Stock futures cut gains after banking reports

By Andrea Tse

U.S. stock futures were paring gains Friday after JPMorgan Chase's (JPM) third-quarter earnings report raised some red flags and Wells Fargo (WFC) reported lower than expected revenue.

Futures for the Dow Jones Industrial Average ($INDU) were up by 19 points at 13,284. S&P 500 ($INX) futures were up by 3.50 points at 1,431. Futures for the Nasdaq ($COMPX) were rising by 3.25 points to 2,717.

JPMorgan reported third-quarter results that blew past Wall Street estimates.

The company reported third-quarter earnings of $5.7 billion, or $1.40 a share, beating the consensus estimate of $1.24, among analysts polled by Thomson Reuters. Third-quarter revenue totaled $25.1 billion, beating the consensus estimate of $24.5 billion.

However, during the quarter the firm also saw a significant decline in credit quality, as nonperforming assets grew by 10%.

"The big global banks -- the JPMorgans, the Goldmans, they're all in that camp where they look dirt cheap, like they're easy doubles, but they've got still a lot of unknown exposure on their balance sheets. Exposure to Europe, exposure to a lot of things," said James Kee, president and chief economist of San Antonio's South Texas Money Management.

"The larger banks have run up a lot and so valuations are not as attractive as they were say a year or two years ago," said Leo Kelly, managing director at Hightower. "However when we look at these larger banks, as spreads contract, as you get a better housing picture  -- that's favorable to banks overall because if we get a better credit picture in the U.S. and if housing prices start to recover,  then estimates for foreclosures and write-downs for foreclosures and bad credit go down. When those go down, these companies can release reserves. And that goes right down to the bottom line."

"The minus is that there are significant revenue streams that they no longer have. Regulation has increase dramatically here in the U.S.," said Kelly. "I don't think anyone really has their hands around what that means yet."

Wells Fargo, facing a lawsuit for its mortgage practices related to the financial crisis, posted third-quarter adjusted earnings of 88 cents a share, beating estimates by a penny. Revenue came in at $21.2 billion, below the consensus call for $21.47 billion.

"All of these companies are much stronger than they were prior to the crash," said Kee.

"The key to some of the bigger the banks is what their economic profile is going forward. I mean in the last 20 years financials basically was a group that had very high return on equity. But with the financial regulation going forward, a lot of their ability to generate revenue is going to be changed and altered because some of the products that they sell are going to be more regulated. So we do think that the profiles going forward are going to be different. The question is, how different?"

The Bureau of Labor Statistics reported that the producer price index rose 1.1% in September after advancing 1.7% in August. Economists were expecting the index to rise 0.7%.

The core read that excludes food and energy costs was unchanged after rising 0.2%. Economists were anticipating an uptick of 0.2%.

The University of Michigan Consumer report for October will be released at 9:55 a.m. and is forecast to have fallen to 78 from 78.3.

The FTSE 100 in London was down 0.27% and the DAX in Germany was falling 0.45%. The Nikkei Average in Tokyo closed down 0.15% and the Hang Seng in Hong Kong finished up 0.65%.

November crude oil futures were up 9 cents at $92.16 a barrel. December gold futures were down 80 cents at $1,769.80 an ounce.

The benchmark 10-year Treasury was down 4/32, lifting the yield to 1.69%. The dollar was down 0.21%, according to the dollar index.

Ecolab (ECL) shares were gaining more than 3.5% after the developer and marketer of  products and services for the hospitality, foodservice, healthcare and industrial markets said it will buy privately held energy products and services  company Champion Technologies  for $2.2 billion in cash and stock.

Advanced Micro Devices (AMD) forecast Thursday third-quarter revenue of $1.27 billion, a 10% sequential decline. Previously, AMD had predicted a sequential decrease of 1%, plus or minus 3%.

Analysts were looking for sales of $1.38 billion.

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