What Does JP Morgan’s Trading Loss Mean for Investors?

The answer is, not much. On the surface, there has been much hoopla around the $2 billion trading loss that JP Morgan (NYSE: JPM) suffered. Yesterday it was announced that Ina Drew was now the ex-Chief Investment Officer of JPM. Dealbook reported that two of “Drew’s lieutenants, Achilles Macris and Javier Martin-Artajo, are also expected to resign” and that the company would “form a team of senior executives to investigate and respond to the recent losses.” Our take is that if you take a step back and evaluate JPM as a whole, the couple billion-dollar loss will be easily absorbed.

JPMorgan Chase & Co (NYSE:JPM)

The lowdown on the trade is that in order to hedge corporate credit risk, JPM had re-hedged synthetic credit exposure. Now, the re-hedge is not working and the trade is losing money…and a lot of it. We expect that the losses will not be limited to $2 billion, given that as the re-hedge position is unwound, additional losses will accrue. However, let’s take a look at the company’s capitalization stats: total assets of $2.3 trillion and shareholders equity of $190 billion, 2011 revenues of $97 billion, and 2011 net income of $19 billion. That $2.3 billion (media has been rounding) amounts to ~1% of the firm’s total net worth, which isn’t worth going crazy over.

The loss was booked in the corporate & private equity division. According to CEO, Jamie Dimon, the $2.3 billion loss will be partially offset by a $1 billion gain from sale of securities, so that results in a $800 million Q2 loss for the division. In 2009 the division’s net revenue amounted to $6.6 billion, in 2010 it brought in $7.4 billion, and last year it generated $4.1 billion. The division has been around since 2006, and we’ve dug up to those numbers to show that the loss is manageable even on a division-level; we don’t see any spill-over losses. So, when that $800 million loss is put into perspective, it seems to lessen the sting. Besides, as an astute investor pointed out to us, the street doesn’t focus on the corporate and private equity division’s performance as a major earnings or expectations driver. For example, in Q1, the street didn’t bat an eyelash when the division reported that it had benefitted to the tune of $1 billion from a bankruptcy settlement. That certainly didn’t’ get a front page headline.

Additionally, from a more macro standpoint, JPM has a number of opportunities we think it will be able to capitalize on. Analysts have been increasing earnings estimates due to the company taking market share in Europe and returning capital to shareholders, among other factors. There are many bright spots in the business including decreasing mortgage foreclosure costs, a healthy investment banking department is doing quite well in gaining market share, the card business is showing stabilization in NIM, and growth in commercial and industrial loans.

Once again, the media has blown this way out of proportion and has conveniently left out any relevant context. We don’t want to discount the size of the loss. After all, $2 billion is a large chunk of change, but we seek to remind investors that JPM remains among the best capitalized banks out there, and that the firm is taking measures to investigate and prevent future similar incidents. Near-term volatility is likely as investors digest this news and information from the forthcoming conference call. Now, if JPM’s credit ratings are negatively impacted or if litigation arises from this event, we think it would be appropriate to reevaluate the situation. Meanwhile, we will be interested in tracking what changes Eric Halet, Paul Ruddock, Martin Hughes, and Christopher Grisanti make to their holdings of the stock.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!