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Tech stocks - Wednesday, October 14, 2009

The Dow Party Surpasses The 10,000 Mark

With the Dow finishing 114 points higher and eclipsing the 10,000 mark, investors who are currently in equities have to be wondering when this rally party is going to end. After all, every party ends sometime otherwise new ones can’t begin. But the Dow finishing over 10,000 is psychologically important to investors as it gives them a little more confidence that the market will continue to keep moving forward. So how long will this rally party last? That’s tough to say as we’re only at the beginning of earnings season and investors seemed more focused on Intel’s (INTC:NASDAQ) and JPMorgan’s (JPM:NYSE) revenue celebrations then Johnson & Johnson’s (JNJ:NYSE) lackluster revenue performance.

It’s easy to argue that Intel and JPMorgan are key bellwether stocks for their respective industries and their better-then-expected earnings reports should drive the market higher. To an extent, the staff at tech:stocker agrees with this but earnings season is only beginning. Unemployment is expected by many to increase for the rest of the year while credit defaults, foreclosures, and inflation could easily “turn off the lights” on the latest rally party. And when the current rally party ends as investors decide they have had enough, we do believe a new one will take its place. For now, instead of pulling out of the market, we recommend diversifying your portfolio by taking profits from current investments and investing in new areas. Diversification never prevents losses, but it can limit them.

But its hard to ignore JPMorgan’s earnings report today and think that if a majority of companies reporting earnings delivered similar results, the 11,000 mark for the Dow would certainly be within reach before the end of the year. Unfortunately for investors, it’s not going to be that easy. Even with Google (GOOG:NASDAQ) on deck to deliver earnings tomorrow (and with the stock leaping almost 2 percent today, it appears that investors agree with our assessment that Google will report improved earnings), there are still many potential party crashers to deliver less than stellar numbers.

But for today, let’s focus on JPMorgan. With analysts expecting earnings of $0.52 per share, JPMorgan delivered $0.82 per share. The top line was also extremely solid as the company earned $28.78 billion in revenue, a solid beat of the $24.96 billion estimated by so-called experts. JPMorgan’s investment bank had an extremely strong quarter delivering $7.51 billion in revenue as fixed income markets delivered two-thirds of this number. With many investors still uncertain about the near term future of the market, bonds are once again an attractive investment.

The profit party at JPMorgan was not without its pitfalls as the bank was forced to increase its provision to cover current and future home loan defaults to $3.99 billion while bumping its provision for credit card losses to a rather large $4.97 billion. Much of this can still be attributed to the acquisition of Washington Mutual but to JPMorgan’s credit, they are not blaming the acquisition for their increased credit exposure.

Yes, JPMorgan is benefiting from the suspension of mark-to-mark accounting rules, but so is everyone else in the banking industry. But unlike many of its banking peers, JPMorgan has a far better diversified revenue model which has helped the bank deliver better-than-expected numbers. After seeing this earnings report, investors may be interested in buying any company with the work “bank” in its name. Don’t fall for that trap. With the increasing amount of commercial loans defaulting, regional banks are going to have a tough time turning profits in the immediate future. And even larger banks like Wells Fargo (WFC:NYSE) could still use more capital to stem potential credit losses. JPMorgan is definitely a best of breed bank right now and that’s why we are raising our 12-month target price to $61 per share. With company planning on improving its quarterly dividends if its credit portfolio stabilizes, this aggressive forecast is actually very reasonable. JPMorgan will keep the party going.