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Is This the Time to Buy JPMorgan?

Wednesday, June 20th, 2012
By for Profit Confidential

Buy JPMorganThe recent testimony by Jamie Dimon, CEO of JPMorgan Chase & Co. (NYSE/JPM), in front of the Senate’s panel proves two things: 1) Dimon is quite cool under pressure; and 2) lawmakers know very little about the financial market sector and bank stocks. In response to the reported $2.0-billion loss at one of JPMorgan’s divisions based in London, lawmakers have decided to put the hammer down on bank stocks to try to reduce risk and volatility. Conversely, bank stocks want to keep as little regulation as possible to enable them to make profits. With all of this uncertainty, many investors have jumped ship, and it has made me question if an opportunity exists to get into bank stocks and the financial market sector while others are leaving it.

Dimon reiterated that these losses were hedged trades and not proprietary trades. The difficulty is differentiating one from the other with all bank stocks. To understand this better, think of bank stocks like a store selling clothing. Part of the requirements for bank stocks is to hold inventory for clients to make markets and facilitate trades. To not allow any flexibility in the system would be similar to having a clothing store with no clothes, while having any clothes might be viewed as proprietary speculation on how many shirts would actually sell. Of course, this is ridiculous, as is having handcuffs on bank stocks.

However, things do need to change in the financial market sector, as we’ve seen by the crisis in 2008. Obviously, the existing financial market sector is not perfect. Ultimately, the incentive and punishment system must be in place so that one can’t simply gamble with other people’s money and take the profits, but taxpayers take the losses. Imposing a system of clawbacks, which Dimon did say he would favor, stretching payments out over an extended period of time and having mandatory shares in the firm are important steps to achieving a better system.

The question is whether or not JPMorgan is a good buy right now. I would say not quite yet, but it will be. This trading loss has already grown from the initial $1.0-billion statement to perhaps $2.0 billion to $4.0 billion when it’s wound up this fall, as I initially thought it would when I wrote my article, What You Don’t Know About Banks Will Hurt You.

I also see further financial troubles in the fall with more European turmoil. JPMorgan is currently trading at a discount to book value of 25%. Historically, buying bank stocks when they’re trading at a discount to book value has been a sound investment decision. When everybody loves bank stocks and they trade at full value, it’s very difficult to make money at that point. But when everybody hates bank stocks and they trade at a discount, then they’re on sale and worth a look.

J.P. Morgan Chase Chart

Chart courtesy of www.StockCharts.com

Note the recent positive divergence between the price of JPMorgan and the Relative Strength Index (RSI). The stock still has quite a lot of resistance overhead, but it appears the 61.8% level is giving the stock support. One can also view the recent bottom as an inverse head-and-shoulders formation with the current price breaking above the neckline.

This is also a bank that will probably make between $20.0 billion and $24.0 billion this year in net profit with revenues approaching $100 billion. The loss of a couple billion dollars is not significant over the next 10 years. What is significant is if there are any unknown liabilities we are not aware of, especially related to Europe. This we must see once Spain and Italy go through their difficulties over the next six months. I would also want to see this bad trade in London closed and the final loss tallied. However, over the long term, investors interested in the financial market sector would do well to buy strong, stable bank stocks on dips, as long as the discount is not due to structural problems that the firm cannot overcome, such as was the case with Lehman Brothers.

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Sasha Cekerevac - Investment Advisor, Fund AnalyzerSasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. Add Sasha Cekerevac to your Google+ circles