Wow, just a year ago Jamie Dimon was the White House's poster for good management. Today, with JPMorgan's (JPM) nearly 2 billion dollar loss already made public, and many analysts already projecting the loss has grown to between 6-7 billion dollars, with the possibility that the losses will rise.
While longs are arguing that this is a buying opportunity in JPMorgan since the company makes nearly 2 billion dollars a month, the reality is that arguing that now is a good time initiate a long position in JPMorgan on valuation because of the stock's recent significant decline is a very poor argument.
Details are only beginning to emerge, but it appears that JPMorgan was selling protection on corporate bonds for around 125 companies, which means the position has unlimited loss potential. JPMorgan's trade also appears to be too big to unwind quickly.
JPMorgan's trading loss is also likely the least of the company's worries. Jamie Dimon's tenure is at risk, the company's credit rating could be downgraded, and regulators may greatly restrict JPMorgan's trading activities as well. While, obviously JPMorgan is likely to be able to get out of this trade without the company's liquidity levels threatened, the company may also lose significant business because fears of restrictions the company may face on its trading and brokerage businesses.
So, if JPMorgan is likely still a bad investment, where is the opportunity?
I think the best opportunity to come out of the JPMorgan disaster is with Citigroup (C). Citigroup today gets nearly 70% of its revenue overseas, the company recently reported 6% year-over-year revenue group, and Citigroup is well positioned in nearly every major emerging market. Citi has also disclosed its net exposure to European sovereign debt at around a manageable $13 billion.
Citi shares have now fallen over 30% from the company's highs of around 38 dollars a share earlier this year, after the Fed's stress test results were released.
While Citigroup's significant leverage to Europe and has hurt its earnings, the company is well-positioned throughout Asia, with a particularly strong retail franchise in India, and Citi's position in Latin America, run by highly respected executive Eduardo Cruz, has been strong as well.
Citi shares have also taken a big hit on the JPMorgan news, and have significantly underperformed the S&P 500 and its tracking exchange traded fund, SPY (SPY)
Citi recently reported a 30% decline in the company's year-over-year delinquencies in the company's credit card division, and the company's consumer banking division in Latin America reported 5% revenue growth, and 6% in Asia. Citigroup's trading revenue was particularly strong as well. Other major banks and companies with significant financial divisions such as General Electric (GE), reported similar strength in these credit and loan portfolios. Citigroup's tier one captain levels were reported at around an industry leading 12%.
Citi did recently have its share buyback plan rejected by the Fed, and shareholders rejected Pandit's compensation proposal. Still, Citi has been cleared to pay dividends, passed the Fed's recent stress test, and the company's tier one capital levels of over 12% are amongst the highest in the industry. The rejection of CEO Vikram Pandit's compensation proposal also shows that shareholders are significantly involved in the company's governance. Pandit and other Citi executives are also being paid significantly in back-dated call options that will require the stock to perform well over the long-term to be significantly profitable.
To conclude, with Bank of America (BAC) facing massive losses and continued legal issues with Countrywide, Well Fargo largely a domestic U.S. bank with limited future growth opportunities, and JPMorgan now facing a massive trading loss, Citigroup looks like the best positioned of the large U.S. banks today. The fact that Citigroup gets nearly 70% of its revenue from outside of the United States suggests the company will have the least exposure to possible new regulations as well.
Even though the S&P 500 and its tracking exchange traded fund SPY, has declined about 10% in the last month, previous market leaders in the technology sector an financial sector, such as Apple (AAPL) and Citigroup, have fallen over 20%. While buying any stock during a period of market weakness is difficult, often the best value is found in the sectors hardest hit.