This morning J.P. Morgan Chase & Co.(NYSE:JPM) reported earnings. The headline in the media stated that the company's earnings rose or increased by 23 percent. This would normally be a huge beat and most people would believe the stock would skyrocket higher. However, while the headline number was very good the stock is actually trading lower as I write this small article. Let us ask why this is happening?
Can anyone really understand the accounting that is used by the large major banks? Remember these banks do not have to report their toxic assets as liabilities any longer since the FASB 'mark to market' accounting changes. These toxic derivatives that the banks actually have on their books are really credits now. Bad mortgages are also a thing of the past and very few people really understand how they write down their foreclosure losses. Personally I'm not an accountant, however, I can read an income statement and a balance sheet. These bank balance sheets really make no sense to me and looks more like an Enron statement. Every accountant that I have spoken with can't really make heads or tails out of any of the major banks balance sheets either. I suppose when you write the rules you can change the rules at anytime. Please understand that these large major banks can borrow money from the Federal Reserve Bank at zero percent. Therefore, theoretically the large major banks do not need to lend money in order to make money. They can simply buy stocks, U.S. Treasuries, and operate their credit card business. Remember the average interest rate on a credit card is over 16.50 percent. It's not a bad racket when you think about it.
This is why as a trader we must use charts. The charts will simply tell us if money flow is going in the stock or out of the stock. Who can really figure out what a bank's balance sheet or earnings report is really telling us? These earnings reports are so filled with accounting shenanigans that sometimes I wonder if they understand it themselves. My advice is too stay with the charts as price action is king.
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