When things go against you, sometimes they really go against. And in doing research on JP Morgan (JPM), it appears there may be more to the story than meets the eye or that has been clearly reported.
First and most importantly, let's take a look at the chart, action, and volume for JP Morgan. The trouble really started on May 4 when JP Morgan crashed below its 50 day moving average. This was the day AIG shares and other financial companies were hit by a lackluster jobs report at the time and JP Morgan was downgraded to "under perform" by CLSA.
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Once the slide (or the new trend) starts, it is hard to stop. And on May 11th when Jamie Dimon announced billions in trading loses, that gave the signal for institutional investors to start dumping their shares, as you can see from the tremendous pick up in volume. Also the same day, credit agency Fitch downgraded JP Morgan from AA- to A+ and stated that the new risk may not be manageable. Once a stock has changed direction, on volume, the trend will be hard to break without some very good news and institutional buying.
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In an article posted on May 15th on the blog "Seeing Through Data," Michael Olenick reported that JP Morgan was only one of 26 banks to refuse him access to "the public loan-level performance data for their Washington Mutual loans." Washington Mutual is what he refers to as one the most "reckless sub-prime lenders." The point to the article was if JP Morgan had nothing to hide, why were they refusing access to the data? The London Whales' purpose, he goes on to report, was to hedge against further loses incurred by the Washington Mutual loans.
Whether or not there will be significant loses, or more losses than expected is anyone's guess. But as we all know the market hates uncertainty, and here is a big case of uncertainty staring us right in the face - how much will Washington Mutual lose on its loans?
On top of these very significant issues comes JP Morgan's exposure to credit default swaps. According to the U.S. Federal Reserve, JP Morgan's position in credit default swaps went from a net long position of $10 billion at the end of 2011 to $84 billion at the end of the first quarter - that's a 840% increase. Credit analysts contend that because of the spreads with maturity date from 2012 to 2017, it will take a long time to close out the positions.
The bottom line to JP Morgan's credit exposure is that it has taken the opposite position from most other U.S. banks, betting the world credit markets will get better with a net long position, as opposed to worse, with a net short position.
JP Morgan continues to announce management changes and will undoubtedly face additional scrutiny and regulations from Capitol Hill. The latter cannot bode well for enhancing the banks' performance any time soon.
Conclusion
Continued market and financial instability, high volume selling by institutional investors indicating the stock is under distribution, changes at JP Morgan, the risk of additional regulations, and the chart trend turning decidedly negative, all point to lower prices for JPM stock in the near and medium term.
Disclosure: I am short JPM.
