What’s the Story?

Reuters

JPMorgan Chase & Co’s shock trading loss of at least $2 billion from a failed hedging strategy knocked financial stocks across the globe on Friday, as well as the reputation of the biggest U.S. bank by assets and its CEO Jamie Dimon.

For a bank viewed as a strong risk manager that navigated the fallout from the 2008 financial crisis without reporting a loss, the errors are embarrassing, especially given Dimon’s public criticism of the so-called Volcker rule to ban proprietary trading by big banks.

“This puts egg on our face,” Dimon said.

He conceded the losses were linked to a Wall Street Journal report last month about a London-based trader Bruno Iksil, nicknamed the ‘London Whale’, who, the paper said, amassed an outsized position which hedge funds bet against.

JPMorgan had informed the UK’s Financial Services Authority (FSA) of the situation, but this was a regulatory requirement and there was no indication at this stage that the regulator would take any action, a source familiar with the situation said. Talks between the bank and the watchdog were continuing.

Ritholtz

• The inherent tension between traders using leveraged risk with Other People’s Money in the pursuit of enormous bonuses is still weighed heavily towards excess risk taking;

• There is no bank in the United States that has demonstrated the ability to manage proprietary trading risks — if they use derivatives and/or leverage;

• It took less than 3 years after the financial crisis peaked for traders to engage in the same sorts of highly leveraged reckless speculative bets that helped crash the economy last time. Imagine the sorts of risks these mis-incentivized desks will be doing when the memories of the crisis fade 10 years after.

• Trades that are so enormous as to be “credit index distorting” are not hedges, but pure speculation. Within banks, apparently the word “Hedging” loosely translates as “speculation.” Actual hedging of existing positions appears to be nonexistent.

• VaR remains a mostly useless concept as applied by banks today. It is a false model of reality whose deviations have devastating consequences. (Call it physics envy)

• At these size trades, the asymmetrical preference for bonuses over risk management is such that even clawbacks won’t work;

• Jamie Dimon, formerly praised as the Capo di tutti capiof bank CEOs, apparently has been more lucky than brilliant. This quarter, his luck ran out.

• Derivatives, because of their enormous built in leverage, are inherently dangerous. They are still financial weapons of mass destruction;

• Too big to fail banks remain a threat to the stability of the global economy.

Marketwatch

A drop in gasoline prices dragged producer prices down in April by the most in six months, according to data released by the government on Friday.

The Labor Department said producer prices fell a seasonally adjusted 0.2% in April to mark the biggest decline since October. The unadjusted 12-month rise of 1.9% in the rate of wholesale-level inflation was the weakest since October 2009.

Excluding food and energy, core producer prices edged up 0.2% — the second month in a row where core prices exceeded the headline rate.

Economists polled by MarketWatch had anticipated a 0.1% drop in producer prices and a 0.2% gain for core wholesale prices.

CNBC

JPMorgan Chase – CEO Jamie Dimon says the bank suffered a $2 billion trading loss on derivative investments, and that the loss could grow by as much as another $1 billion. The news puts the entire banking sector on the watch list, including Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley, as well as the Financial Sector SPDR ETF.

Arena Pharmaceuticals [ARNA  3.66        ] – A U.S. Food and Drug Administration advisory panel recommended approval of the company’s obesity drug. If approved, it would be the first new treatment in that category to hit the market in more than 10 years. We might also see a spillover effect on Orexigen [OREX  3.35        ], which is also trying to bring a weight loss drug to market.

Nvidia [NVDA  12.42        ] – The chipmaker reported first-quarter profit of $0.16 per share, excluding certain items, six cents above estimates, with revenues and its second quarter sales forecast also beating estimates. The company credits the success of its newly launched desktop products among the factors helping its bottom line.

Nordstrom [JWN  53.53        ] – The retailer earned $0.70 per share for the first quarter, five cents below estimates. It said expenditures on developing its e-commerce business were a key factor during the quarter, and that such expenditures for the rest of this year would be higher than previously thought.

Lam Research [LRCX  40.45        ] – The semiconductor equipment maker’s stock will be added to the S&P 500 index when its deal to acquire current index member Novellus Systems [NVLS  45.41        ] is completed. In a similar move, Tempur-Pedic [TPX  49.92        ] is being added to the S&P MidCap 400 when it closes its purchase of current index member ABB Ltd. [ABB  17.14        ]

GameStop [GME  21.07  —  UNCH    ] – The videogame retailer has preannounced fiscal first-quarter earnings of $0.54 per share, one cent above estimate, but also says same-store sales will be down 12.5 percent. GameStop cites slower-than-expected store traffic as a result of no significant game launches.

Videogame makers like Electronic Arts [EA  14.71        ] and Activision Blizzard[ATVI  12.74        ] may be impacted following NPD’s report that retail sales of videogame hardware and software were down 32 percent in April compared to a year earlier.

Yahoo [YHOO  15.44        ] – Chief Executive Officer Scott Thompson has reportedly told internal investigators that he never provided a resume to Yahoo. The company is looking into a controversy over his educational background.

Gilead Sciences [GILD  51.25        ] – An FDA advisor panel has recommended approval for Gilead’s drug Truvada for use by healthy people at risk of contracting HIV. Truvada is already on the market as a treatment for those infected with HIV.

AT&T [T  33.13        ], Verizon Communications [VZ  40.55        ] – Credit Suisse has upgraded both stocks to “outperform” from “neutral,” and increased price targets for both. The firm says both have shown new discipline regarding pricing and subsidies.

Leap Wireless [LEAP  5.36        ] – Reuters reports that AT&T has held talks to buy Leap in recent months, although it’s unclear how far those discussions went and whether they’re still continuing.