Earnings Shenanigans Continued - the JPM Version

JP Morgan was the first of the major banks/brokerage houses to report earnings this morning, and once again we're getting an incredible spin job in the media because Earnings per Share (EPS) came in at $1.01 vs. an expected $.88 per share.  But wait a minute.....If net revenues are down by over $1.2 billion from Q2, and down by $3.4 billion compared with Q3 2009.... how is EPS coming in higher than expected, and what is there to cheer about???


Below you will find a table representing the total numbers from all JPM Chase's business units, taken directly from JPM's earnings report off their own website. 




The numbers are pretty clear....top line is definitely down, and quarter on quarter, so are profits, but let's not highlight these figures in the mainstream media.  No, let's highlight the increase in EPS, which is a number that we can engineer with accounting gimmicks.  What exactly JPM's accountants have done to engineer this magical EPS increase is not readily apparent to me...I've seen references to a lowering of their credit reserves, but based on the above table, that doesn't seem to be a huge factor.  Suffice it to say that there was some backroom wizardry and all you're seeing here is the front facing facade....sort of like how Main St. looks in one of those old West towns.  

And just to highlight a point that I commented on in post some weeks back, here's a look at JPM's Investment Banking business unit.



Notice the big drop in net revenue from $6.3 billion in Q2 to $5.3 billion in Q3....a 15% drop quarter on quarter, and 28% drop from Q3 2009 ($5.3 billion vs. $7.5 billion).  This is a direct impact of lost trading revenues since the Flash Crash in early May which has resulted in investors fleeing the stock market in droves ever since.  Click here if you missed my earlier post on this.

Conclusion:  JPM revenues are headed South.  Due to their exposure to the mortgage fraud crises, they are likely going to be taking some serious balance sheet hits in the coming quarters.  Not to worry though - the facts aren't important, only perception is, and perception can be engineered.....for a little while at any rate.  Looks like JPM's big gap-up is selling off now.....