JPMorgan: Now A $9 Billion Loss?

Jul. 05, 2012 7:07 AM ETJPMorgan Chase & Co. (JPM)BAC, C, GS, MS, WFC15 Comments
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JPMorgan Chase & Co.'s (NYSE:JPM) stock was most recently rocked when The New York Times reported that the losses from the trading debacle could reach $9 billion. After the New York Times story ran that JPMorgan's losses from its derivatives trading would be steeper, its stock dropped more than 2% as investors hurried to pull away, likely worried that the bank's issues would worsen before they got better.

The bank's stock was not even able to jump on the rally bandwagon that the rest of the market enjoyed on Friday after a bounty of positive news was reported. That included information that Europe's financial woes could be eased due to an agreement to allow rescue funds to shore up the finances of banks there. Unfortunately, this news, fully vetted, was not good enough either to prompt investors to buy JPMorgan. By the closing bell, its stock was down almost half a point to about $37.

The New York Times story left me, and I'm sure plenty of other investors, torn. Do we trust the findings of a major news site and the anonymous sources it unearthed that call into question how much JPMorgan stands to lose? Or do we just trust that JPMorgan is giving us all the information?

The newspaper authors wrote that the $9 billion figure was based on comments from "people who had been briefed on the situation." Specifically, the article points to an internal report drawn up in April that showed the worse-case scenario resulting from the trading debacle could reach $8 billion to $9 billion. This was based on a person who reviewed the report, according to the New York Times.

Doing just one or the other would be naïve at best. A better strategy is to take the news in stride, and weigh the bank's strengths versus its weaknesses. Clearly, the London Whale debacle provided the reality check that many of us needed in not giving JPMorgan credit for being invincible. Does too big to fail come into play here?

JPMorgan's stock hits stem from the bank's announcement in May that it had participated in a highly controversial trading strategy that involves derivatives. The news stung because this type of trading was largely to blame for the 2008 financial crisis that led to the collapse of the housing market and demise of some of the largest banks, such as Bear Stearns. We all thought that the banks had learned their lessons.

CEO Jamie Dimon said in May that the bank's losses would be in the $2 billion to $4 billion range. Furthermore, he said that the bank was well-positioned to absorb the losses. He went on to testify before Congress stating the same message in June. A quick scan of the bank's fundamentals confirms that.

JPMorgan had emerged almost unscathed from the financial crisis with many market players pointing to its strong and conservative management practices as the reason. An example of its financial strength relates to its passing the Federal Reserve's stress test for banks. In the spring, the Federal Reserve held the feet of 19 of the nation's largest banks to the fire to determine if they were fiscally sound enough to survive another recession. Other banks that passed the test in JPMorgan's peer group included Wells Fargo & Co. (WFC), Citigroup Inc. (C), Bank of America Corporation (BAC), Goldman Sachs Group Inc. (GS), and Morgan Stanley (MS). Citigroup was among the handful of banks that failed the test.

Passing this stress test was also important because it set the stage for the banks to increase their dividend payout, which JPMorgan did immediately after it learned it had passed the test. It increased its dividend 20% to $.30 a share. Its $1.20 dividend yields 3.4%.

It also announced a share buyback program at the time. The company had planned to buy back at least $15 billion of shares through next year. However, the bank had to put those plans on hold as it sorted out the mess left from the derivatives trading losses.

I consider JPMorgan to be a good short-term investment, and the strong yields from its dividend payout also make it a value investment. Compared to others in its peer group, it pays the highest dividend. Wells Fargo pays $.88, yielding 2.6%; Bank of America pays $.04, yielding .5%; and Goldman Sachs pays $1.84, yielding 1.9%.

JPMorgan will release its second-quarter earnings for 2012 on Friday, July 13. If you are superstitious, this date may give you a pause. All jokes aside, this earnings report will shine a key spotlight on what the damage from the trading debacle caused.

Already, the bank has ridded the unit responsible for the losses of people who put the deal together. Shelving the share buyback program, though disappointing, was important still. Also, the bank has reportedly unloaded up to 70% of its position in the trade.

It is imperative that the bank do all it can to get a hold of this monster to prevent, or at least negate, headlines like those that rocked its stock last week.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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