Dow Futures

The stress tests are out. The results helped to send Bank of America (NYSE: BAC  ) up 22%, JPMorgan Chase (NYSE: JPM  ) up 9%, and the Dow Jones Industrials Average (INDEX: ^DJI  ) up 2% for the week.

JPMorgan received permission to increase its dividends and stock buybacks. Bank of America soared after it didn’t fail the tests. Of course, the test parameters focused on the results of hypothetical economic conditions, rather than worst-case losses from its legal challenges.

Of the 19 institutions tested, Citigroup (NYSE: C  ) , SunTrust, MetLife, and Ally Financial were the four to fail at least one scenario.

Too-big-to-fails Wells Fargo (NYSE: WFC  ) , Goldman Sachs (NYSE: GS  ) , and Morgan Stanley managed to stay above the 5% Tier 1 common equity threshold.

Despite lobbying from the banks to keep details of the results secret, the Federal Reserve went ahead and released lots of useful information. Here’s how the 19 fared:

The blue amounts are losses under the test’s scenario; red is how much capital would be left over after the carnage.

Although banks would take big losses on their mortgage, credit card, and commercial and industrial loans, the biggest source of losses would come result from trading and counterparties, which should remind us all that a strong Volcker Rule is so important.

Now, the test had its limitations. For one, the worst-case assumptions modeled a more severe recession than the one we just had — mortgage losses, high unemployment, gross domestic product decline, and low interest rates. Kudos for using much more stressful assumptions than in the flimsy 2009 tests. And given the liquidity trap we’re in, it makes sense that a hypothetical double-dip recession sometime over the next few years would be deflationary rather than inflationary, just like the last one. But hopefully in future tests we’ll also get to see how well banks would cope with alternative kinds of financial crisis. At the very least, it would be nice to see what affect moderately rising rates would have.

More importantly, as FDIC Chair Sheila Bair recently pointed out last week, the test looked at risk-based capital levels. Future versions of the test should look at overall leverage, too, since “risk-based” can be a somewhat squishy metric.

Furthermore, the tests, which focused on solvency, aren’t a guarantee that we won’t see another financial panic, with a shadow banking run once again crashing the entire system.

It’s encouraging to see banks performing decently under the tested scenarios, since solvency would decrease the odds that we’ll have to undergo another financial crisis and possible bailout during the next recession. But we still have a long way to go to protect ourselves from the next crisis.

Looking for a simpler, safer bank than too-big-to-fail behemoths? My colleague Anand Chokkavelu highlights one name that looks like the kind of bank Warren Buffett might have bought in his earlier years in “The Stocks Only the Smartest Investors Are Buying.” I invite you to download this special report for free.

Today, Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) led the Dow Jones Industrials (INDEX: ^DJI  ) up 0.44%, to 13,252.76, and the broader banking sector helped lead the S&P 500 up 0.60% to close above 1,400 for the first time since 2008. 

The Federal Reserve’s announcement of banking “stress test” results on Tuesday has led to surging bank share prices. The KBW Bank Index is up 8.8% since Monday’s close, including a 2.7% rise today. Here’s how the six largest banks have done (note that all six were part of the 19-bank stress test):

Note that even Goldman Sachs, which has been dealing with the resignation letter from hell, is up. So is Citigroup, which failed one part of the stress test (but only because it got too aggressive in asking for higher dividends and share repurchases) and will have to resubmit its capital plan later this year.

Why has the market responded so favorably? I believe it’s because the stress tests weren’t the watered-down tests we’ve seen from the U.S. and Europe in the past. For its worst-case scenario, we’re talking 13% unemployment, a Dow that falls under 6,000, and a housing market that crashes 21%. Even in that scenario, every bank but Ally Financial exceeded the Fed stress-test minimum 5.0% Tier 1 common capital ratio, if dividends and share repurchases are restricted.

So you can thank the Fed for conducting a plausible stress test and publicizing the robust results bank-by-bank for this banking rally. In an industry with little balance-sheet visibility, this was a step in the right direction.

The Dow Jones Industrial Average (INDEX: ^DJI  ) was flat this week, but that doesn’t mean nothing big happened. In fact, this week saw several big winners and big losers amid a slew of important economic reports.

When you ignore all the noise and rhetoric and focus on the data, the problems facing the economy boil down to two basic issues. With so many consumers underemployed or overindebted, there just isn’t enough spending on goods and services. When sales are weak, companies are reluctant to hire new workers, which further weakens consumer spending and makes it harder for people to repay their debts.

But this week saw several important updates. Here are three things you need to know.

First, the economy continues to improve on its most important measure — employment. Unemployment rates decreased considerably in 2011, and we found out this week that unemployment claims have continued to decline. JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) , whose combined $1 trillion in consumer and residential loans are obviously affected by their customers’ ability to repay debt, were the two best-performing Dow stocks this week.

What’s going on? That brings us to our second point. People have a bit more money to spend, and that’s what they’re doing with it. Personal income rose 0.3% in January, and consumption increased 0.2%.The consumer confidence index in February shot up from 61.5 to 70.8.

Finally, the bad news is that much of the manufacturing industry is hitting a speed bump (except auto sales). Orders of durable goods fell a whopping 4% in January, helping to push Caterpillar (NYSE: CAT  ) , Alcoa, and General Electric (NYSE: GE  ) down 3%, 1.8%, and 1.4%, respectively. A big issue for the sector is that Brent crude prices have hit a four-year high amid concerns about a possible showdown with Iran. That’s pushing up not just transportation costs but also the prices of all kinds of raw materials. It’s probably a temporary problem, but expect this sector to remain rocky in the short term.

While threats like rising energy prices still exist, the U.S. economy is slowly but surely in the midst of a comeback. If you’re looking for a group of solid stock ideas in this economic environment, I suggest you check out “Secure Your Future With 11 Rock-Solid Dividend Stocks,” a special report from The Motley Fool. I invite you to grab a free copy to discover everything you need to know about these 11 generous dividend payers.

For the week, the Dow (INDEX: ^DJI  ) closed pretty much flat last week, ending up just under the 13,000 mark (12,977.57 to be exact).

Looking at the individual components, there were 17 winners and 13 losers. Only two components were up or down 5% or more, though.

The big winner
On the up side, JPMorgan Chase (NYSE: JPM  ) rose 6.1% this week. It’s also notable that the runner-up was the only other bank in the Dow: Bank of America (NYSE: BAC  ) , which was up 3.2%.

There has been a general run-up in bank shares this year as the news on the overall U.S. economy has been mostly positive. A few things to note about banking this week:

• Warren Buffett was generally favorable toward banks in his latest shareholder letter, released last weekend, and specifically favorable toward Bank of America and Wells Fargo (NYSE: WFC  ) . He also revealed on CNBC that he owns shares of JPMorgan Chase in his personal account. The man who is known for his annual shareholder letters again praised JPMorgan Chase CEO Jamie Dimon.
• On Friday, both JPMorgan Chase and Bank of America were deemed “substantially” improved in their performance with respect to mortgage assistance — the government will now pay them incentive payments. Read more here.
• Bank of America got a good deal of press in a Wall Street Journal story regarding its plans to change checking account fees. Bank of America denies that it’s made any decisions yet. Read more here.

The big loser
On the down side, Hewlett-Packard (NYSE: HPQ  ) lost an even 5% this week. The reason here doesn’t require much speculation. Its disappointing earnings on February 22 helped fuel nine straight losing sessions for HP before a slight uptick on Friday.

Meanwhile many of us value investors have this question on our minds: Have shares fallen enough to compensate for the drop in earnings power? Read about the latest quarter here.

If HP’s value play vs. value trap debate isn’t your speed, you can read about another Dow component whose business is on more solid footing in our free report, “3 American Companies Set to Dominate the World.” Click here to read all about it.

The Dow Jones Industrial Average (INDEX: ^DJI  ) rose 28 points (0.22%) today after a slew of economic reports showed fewer unemployment claims, a slight uptick in personal income, and under-control inflation amidst a drop-off in construction spending and disappointing manufacturing growth.

Naturally, construction equipment giant Caterpillar (NYSE: CAT  ) , which is also struggling to handle the probably temporary spike in commodity prices, fell 0.7%.

Meanwhile, bank stocks were the strongest performers, with JPMorgan Chase (NYSE: JPM  ) jumping 2.9% and Bank of America (NYSE: BAC  ) rising 1.9%. Banks are in an interesting place right now: One of the risks still hanging over the sector is weak loan growth. Having been burned by the bursting of the housing bubble, their balance sheets under pressure, so many homes underwater, and the economic recovery progressing slowly, banks are either reluctant to lend or can’t find great loaning opportunities. Add to that declining long-term rates, which crimps interest income, and the sector is arguably between a rock and a hard place. However, the slightly-than-better economic news, combined with the Fed’s failure to signal yesterday that it will drive down long-term rates further in the near future — as well as a report that Bank of America is considering raising fees — and suddenly you have a good day for bank stocks.

AT&T (NYSE: T  ) announced that it’s going to scrap its unlimited data plan. Once users cross the 3 gigabyte threshold, their download speeds will slow down. Smartphones have been costly to telcos, and the iPhone carriers — AT&T, Verizon, and Sprint — are getting squeezed by their customers and Apple, both of whom increasingly hold the bargaining power.

The Dow rose today, but it’s important for us to remember that what happens to the market on a day-to-day or even week-to-week basis doesn’t matter nearly as much as how our stocks perform over the long run. If you’re interested in one stock that our chief investment officer picked to crush the market, check out our brand-new report, “The Motley Fool’s Top Stock for 2012.” It highlights a company that is revolutionizing commerce in Latin America. For a limited time, you can get instant access to the name of this company for free by clicking here. 

The Dow Jones Industrial Average (INDEX: ^DJI  ) finished up 0.36% today on positive housing and employment data; however, some stocks did much better than the Dow as a whole.

Source: Google Finance.

Source: Google Finance.

Today’s Top 3
1. Today’s leader was Procter & Gamble (NYSE: PG  ) , which finished up 3.07% [$1.98] to end the day at $66.42. The stock rose on news that the company plans to cut 1,600 non-manufacturing jobs by July and another 4,100 by next July. The company’s goal is to reduce costs by $10 billion over the next five years. Fool analyst John Maxfield recently wrote that if he could buy only one stock his pick would be Procter and Gamble. Find out why.

2. IBM (NYSE: IBM  ) was second behind Procter & Gamble today, finishing up 1.93% [$3.74] to end the day at $108.41. The big news is tech today was Hewlett-Packard‘s terrible earnings report, and IBM was probably up on HP’s weakness.

3. JPMorgan Chase (NYSE: JPM  ) took third for the day, up 1.10% [$0.56] to end at $38.57, followed closely by Bank of America (NYSE: BAC  ) , which rose 0.88% [$0.07] to $8.02. Most of the banking sector was up today on positive economic news. Seasonally adjusted home prices climbed 0.7% in December, and new seasonally adjusted unemployment insurance claims remained flat at 351,000, their lowest level since March 2008. Fool blogger Chad Henage believes JPMorgan Chase is the best of the big bank stocks.

The best approach
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The Dow Jones Industrial Average (INDEX: ^DJI  ) fell back 97.33 points today, or 0.76%. Amazingly, that relatively paltry loss is the Dow’s worst performance of the year. A full 31 trading days into 2012, and the Dow still hasn’t fallen by more than 1% in a day.

That’s an amazing level of total stability in the market. Last year, 35% of trading days, or 89 days in total, featured the Dow Jones up or down less than 1%. This year, only two out of 31 trading days have resulted in a move more than 1%. That’s a total of only 6% of trading days, a very low level of volatility by historical standards.

Still, the widely followed Volatility S&P 500 index, or VIX, was up over 8% today. That’s a pretty huge jump for a day when the market was flat throughout the first half and closed down less than 1%. Something tells me the year won’t close out with only 6% of days seeing moves of 1% or more.

As we look at a rough day for the Dow, what companies plunged southward? Not surprisingly, some of the biggest losers were in banking. Here’s a snapshot of the Dow’s three worst performers today.

Just barely missing the list was JPMorgan Chase (NYSE: JPM  ) , which fell 1.37%. Banking stocks have rallied throughout the early part of 2012, and that rally is largely predicated an economic rebound that would boost the price of houses and other assets on banks’ balance sheets. Whiffs of instability will continue to send banking shares crashing faster than their peers in the year ahead.

Then there’s Caterpillar. The company is also a candidate for steep falls if sirens are wailing that the global economy is about to hit a speed bump. Caterpillar is a global company that saw 49% sales growth in Asia last quarter. The company sports a higher P/E than many Dow peers based on its heady forward growth projections — this year the big Cat is expected to grow earnings by 25%. Caterpillar’s growth assumptions entail U.S. economic growth of 3% and Asian growth of 6.5%. So, if there’s warnings that those projections could be too optimistic, the logical follow-through is that Cat could be too optimistic in its earnings projections for the year ahead.

In the end, while days like today could make you feel queasy, I still think global brands like Caterpillar are great buys and will live up to their potential in the years ahead. Finally, if you’re looking to get back into banking but large banks like JPMorgan Chase and Bank of America still have too many unknowns for you, The Motley Fool featured it in its brand-new free report: “The Stocks Only the Smartest Investors Are Buying,” which details an under the radar banking play. We invite you to download a free copy — just click here.

The Dow Jones Industrial Average (INDEX: ^DJI  ) is up an impressive 5% so far in 2012. But that’s peanuts compared with the gain enjoyed by its biggest winner so far this year.

Bank of America (NYSE: BAC  ) is up an incredible 45% in a few short weeks. But can its hot streak continue?

Three major factors account for BofA’s huge gains.

First, let’s keep things in perspective. Shares are rebounding after a 58% loss in 2011. Part of the selling toward the end of 2011 and subsequent buying in early 2012 undoubtedly had to do with investors who were selling their losers to capture tax deductions, and institutional investors who were selling their losers so their portfolios would look better to their bosses and investors at year-end reporting. Although momentum can continue to carry stocks, six weeks into the new year, it’s unlikely that this factor will continue to propel BofA.

Second, banks — particularly troubled banks like BofA — are economically sensitive. An improving economy means more attractive opportunities for loan growth, a greater likelihood that old borrowers will be able to repay, and better trading and investment-banking results. With reasonably good employment and manufacturing data coming out so far this year, economically sensitive stocks such as Alcoa and Caterpillar have been top Dow performers as well.

Finally, bank investors are licking their chops after it was announced on Thursday that BofA, Citigroup (NYSE: C  ) , JPMorgan Chase (NYSE: JPM  ) , Wells Fargo (NYSE: WFC  ) , and Allied Financial had settled with federal and state prosecutors over widespread allegations of fraud in the mortgage-servicing industry.

The settlement should be presumed to be favorable to the banks, because (1) a full investigation never actually took place, (2) banks can pay a portion of the settlement with investors’ money, rather than their own, (3) homeowners whose homes were wrongfully taken from them are only eligible to receive some $2,000 from the settlement, and (4) the actual terms of the deal will reportedly be kept from the public until the latest possible date.

Despite the fact that “the cost of doing business” here appears to be relatively small, that doesn’t mean banks are totally in the clear so far as the law is concerned. For one thing, the actual settlement terms don’t even exist yet, so the deal could conceivably fall apart again before it’s inked, though that’s unlikely.

Although we won’t know until the details are made public, reportedly, the settlement won’t cover liabilities over how mortgages were bundled during the financial crisis, nor will it cover MERS (the fake electronic mortgage-tracking system banks used to track mortgages) or prevent homeowners or private investors from suing banks.

In short, the settlement appears to be about a lump payment plus some mortgage-debt relief in exchange for letting banks off the hook for potentially widespread forgery, document fabrication, and mistreatment of borrowers. But what’s unclear is whether the settlement will inhibit prosecution of the aforementioned liabilities. If it does, and the recovery is for real, bank investors could be in good shape. If it doesn’t, and the economic recovery isn’t as strong as it appears, they could be in for a wild ride.

If you’re looking for some safer, less convoluted stocks, I’ll point you to my colleague Anand Chokkavelu’s top banking picks. He details them in our brand new free report: “The Stocks Only the Smartest Investors Are Buying.” It includes one that’s the kind of stock even Warren Buffett might have been interested in during his earlier years. I invite you to grab a free copy. 

After weeks of big gains, The Dow (INDEX: ^DJI  ) closed down 0.13% today after falling 0.5% point earlier.

It’s ordinary for traders to sell after a string of gains. But the last-minute negotiations between the European Union and Greece served as an added reminder today that the improving economic outlook that’s been driving market returns could have vulnerabilities. If conditions in Europe continue to deteriorate (goes the worry), the slowdown in economic activity could spill over into its trading partners, including the U.S.

Greece is caught in a catch-22 — the harsh austerity that the EU is demanding of Greece is almost certain to take a massive toll on its economy, making it even more difficult for the country to repay its loans. The only question left is whether something will get worked out that allows Greece to default in an orderly way that minimizes the damage to other economies and the global financial system. As recently as the fourth quarter, Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Morgan Stanley (NYSE: MS  ) all had significant exposure to stressed European markets.

Still, so long as Europe avoids a full-blown financial crisis, it could be more likely than most think that the U.S. economy escapes from the Europe’s troubles more or less unscathed. As far as the financial sector goes, regional banks generally have far less exposure to European markets or trading results.

While the market’s day-to-day fluctuations get all the headlines, it’s important for us to remember that it’s long-term performance — not week-to-week price fluctuations — that ultimately matter. If you’re interested in one stock that our chief investment officer picked to crush the market in 2012, check out our brand new report, “The Motley Fool’s Top Stock for 2012.” It highlights a company that is revolutionizing commerce in Latin America. For a limited time, you can get instant access to the name of this company by clicking here — it’s free. 

The Dow Jones Industrial Average (INDEX: ^DJI  ) is falling for the third day in a row as the Greek debt deal looks to be delayed. At 11 a.m. EST, the Dow was down 98.5 points to 12,561.96.

The Dow is down after German Chancellor Angela Merkel declined to discuss Greece this morning at a European summit in Brussels. The reason given was that the governing bodies that oversee the Greek bailout packages are still in talks with Greece, banks, and other bondholders. Investors believe a second debt bailout is needed to keep Greece from defaulting

Leading the Dow’s charge down are bank stocks Bank of America (NYSE: BAC  ) and JPMorgan (NYSE: JPM  ) , down 3% and 1.6%, respectively. These stocks have a tendency to swing with the state of the Greece talks and as such are down today. Fool analyst Sean Williams has written about what you need to know about the Greek debt talks. Also weighing on these stocks are this morning’s downgrades by Goldman Sachs. Bank of America was downgraded from buy to neutral, while JPMorgan was downgraded from conviction buy to buy.

Foolish bottom line
The Greek debt situation is moving the Dow today, and with it being earnings season, there are plenty of companies out there that investors need to watch that could move the Dow. In the Fool’s “Fourth-Quarter Earnings Report: 7 Stocks You’ll Want to Watch,” you’ll find information on this quarter’s possible big performers. It’s completely free for our readers, so click here to access your free report today.

Bank of America (NYSE: BAC  ) was up about 5% this morning on the strength of a market-pleasing 7 a.m. earnings report, helping to drive the Dow (INDEX: ^DJI  ) and the market higher.

Importantly, B of A posted positive earnings for the fourth quarter and for the full year. It’s important because Bank of America has been the laggard of the big banks.

Wells Fargo (NYSE: WFC  ) , JPMorgan (NYSE: JPM  ) , and even Citigroup (NYSE: C  ) have been firmly in the black, but it’s only now that Bank of America is back to profitability on a trailing-12-month basis.

We also see an improving Tier 1 common equity ratio (up to 9.86% vs. 8.65% three months before) and less need for credit-loss provisioning (in other words, better credit quality). And for what it’s worth, it claims $14.4 billion in exposure to the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), down $1.4 billion from a year before.

That’s the good news.

The bad news is that the newfound profitability isn’t due to core operations. It’s due to shedding assets. For example, the fourth quarter’s $2 billion of net income can be attributed to the pre-tax $2.9 billion on the gain on sale of China Construction Bank shares.

Over the course of the year, B of A sold $34 billion in “non-core assets and businesses.”

But for Bank of America, I think we’ll take the earnings win any way we can get it. And bigger picture, I like what I’m seeing from CEO Brian Moynihan. He’s being prudent about becoming leaner and meaner — both through asset sales and through cost-cutting measures like Project New BAC that looks to cut some 30,000 jobs.  

When your stock is trading at about a third of book value, even an earnings report full of asterisks is welcome news. That’s what we see today for Bank of America.

I’m long-term bullish on Bank of America for advanced investors who can stomach the risk and unknowability of its balance sheet, but if you’re looking for a much less complex bank that has some of the best operational numbers I’ve ever seen, check out our brand new free report: “The Stocks Only the Smartest Investors Are Buying.” I invite you to take a free copy to find out the name of the small bank I believe Warren Buffett would be interested in if he could still invest in small banks.