sector health. Host Tony expresses his enthusiasm for this time, understanding it acts as a catalyst for market movement. With the banking sector often leading the charge, how they report can set the tone for market expectations and investor sentiment. 2. The Mixed Bag from Big Banks’ Earnings Reports The episode dives into the recent earnings from major banks like JP Morgan and Bank of America. Luke notes they've had mixed reviews, with particular growth concerns in areas like investment banking. However, asset management showed strength in many reports. Despite some stocks selling off due to investor dissatisfaction, there remains an acknowledgment that credit quality has been generally robust, an optimism captured by PNC's anticipation of a 'soft landing'.
3. The Banking Sector's M&A Activity In recent developments, First Republic's acquisition by JPMorgan was discussed as having an impact on earnings. The hosts highlight the ease with which large banks can acquire smaller, struggling entities like New York Community Bank, reinforcing consolidation trends in the industry. There's an underlying narrative that the "big are getting bigger," with more depositors trending towards these massive, more secure banks.
4. The Stakes in Commercial Real Estate and Regional Banking Tony discusses the concerns around commercial real estate within the banking sector, identifying it as a weak point, especially for regional banks that disproportionately bear such exposures. The change in office culture post-pandemic, with a shift towards remote work, poses serious questions about the future use and value of these properties.
5. Executive Stock Moves and Economic Outlook An intriguing point raised by Luke relates to the stock selling actions of Jamie Dimon, CEO of JPMorgan. Dimon's sale of a substantial chunk of his own stock raises eyebrows, with speculation surrounding the reasoning—whether for personal financial restructuring, such as tax considerations, or a potential lack of confidence in the near-term economic landscape. While the hosts admit uncertainty about the exact motivation, they conclude it is likely a mix of personal strategy and broader economic hedging.
Welcome to our next episode of the Capitalist Investor. As I mentioned last time, is we're trying a new, new little method here of doing more episodes, but shorter takes so that you can move on with your day. Get that knowledge and the knowledge, the sophistication. It's coming at you. All right, today we're going to talk. You know, it's earning season, right? We're just kicking off earnings season. My favorite time of the, you know, a couple times of the year, I love it. It's got to start hearing, watch the, it's, it's a catalyst for market movement. So getting shape season to like stop eating so much and start burning some calorie season. Well, it is spring, but it's like summer body season. I'm doing a very bad job. All right, good luck, Luke. So that goes right into their earnings. Like was that kind of bank, kind of is. It all starts off with the bank. Is, they're all trying to trim the fat, essentially, is kind of what happening. They're trying to add dollars to the bottom line. A lot of these banks have some mixed reviews, mixed earnings. JP Morgan reported, Bank of America reported a lot of these stocks actually sold off. A lot of investors were not happy with some of the growth areas and areas that aren't growing, like some investment banking route or asset management was actually, asset management was a pro in a lot of these earnings, I believe, took. It on the chin because they're getting audited for their money management. So we'll see how that goes. But overall, what the banks are telling us right now is that credit quality is pretty good. PNC came out and said that they're expecting a soft landing. So there's probably some pretty smart people over at PNC trying to figure this stuff out. And you only hope. You only hope you would think so. All right, so there's still good things, right? Their first republic got acquired by JPMorgan. I think Jamie Dimon hit on that a little bit. Basically said the acquisition was, it took a little bit of a toll on their, hurt, their earnings in some areas, but overall it was a pretty successful acquisition. So going forward, a lot of the ease investors ideas in mind around. If there were any more bank failures, like New York Community bank, that just needed a billion dollar liquidity infusion, you have the biggest and baddest banks of the world, JPMorgan, Goldman Sachs of the world, that are able to scoop them up at a pretty reasonable valuation to save them. Right. The kind of philosophy is that we've been preaching for actually about a year. Is the bigger going to continue to get bigger and the small will continue to get smaller? The banking sector is going to see a lot of consolidation where the JP Morgans of the world will continue to scoop up little smaller regional banks that may be hurting because a lot of depositors. What you're seeing is a lot of flows to the top. You're seeing a lot of depositors go from their pncs of the world and go to the JP Morgan. Well, but the problem is, like, here's the thing with these regional banks, is that the weakness in the banks is their commercial and office real estate. You know, and these regional banks have the most exposure to commercial real estate. People aren't going back to work like, people are not turk car jobs. They can't. Well, you know, like the stay at home kind of stayed. Right. You know, work from home kind of thing, or just consolidation out of expensive office space. We saw that here in Cleveland. The, the old BP tower, the Huntington bank tower got, was sold for like$50 million the last time it was sold or appraised. And the way that they calculate the tax revenue, that bank, that building should have sold for about $140 million. No, Tony, you should have went to your bank real quick and just said, hey, I need $50 million. Let me go buy the. I know I could have, could have played a great game of hide and seek on that in that whole building. Right? But commercial real estate's a huge, like, that's been one of the biggest names or themes with regional banks that you hit on. A lot of concern around commercial real estate as the work from home trend continues and stays. Now that being said, I mean, I don't know. I don't know. I've heard, I mentioned I was having this conversation with somebody else and they're like, have you been in that building lately? And I'm like, no, but I hear it's empty. Like, it is not. There's no one in it virtually. Right? That's a problem. Great deal. You bought it for $50 million. What are you gonna put in there? Good God. You know, I don't know what you do with the building. One thing I'm paying attention to, too, is the CEO's and executive management teams, when it comes to these banks, what they're doing with their own stock, because that's. A lot of these executives are compensated through stock options or other incentive programs. So you see, like, one thing I kind of noticed, and listen, we let JP Morgan, we own JPMorgan in our portfolio, but one thing I kind of started to think about and, like, look at, and at least you want to keep in the back of your head is Jamie Dimon, the CEO of JPMorgan, sold, I think, 100, like $50 million in February of his own stock and then liquidated another, like$40 million in March. So, like, almost a total of$200 million. I don't know what Jamie Diamond's exact net worth is. I think it's like $2 billion. Yeah. So 10%. So he liquid. Well, I mean, I don't know how much else he's liquid, but that's 10% of his liquid net worth, right. Or whatever you want to call it.$200 million is a big number, but 2 billion is even bigger. So is 10% a big deal? I mean, that's a lot. I mean, it is a lot of money, but in his grand scheme of things, is it, I mean, that's a lot of walking around money. I don't know what you're going to. I mean, obviously he's just going to try and diversify, but if he liked the company, I mean, who knows? There could have been a lot of different reasons why he's doing it. Tax reasons. Worried about maybe the sunset of Trump's tax laws coming down the pike? Who knows why he did it? Maybe he sees something that we don't, and maybe it's not related to the performance of the stock. It might be a personal tax reason. Who knows? Well, I think Jamie's been pretty outspoken about concerns and holes in the economy. Right. I think he was the one that said, like, there's, we got to prepare for an economic hurricane or something like that. Like two years ago he said that. Yeah. So, I mean, he was kind of, I think, wrong in some aspects with that, but he saw something. I think he continues, he's been outspoken that, like, not everything is perfect. Like, there are definitely some things that he's paying attention to, but the fact that they're aware, I think Jamie, from our standpoint, from our research, and from what our, my perspective is, I think he's got a pretty good idea of what's going on internally with JP Morgan to try to hedge their bets against something bad happening. So I think at the end of the day, this is an example of there can be bad things happening in the economy and some things to be concerned about. But if you're a good, if you're a CEO and you're a good CEO and your company is set up properly and you're hedging your bets and making sure that you're taking dumb risks, then you should be able to weather the storm through almost any kind of environment. I think that even whether or not you sell the stock to hedge against that, whether or not he did that just for diversification, tax reason, I don't think he's overly concerned about the overall economic outlook because if he was, I think he would be making some bigger, bigger waves, bigger waves out there in the public. You know, CEO, you have an obligation maybe not to spook too many people, but Jamie Dimon also doesn't seem like he has a, too much of a filter. Yeah, I think he, there's even thoughts about him running for president or something like that. There's not now but like maybe down the road, but yeah, yeah. And you know, I would say like, you know, one of the more, you know, the good, the bad, the ugly of the earnings season, especially with the banks. Your favorite saying? Well, the ugly part is that and it's just the rubber has not hit the road on this. But you know, there's, there's talks of future regulations. So capital requirements are going to be going up because you know, Nate or Luke, this is your favorite point is that we're racking up debt, you know, consumer debt. Credit cards are maxed out over a trillion dollars in credit card debt. Right. And consumer still strong, but they're putting it on credit cards. So how sustainable is that? If everyone's doing it, then what's the worst it can happen? Yeah, but, but it's as these companies are gonna be able, are going to be required to have higher capital requirements. Obviously that protects the bank, but it also hurts their profitability because they just got to park that money and watch it and stare at it and, and it's not good for the banks and their profitability. But watching I guess what we're looking for for this earnings season is high single digits for earnings growth. We're going to be in an earnings growth boom. The market went up during an earnings growth, not growth. There was a lot of earnings decline. The bar has been set so low. So we should see more growth. It might be already priced into the market. And the other thing is the biggest thing we should be watching is the consumer, are they still strong? Because people need to buy stuff to make sales right down the, coming down the pike. So we'll be watching the consumer. So we'll be watching, you know, the credit cards, Amazon when they come out. It all comes down to jobs. It doesn't even come down to credit anymore. It's like jobs, people will stop borrowing money and borrowing. Okay, so people are doing the same thing that the government's doing right now. They are borrowing new debt to pay off old debt. And that's in companies like banks like JPMorgan's of the world or regional banks of the world are more willing to do that. When times are good, everyone's got a job to pay for any kind of debt and like, prolong it over a long period of time. Right. They aren't willing to lend out money. If you, the first thing they ask you is, you know, whatever w two s, whatever it be for previous jobs or for your job, if you're going for, apply for loans, whatever it be. And if you don't have a job to sustain that lifestyle, spend, they're not going to give you a loan. So it's no longer even about credit anymore. We have $4 trillion of accessible credit available still. Revolving credit, credit cards, loans, things like that. The question becomes, when job losses ever do happen, maybe they won't. Well, luckily we have, unemployment's pretty low. It's below 4%, which is kind of the line, you know, the invisible line of good, you know, a good market and a bad market for jobs. So right now we're good, and people will continue to spend. I'm not expecting anybody saying, oh, my God, no one's spending money. No, they are, because they got to pay for that. I've done a pretty good job for the most part of not spending money, and I'm proud of myself. I'm staying at home, just enjoying life. You know, sit in my backyard watching my dog going to the piers, taking pictures. I think you liked it. Last night I toasted a picture of my story of just sitting on the pier. It was kind of cold. Yeah, but, yeah, just. I need to do that. No hiking. Hiking, things like that. Enjoy nature. Yeah, I need to. I need to do more that. But it's golf season, so that's more. Reason to spend money. It's like a pop, dude. It could be. Yeah. Well, after paying for greens fees and then, you know, getting an adult beverage. Driving around, we all want to be Tony Zabagala. No. No, you don't. All right, guys, well, thanks for listening, and we will hit you up with the next episode here shortly. So if you have any questions, hit us up at info connect.com and we'll talk to you next episode. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.