Dimon in the Rough
Market Commentary
By Charles Payne, CEO & Principal Analyst

He came, he saw, he conquered. No, it's unlikely Jamie Dimon made any converts on Capitol Hill today, but he kicked a few backsides and straightened out historians bent on revising the past and JP Morgan's role in the financial meltdown. Talk about getting pissed; Dimon shot back when the topic of his firm taking a bailout or being a hedge fund was brought up. The Street liked his poise and confidence from the start, sending his stock, which opened lower, up 3.5%. Even the broad market stemmed its selloff. Beyond defending himself, the firm, and capitalism, subtle statements threw the ball back into the court of lawmakers.

"Unfortunately, there are some in the financial industry who are misreading this moment. We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis. Those on Wall Street cannot resume taking risks without regard for consequences."
Barack Obama

With conventional wisdom that Wall Street's wild risk-taking and trading was the source of the financial meltdown and not the bogus house of cards that was the housing market, Dimon pointed out that JP Morgan's biggest risk is its $700.0 billion in loans. In essence, if the idea is to stop "reckless" loans, then we are talking about fewer loans to Main Street—which is exactly what's happening. In fact Senator Cocker of Tennessee asked, if there were fewer options to hedge what would happen to their biggest risk. The answer is less loans and higher prices for those loans. In other words, you guys in DC looking to score political points are barking up the wrong tree and will make life tougher for your constituents.

There were some odd moments for Dimon like admitting the new model had to be ditched for the old model. JP Morgan got too cute. The penalty for that is you lose $2.0 billion dollars. In the meantime, Dimon did remind the boys and girls in the room that the Fiscal Cliff may be December 31 but the landing could happen well before that so get to work and leave the sideshows to professional clowns.

Markets Holding
By Carlos Guillen

Despite the rather discouraging trend in retail sales and the continuing instability in the euro zone, equity markets are not doing all that bad, with the Dow Jones industrial Average vacillating between red and green territory.

Retail sales posted earlier this morning for May was in line with the Street's consensus estimates of a 0.2 percent decline; however, this did not serve to keep investors calm. In fact, during the first 30 minutes of trading, equities took a rather sharp drop. Perhaps the most disappointing aspect of the report was that retail sales in April were lower than previously reported, revised to a decline of 0.2 percent from a gain of 0.1 percent. A decline in retail sales is clearly not what anyone wants to see during these times of supposed recovery, and these results are serving to solidify the notion that the U.S. economy will see slower growth this year. As it stands, the most recent employment data for May has already demonstrated that job creation is running out of steam. Moreover, with incomes on decline, the only way to support consumption will be out of savings, but we are finding this unlikely as consumers are running scared with their confidence in the economy fading. With labor markets continuing its deceleration, it is difficult to see retail sales improving anytime soon, and with the government spending decreasing and the private sector also putting the brakes on capital spending, gross domestic product (GDP) growth is bound to shrink. Consequently, economists at Goldman Sachs reduced their estimate for U.S. second-quarter GDP growth to a 1.6 percent gain from 1.8 percent. Morgan Stanley also cut its projection by 0.2 percentage points, to 1.8 percent, while Credit Suisse marked down GDP for the period to 2.2 percent from 2.5 percent.

The situation in Europe is also contributing to the malaise in markets today. The Spanish bank bailout has done little to bring any relief, and now all eyes are on Italy, as the risks are increasing that they will be next in the bailout band wagon. At the moment Italian Prime Minister Mario Monti is working hard to get austerity measures accepted, and the Germans are also putting pressure on the Italians to abide by the rules to prevent them from going into dangerous waters. In the end, it is likely that the Europeans will work things out and stay together, but in the mean time it is going to be tough for the weaker nations to take their medicine.

Despite the lack of good news today, equities appear to be headed for positive territory, but given the rather light volumes we are not so sure this will continue. Moreover, with the general election in Greece on Sunday, which could trigger a Greek exit from the euro zone, we are expecting to see more volatility.

Demand Dented
By David Urani

We got another bad economic release this morning, and what's especially worrying is that if one sector had really been a highlight in Q1 it was retail. However, the latest census survey shows that retail sales were down 0.2% in May, and down 0.4% excluding auto. Not only that, but the April results were revised from a slight increase to a decrease; that means it's looking like the customer started to retrench in Q2. Not only is the decline in retail looking worse than it did late last year during that corresponding European debt crisis, but this is the first time retail sales have been down two months in a row since June 2010.

One should note that gas (-2.2%) and food purchases contributed to the sales weakness as a result of declines in prices for those items. Nevertheless, sales were also dragged down by building materials & supplies (-1.7%), general merchandise (-0.5%), and miscellaneous stores (-0.9%).

And speaking of that decline in food and energy prices, it was reflected big time in today's Producer Price Index (PPI). The 1.0% drop in food and energy prices was the biggest decline Since July 2009. That's partially a good sign that suggests we'll see some cost relief but it's also a reflection of a crisis in world demand, the likes of which we haven't seen since the financial collapse. Nevertheless, "core" prices (excluding food and energy) remained stable, up 0.2% which suggests Ben Bernanke & company won't be fearing deflation yet (although it might allow some room for money printing).

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