October 12, 2012
In a note on Friday, BlackRock, the world's largest fund manager warned that "the S&P 500 Index is close to record highs and volatility is eerily low. Our conclusion: Markets have not priced in the fiscal cliff and assume QE3 will drown out other factors." This message is in the same vein as the warning published on the Financial Times website on Wednesday from PIMCO (one of BlackRock's closest competitors) regarding the "central bank put bubble" [subscription required]. Readers of this column will be keenly aware that I share these concerns: Extrapolating strong equity market performance and low volatility into the future looks to me a dangerous assumption in this environment.
The Dow (INDEX: ^DJI ) is up just over a quarter of a percentage point with the S&P 500 (INDEX: ^GSPC ) virtually unchanged at +0.06% at 9:50 a.m. ET. The Dow is getting no help from financials this morning, despite the fact that JPMorgan Chase (NYSE: JPM ) posted third-quarter earnings that were well ahead of the consensus: $1.40 per share against $1.22. The bank also said that it had "effectively closed out" its London Whale derivatives trades at a loss of roughly $6 billion -- not much above the original $5.8 billion loss figure -- removing a source of uncertainty for the stock. For its trouble, the market lopped a percentage point off the share value at 9:52 a.m.
The shares of JPMorgan's nearest competitor and Dow component Bank of America (NYSE: BAC ) are trading down in sympathy, with a 1.2% loss at 10:01 a.m. However, one of our top banking analysts, Anand Chokkavelu, thinks the shares could represent a "big opportunity" for investors with some tolerance for risk. For a balanced assessment of that opportunity, click here to request Anand's premium report on Bank of America along with a year's worth of updates.