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Stock Market Today: Banks Net Record Profits, But Stocks Slip

The stock market today is trying to end what has been a negative week on a positive note.

Markets have traded down all week on global economic concerns and today are being held back by JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) even though the two financial giants posted record earnings.

Here's what's bringing those stocks down and why consumer sentiment is at a five-year high:

  • Banks slide amid record earnings- JPMorgan and Wells Fargo each reported record quarterly profits but neither stock is surging on the results. Wells reported third-quarter net income of $4.94 billion, or 88 cents per share, up from $4.06 billion, or 72 cents a year ago and JPMorgan announced third-quarter earnings of 5.71 billion, or $1.40 a share, up from $4.26 billion, or $1.02 a share a year earlier. The record results were spurred by homeowners taking advantage of lower interest rates in order to refinance their mortgages. "The one big positive is clearly mortgage origination revenues," Richard Staite, an analyst at Atlantic Equities LLP in London, told Bloomberg News in an interview before results were announced. "Rates will remain at this level or potentially drop further and ultimately that will drive a recovery in the housing market."

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JPMorgan (NYSE: JPM) Earnings Preview: Five Things to Watch

The JPMorgan Chase (NYSE: JPM) earnings report due tomorrow (Friday) gives CEO Jamie Dimon a chance to put the huge trading losses from the "London Whale" behind him.

The "London Whale" trades are the are hedged strategy that went bad and cost the bank nearly $6 billion. JPM took the majority of the hit in the second quarter.

JPM stock tumbled in the weeks that followed after details were uncovered and trading losses swelled. Since then, shares have staged a notable recovery rising from $34.59 on July 11 to the recent price of $42.25.

Now JPM earnings have a chance to shake off the scandal and impress investors.

Expectations have grown for Friday's numbers, with the consensus estimate raised from $1.16 per share to projections of $1.21 per share. Estimates have increased in the last three months from $1.04.

Analysts are predicting earnings of $4.74 per share for the fiscal year, with revenue for the year to come in at $97.76 billion.

The fresh forecasts are 18.6% better from the same quarter a year ago when JPM posted earnings of $1.02 per share.

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JP Morgan (NYSE: JPM) Earnings Pinched by Trading Blunder

Despite a $4.4 billion loss stemming from bad credit bets, JPMorgan Chase (NYSE: JPM) still posted a profit of $4.96 billion for the second quarter.

Total losses from the botched trades have reached $5.8 billion, according to Dough Braunstein, JP Morgan's CFO. And it's not over - CEO Jamie Dimon said in the earnings conference call Friday (today) that the fiasco could result in $700 million to $1.7 billion in further losses.

"We learned lessons that will make a stronger company," a contrite Dimon said.

And what expensive lessons they were. The company revealed that the loss on credit derivatives executed by traders in its London's chief investment office (CIO) swelled to $4.4 billion in the second quarter, up from the $2 billion loss it first reported in May when the trading gaffe was exposed.

Dimon nevertheless assured the analysts that JP Morgan has the crisis under control.

"We think we've boxed this," Dimon said.

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JPMorgan (NYSE: JPM) Earnings: What to Watch

It's fitting the JPMorgan (NYSE: JPM) earnings report will be delivered on Friday the 13th, since this has been a scary quarter for the bank and its stock.

Ever since JPMorgan, the largest U.S. bank by assets, revealed a trade gone bad in London that caused billions of dollars in losses, shares have waned and industry forecasters have grown more bearish on shares.

The consensus estimate heading into Friday's release has dropped over the last three months to 79 cents a share from 91 cents.

Those mean estimates would be a 36.2% drop in earnings from the same period a year ago, when JPMorgan turned in an impressive $1.27 a share amid a struggling U.S. economy. Revenue is predicted to stumble 20% year-over-year to $21.93 billion for the second quarter, coming in at $96.58 billion for the year.

Investors and regulators will be most interested Friday in the bank's update on the full extent of the trading losses incurred in what has now been dubbed the "London whale trade." The losses are predicted to be sustainably larger than previously reported, now somewhere in the range of $4 billion to $6 billion.

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Inside JPMorgan's (NYSE:JPM) Magical Fun Palace

The financial system wasn't fixed after 2008, and it won't be fixed anytime soon.

The unexpected $2 billion - or is it $5 billion? -- loss incurred by JPMorgan Chase (NYSE:JPM) "whale" trader Bruno Iksil shows only too clearly the flaws in Dodd-Frank and other regulatory activity.

Big banks are still taking risks they simply don't understand. Worse, there's no reason to believe the regulators understand them, either.

While the banks do employ "quant" mathematicians to analyze risk, the problem is the quants are also paid to help maximize the profits from the banks' trading desks.

Not only is this a bit of a conflict, but they are working off a market model that has failed repeatedly in the past.

It's a dangerous mix for investors and taxpayers alike.

The Failed Trade at JPMorgan (NYSE:JPM)

JPM's trade that failed had been to build up a major bullish position on corporate debt defaults -- in other words, betting there wouldn't be many of them.

In a sensible financial system JPM would do this simply by going out and lending lots of money to corporations, or by buying their bonds.

However, according to The Wall Street Journal, in the magical fun palace of today's trading room, JPM achieved this instead by buying an obscure credit derivatives index known as CDX.NA.IG.9.

The key is that this is a "mature" index. Conceived of 10 years ago, the index JPM bought only had 5 years of life remaining.

In other words, not only did JPM use this foolish roundabout as a way to take a position on credit, but it did so through an old index, which could be expected to be less liquid than a newer index that attracted the most trading volume.

Then sharks began to circle.

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JPMorgan (NYSE: JPM) Stock Price Falling as Losses Could Hit $7 Billion

Since the company announced May 10 that it lost billions on a bad trade, the JPMorgan (NYSE: JPM) stock price has dropped about 20%.

And it may have more to go.

CNN Money reported on Monday afternoon that the trading losses are closer to a range of $6 billion to $7 billion, citing several sources who work on trading desks that specialize in the derivatives JPMorgan Chase used to make its trades.

Investors at the Deutsche Bank Global Financial Services Investor Conference in New York drilled CEO Jamie Dimon with questions Monday about how the chief investment office (CIO) racked up the sizable losses.

The biggest U.S. bank by assets, JPMorgan is under pressure from investors and regulators alike to enlighten them on how the CIO, which is in charge of managing excess cash while minimizing risk, made dicey and costly bets on illiquid credit derivatives, some so big they misrepresented market prices.

The $350 billion portfolio managed by the CIO, Dimon reiterated, has a very short duration and an average credit rating of AA designed to "very conservatively handle" interest-rate risks. The heart of the losses, Dimon explained, was the synthetic credit derivative, and just "a part" of the broader portfolio.

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JPMorgan (NYSE: JPM) Losses Keep Unraveling

JPMorgan Chase (NYSE: JPM) beleaguered CEO Jamie Dimon will not be happy when he reads through Friday's papers.

The Financial Times reported that more than a dozen senior traders and credit experts know that JPMorgan is in a lot more trouble than just suffering $2.3 billion - and counting - in losses.

Turns out the unit at JPMorgan that's responsible for the loss has been the biggest buyer of European mortgage-backed bonds and other complex debt securities in all markets for three years.

Now JPMorgan has built up positions totaling $100 billion in the same risky financial products that triggered the financial crisis in 2008.

But anyone who followed Money Morning's Shah Gilani as he covered the topic knew this was a likely hidden truth.

You see, Gilani told us last Sunday, just days after news of the losses broke, that there was more to these trades than one hedge-gone-wrong.

"The idiots at the bank wanted to hedge against European credit exposure that they had," Gilani wrote last to his Wall Street Insights and Indictments readers. "They are idiots because the money that's shepherded by the Chief Investment Office (some $379 billion, yeah, that number is right) is money that the bank has and hasn't lent out, or technically is "available" to play with. And instead of parking it in U.S. government bonds (Citi has $293 billion of the same float and has 87% of it parked in "governments"), they parked a lot of it in Europe's crappy credit markets."

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