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danielosborne
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I am an investment professional currently working for the amazing Wall Street Bad Boys.
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NextCandle.com
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  • Stock Of The Week: By How Much Will JPMorgan Chase’S London Whale Beach JPM Stock? 0 comments
    May 12, 2012 7:25 AM | about stocks: JPM

    Yesterday after the market closed, Jamie Dimon, the CEO JPMorgan Chase (JPM), called an urgent conference call to announce that JPM had suffered a $2 billion trading loss over a recent six-week period thanks to a complex derivatives portfolio that was supposed to reduce risk.

    In pre market trading, shares of JPMorgan Chase (JPM) were sinking as much as 8% - which will wipe out at least $10 billion in shareholder wealth should the stock stay down when the market closes later today. Nevertheless and as of the Thursday close, JPM was still up 22.5% since the start of the year, down 9.5% over the past year and down 22.6% over the past five years.

    So how do you loose as much as $2 billion in six weeks? Apparently and according to Dimon, the internal group that was supposed to be managing risk for JPMorgan Chase (JPM) had put together a "synthetic credit portfolio" in order to "hedge" potential losses elsewhere on the books. However and over the previous two months, the portfolio started yielding huge trading losses - specifically $2 billion with about $1 billion covered by the sale of other assets BUT since JPM still carries a portion of the position, there could be another $1 billion in losses as the portfolio "still has a lot of risk and volatility going forward"

    Reading more or less between the lines, it appears that a mysterious French-born trader named Bruno Iksil, dubbed "The London Whale" (and "Voldemort") after the attention he received from hedge funds, had built derivative positions with a face value of $100 billion or more. When hedge funds began taking large bets against Iksil's trades, things began to unravel.

    Common sense should tell most people that a $100 billion trading position would attract attention from hedge funds and other market players who could easily start betting against you but apparently that type of logic escaped whoever at JPMorgan Chase (JPM) is supposed to keep an eye on such activities.

    Nevertheless, JPMorgan Chase (JPM) has already reported that first quarter 2012 net revenues rose 24.4% sequentially to $26.7 billion while net income rose 44.4% sequentially to $5.4 billion. In other words, there is no question about whether or not JPMorgan Chase (JPM) can absorb. JPMorgan Chase (JPM) also pays a $1.20 dividend for about a 3% dividend yield - something that will help cushion in losses for investors.

    However, a much bigger concern is not the $2 billion+ trading loss nor the $10 billion + in shareholder value that is about to be wiped out but more calls for more regulations that will further constrain banks like JPMorgan Chase (JPM) from making profitable and more safer bets.

    In the mean time, keep an eye on the headlines about JPMorgan Chase (JPM) along with the political headlines about any fall out coming from politicians and regulators. Moreover and if you invest in or trade banking stocks, be sure to keep track of them on your NextCandle.com My Portfolio screen for any hints as to the direction they will move in when the markets open but do take into account that at any given moment, there is still a risk that the banking stock you own may flounder and beach itself at your expense.

    NOTE: THIS PIECE WAS JUST POSTED ON THE NEXTCANDLE.COM BLOG.

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