JPMorgan Fallout Continues, But The Question is Buy or Sell?

Anyone tuning into the financial news media over the past few days has been inundated with split commentary on whether or not JPM is a “screaming buy” or a “run from sell” after being severely punished by the market for its $2.3 billion “whale-like” trading loss.

We really don’t mean to come up with a recommendation here or rehash all the news flow, but do want to take a brief look at some of the arguments being put forward, both pro and con.

First, let’s review the bidding on the stock itself.

JPM is generally acknowledged as the major money center “too big to fail” bank which came out of 2008-2009 in the strongest shape possible, led by the strong-willed and talented Mr. Jamie Dimon.

The stock historically traded in the $35-50 range for the post 9/11 era up until 2008-2009, seeing lows under $20, along with the beating taken by all of the rest of the financials, at the worst of the crisis. Seen as “best of breed”, JPM then ran up to the mid-$40’s in about a year, certainly the best-performing of the major financials, we think. Dimon has been CEO since late 2005 and Chairman since late 2006. He has been recognized with a slew of management/CEO awards and is currently a director on the board of the New York Federal Reserve.

Ok, fast forward to the last year. JPM traded down with the market during the summer of 2011, like the rest of the market reacting to Europe and hit under $30. Since then has been back on a roll until last week, putting in basically a move from $27 to $46, with some major stumbles along the way each time European concerns heated up. It made 52-week highs in late March at $46.49 and was in the $40-45 range for the past two months, before the recent news which cost the stock about a 10-15% hit. Before the news on the trading loss it was trading in the low $40’s, and then hit recent lows at $35.76 yesterday.

So what are the arguments being made?

The Pro’s:

• Dimon is the “best and brightest” and will remain so
  
• JPM has a “fortress-like” balance sheet, strong earnings, an approximate 3% yield, and the loss was “a drop in the bucket”, representing “a month or so of results”.
  
• There is a $15 billion share repurchase authorization
  
• EPS was $4.48 in 2011, estimated at $4.50 for 2012, but seen at $5.20 for 2013
  
• Analysts, at least before this week, maintained an overwhelming “strong buy” rating
  
• Several commentators and analysts call the sell-off a typical “overreaction” by the Street
  
• Those bullish on the economy, corporate earnings, housing, and jobs all see JPM benefitting from an upturn

The Con’s

• The “reputational premium” for JPM has been severely weakened
  
• JPM has too much exposure to European banking risk
  
• Dimon’s dual role as Chairman/CEO is threatened, as is his board seat at the NY Fed (and some even calling for his resignation)
  
• The losses from “the trade” will get worse
  
• Continued housing/mortgage issues will continue to plague the banking sector
  
• Fitch downgraded JPM debt after the report of the loss
  
• Noted bank analyst Dick Bove was out today talking about a lowering of profit estimates and the need for a good 12-24 months of restructuring risk management controls (although he remains positive on the stock, calling it “dirt cheap”)…Bove also raised the very interesting question of whether other banks are at risk of similar situations and how fully banks, and their CEO’s, understand the risk of some of the most elaborate of derivative hedging strategies
  
• Shareholder suits and various investigations by an assortment of agencies are possible and some talk of even “criminal charges”
  
• JPM will face many months of being dragged in front of “dog and pony” Congressional committees, keeping the stock in a negative searing light, including the issue of “clawbacks” of executive pay
  
• Banking/financial regulations will only get tougher now, with a diminishing of Dimon’s industry “guardian” role

To this last point, Pres. Obama said today:

“JPMorgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion and counting. We don’t know all the details. It’s going to be investigated, but this is why we passed Wall Street reform.”

All of this chatter is front and center today as Dimon had to face investors at the JPM annual meeting but did win approval of executive pay packages and continued “confirmation” of his role as Chairman. What does seem certain is that firings and resignations have and will occur, the story will have long legs, and that Washington has regained the upper hand on banking/financial regulation. The big unknown is how bad the loss really is and if investigations will severely wound JPM as an organization or Mr. Dimon personally.

  JPMorgan Chase Last 12 Months

 

Good Trading!
David W. (aka The Underground Trader)

David W’s Option Income Generator. service is designed to help tame market volatility by producing monthly income via a proprietary buy-write strategy. Check it out today!

 

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