Big Banks’ Biggest Number

MARKETS

Inflation Relief

Producer prices ease anxieties.

Of course Producer Price Index data for March was cooler than forecast. That’s just the way things are going in the “incoming data” era.
And, of course, the 8:30 a.m. ET release eventually gave way to some nice, healthy price action on Thursday.
The S&P 500 made up all the ground it lost to Wednesday’s hotter-than-forecast Consumer Price Index data after lunch before easing into the close.

The S&P 500 regained all the ground it lost after Wednesday’s CPI release by Thursday afternoon.

Though the Dow Jones Industrial Average finished slightly in the red, the Nasdaq Composite posted a solid 1.68 percent gain. Small-caps also caught bids.

It could be the case that a strong economy continues to make a rate cut seem unnecessary. And it’s hard to understand that as a negative.
I do like to keep it simple, but I’m aware of the risk of going too far in that direction. Still, an expanding economy is a healthy economy.
The other thing is, the Federal Reserve’s favorite inflation gauge is the Personal Consumption Expenditure Price Index, as we’ve discussed. That number won’t be out until April 26.
We know, though, that the softer PPI data will have a greater impact than the harder CPI data.
What that means for the timing of a rate cut is still hard to figure.

DEEP DIVE

“Net Interest Income” Is the Metric

It says a lot about banks’ long-term health.

JPMorgan Chase & Co. $JPM will get this Friday started well before the opening bell with first-quarter financial and operating results that will probably show some year-over-year slippage.
Analysts expect all of JPM, Citigroup $C, Wells Fargo $WFC, Goldman Sachs $GS, Bank of America $BAC, and Morgan Stanley $MS to report little growth when they reveal numbers between now and Tuesday.
Earnings are important. And bank earnings – particularly the big banks – are a critical indicator of the condition and functioning of the overall financial system.
The Global Financial Crisis and the Great Recession provided stark lessons on this central point. More recently, regional banks have given observers pause to consider whether their problems of concentration will turn into systemic threats.
Bottom line, healthy banks generally mean a healthy economy.
At the same time, earnings are also backward-looking.
They tell us what happened during the quarter, half, nine months, and/or full year just completed. The trend too is more important than any one three-month or even 12-month period.

Financials have been leading the broader market higher in 2024, but their momentum appears to be waning.

The stock market, of course, is forward-looking: It’s a mechanism to discount the present value of future cash flows, in its pure and stylized form.
That’s why investors, traders, and speculators alike focus on management guidance and commentary during reporting season.
JPM will report at approximately 7:00 a.m. ET. When Jamie Dimon opens JPM’s earnings conference call at 8:30 a.m., investors, traders, and speculators will be listening for guidance on a metric called “net interest income.”
“Net interest income” is the difference between what banks generate in revenue on their interest-bearing assets and what they pay to depositors on their interest-bearing accounts.
A rising-rate environment is generally good for banks, as it creates greater potential spread between what comes in and what goes out.
But if rates get too high and stay there for too long consumers start to get squeezed. So far, consumers seem to be adapting well to higher interest rates. Banks, too, have done well.
JPM, the biggest US bank by assets, will offer good information on the durability of those trends.

PHARMACEUTICALS

How Pfizer Gets Well

This is what value looks like.

This is what value looks like.It’s been a rough run for Pfizer $PFE off its all-time closing high of $55.87 on December 16, 2021, when its status as the first mover on a COVID-19 vaccine seemed like it would power it forever.
As of Thursday’s close PFE is yielding 6.38 percent, though, and it’s the kind of business that can both sustain and grow that payout over time.
From the Research Desk we learn that Goldman Sachs has identified PFE as a “compounder.”
A “compounder,” according to Goldman, is a company that generates free cash flow on good margin and sales growth but whose stock has lagged its benchmark by at least 5 percent over the trailing 12 months.
Based on Goldman’s criteria, PFE could generate a high return if the market recognizes the mis-pricing opportunity.

Pfizer $PFE has fallen a long way from its pandemic-era closing high of $55.87 on December 16, 2021.

The stock is down 8.50 percent so far this year, lagging well behind the SPDR S&P Pharmaceuticals ETF $XPH as well as the broader market.
Some on Wall Street see something, as 10 analysts rate the stock a “buy” and forecast average upside of 19 percent from here. Sixteen say PFE is a hold, but no analysts rate it a “sell.”
John Zechner, an analyst with a “buy” rating on the stock, said in a StockPick Pro Tips interview on Thursday that PFE has re-invested its vaccine windfall into cancer drugs and other therapies with long-term promise.
Zechner also notes that PFE is trading at around 10 times forward earnings, a low valuation that also means limited downside in what could be an increasingly volatile market.

Pfizer $PFE is underperforming pharmaceutical industry peers and the broader stock market in 2024.

Zechner’s firm is overweight other sectors with similar “value” characteristics, including utilities, telecom, and pipelines as well as health care.
Here you get growth but you also get what Zechner calls “valuation protection” with some upside potential.
There’s something about consistent dividend payments – Pfizer last cut its payout in 2009 to free up resources to acquire Wyeth – that makes holding on for that capital gain a lot less aggravating too.
PFE is no longer a “Dividend Aristocrat” because of that cut. But it’s grown its payout every year since then. And it’s been punished for the normalization of its sales in the aftermath of the pandemic.
You can get paid more than 6 percent to wait for the market to discover its error.