Alongside earnings growth, there is of course the quality of earnings. J.P. Morgan (JPM) kicked off the earnings debate yesterday with earnings of $1.02 per share -- at first blush, it seemed solidly above consensus of $0.92. The question as always, though, relates to the quality of earnings, and $0.29 of EPS was a "benefit from debit valuation adjustment ("DVA") gains in the investment bank, resulting from widening of the Firm's credit spreads." So, if we back out the benefit to JPM's earnings from widening of their credit spreads, EPS declined -27% year-over-year. Yikes !
The more pressing failure in global macro land is the failure of the Chinese to maintain high exports to Europe. To be fair, in aggregate Chinese exports overall were up 17.1% in September, which is a formidable number. Unfortunately, exports to Europe, Chinese largest trading partner, declined substantially, sequentially from 22% year-over-year in August to 9.8% in September. This is the second-slowest year-over-year growth rate of Chinese exports to Europe in 18 months.
Chinese economic activity is clearly slowing, but in our purview it is still too early to call for massive Chinese easing. As my colleague Darius Dale wrote this week:
"All things considered, it could be a while before China pulls the trigger on the monetary easing front. Merely using 2008 as a semi-comparable reference, we saw that China waited a full six months for confirmation of flat-to-down sequential CPI growth and a -380bps reduction in YoY CPI before cutting interest rates in early September of that year."
Certainly though, growth doesn't slow forever and whether by monetary stimulus or organic means, the positive catalyst we will be looking for is growth accelerating, on the margin. So far though, it is too early to bet on that.
