Why Would You Want To Own JPM? (according to Jamie Dimon)
Many of our assets would sell at a substantial premium to what currently is on our books; e.g., credit card loans, consumer branches and others. And certainly, most of our businesses, if we sold them whole, would sell at a substantial premium to tangible book value.
2. Capital Structure
We have huge capital formation. When you look out many years into the future, JP Morgan Chase should generate huge amounts of capital, and once JPM meets the Basel III mandate of 9.5% capital, we will be generating extreme amounts of excess capital. And our organic growth and acquisitions unlikely will be able to use it all."
3. Share Buyback
"Excess capital will allow the bank to buyback $10 billion of stock a year for 3 years at tangible book value. Not only would earnings per share be 20% higher than they otherwise would have been, but tangible book value would be 15% higher than it otherwise would have been… So you can assume that we are a buyer in size around tangible book value.
4. Benefits of Buyback
At $45 per share, buybacks would be accretive to earnings and approximately break even to tangible book value. Whatever the case JPM will repurchase every share issued to employees as compensation; so there won't be any dilution to earnings per share for the public.
Reserved substantially for mortgage litigation" arising from the 2008 housing meltdown.
6. Dodd-Frank Legislation
Only two regulations from the Dodd-Frank legislation can hurt our competitive ability… and we believe they both will be properly resolved in a way that will allow us to complete fairly.
7. JPM History
I view it as a great sign of strength, that, in the worst financial markets since the Great Depression, your company could earn money, grow tangible book value, buy Bear Stearns and WaMu and expand our franchise.
8. Exceptional Company
We believe you own an exceptional company. Each of our businesses is among the best in the world, and record earnings were matched by increased market share in most of our businesses.
If Dimon is proved correct, then JPM shares have massive upside ahead. However, in his letter, Dimon fails to address some other notable concerns such as Europe. If things go wrong in Europe, many of the reasons Dimon gave for buying JPM stock will become irrelevant. By owning calls instead of the stock outright, investors are limiting their downside risk while gaining exposure to the upside if Dimon is proved correct.
If you believe what Jamie Dimon says, JPM calls are a good trade. However, if Europe becomes a problem loses will be limited to the premium paid for the calls.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.