Monday Market Mayhem – Earnings Season Begins

And suddenly, it's earnings season!

I hope everyone had a nice, restful weekend because it's all about to hit the fan as war and inflation are likely to have randomized earnings results for Q1 and we KNOW that our fellow traders are not mature enough to absorb a bad quarter and simply wait things out – so chaos is very likely to ensue – very quickly. 

Bank of America (BAC) joined most of its banking buddies from last week in reporting a drop in earnings of 12% from last year and last year we were still in the middle of Covid – so not good.  HOWEVER, that 12% decline still left them with a profit of $7Bn for the Quarter and that's just fine for a $300Bn bank – barely over 10x earnings, so it's nothing rational people should be upset about.  

BAC, along with most banks, has fallen almost 1/3 since the January highs and we should do some bargain-hunting as rising rates are to banks what rising oil prices are to refiners – they may sting initially but, over time, they get to increase the "crack spread" between what they borrow for and what they lend for,  In other words, if the Fed gives the bank money at 0.25% and the bank gives you a home loan of 3% and makes 2.5% but already we're seeing 5% plus mortgages after the Fed only raised rates to 0.5% – just like gas stations do when oil goes up a tiny bit – it's just an excuse to screw the Consumers.  

The last time the Federal Reserve started raising rates at the end of 2015, bank stocks sharply outperformed the S&P 500 over the next two years.  You want to stay away from banks that have too much tied up in bonds – like Community Banks and small Savings Banks – as the bond market is taking a huge hit this year but rising real estate prices have, so far, been good for the lenders – as it decreases their loan to value ratios.  

Part of preparing to take advantage of earnings season is knowing which sectors are undervalued or overvalued AND whether or not it is a fair perception.  Banks are always tricking to invest in as there are so many moving parts.  JP Morgan (JPM), for example, is now off about 30% after going even lower on earnings that I thought were pretty good – considering.  There was a $1Bn credit reserve (against bad loans) and a $5Bn write-off on Russian assets from the World's biggest bank but, without those, Q1 was about the same as Q4 and the bank is priced at about 11x earnings.  

Selling a put is a great way to remind us to keep our eye on a stock so, for our Earnings Portfolio, let's sell 5 JPM 2024 $120 puts for $15.50.  That will put $7,750 in our pocket in exchange for promising to buy 500 shares of JPM for $120 between now and January, 2024.  The current price is $126, so it only triggers if it goes lower and, of course, since we collected $15.50 up front – our net entry would be $104.50 – a 17% discount to the current price.  See our classic "How to Buy Stocks for a 15-20% Discount."

Since the only way we end up owning JPM is if the stock goes even lower – THAT would be a good time for us to buy long calls, using the money we just collected and giving us a "free" (if we don't get assigned) call spread over the next two years.  We think JPM is oversold now and the most likely reason they would go lower is a general Recession that would not be particular to JPM – so they would still make a good long-term investment – ESPECIALLY since the Recession is being caused by rising rates, which is something the Government can adjust, rather than an actual Global slowdown.  Quite the oposite – the Fed is raising rates BECAUSE the economy and inflation are running to hot.  

Anyway, that's the kind of stuff we look for in Earnings Season – discrepancies.  We find the flaws in the investing strategies of others and, when they leave perfectly good bargains laying around – we scoop them up.  

This is going to be a very boring data week and Russia hardly did anything terrible over the weekend so there won't be much to talk about other than earnings.  Covid cases are up 39% in April but, as usual, no one is going to talk about that until it's much too late. 

ONLY 511 people a day are dying in the US – that's only 186,515 per year – hardly a thing added to our Million-corpse pile.  Covid barely even made the list of concerns people have in the most recent Gallup Poll – dropping from 20% in January to just 3% in March:

So you can't blame the Government for not doing enough about Covid when the correct answer, according to the polls, is "What Covid?"  The same goes for Healthcare, Poverty, Inequality, Homelessness and the Deficit – it's amazing what you can keep people from thinking about if you keep it off the TV, right?  

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