New Trade JPM – Pressing the Short, Again

by Enis July 6, 2012 3:20 pm • Commentary

Here is a quick preview of what I will be discussing on Options Action tonight on CNBC at 5pm eastern:

JPM has been a focus stock for Dan and me ever since the “Whale” news a few months ago.  As Dan laid out in his trade idea back on May 11th:

The progression for GS in April 2010:
-Headline broke about the charges.
-Lambasted in the media from all sides.
-Lost its standing as the premier U.S. financial institution.
-Stock never regained previous heights.

OUR VIEW: We think JPM will follow a similar pattern.  Throw out all the fancy valuation metrics that bulls will explain away, why it is Cheap, etc, this is in a sentiment trap and we are likely to see a bit more fireworks before this settles out……We want to press the short…

Very little has changed in that progression of events timeline to change our view.  We think JPM is in the process of losing its place at the pedestal of American finance.  Regulators will no longer “take their word for it.”  Jamie Dimon won’t get the first call from Tim Geithner when a crisis erupts.  And JPM won’t get favorable regulatory treatment going forward.

Here is what I said in a CotD post on June 12th comparing that JPM price action to GS price action in 2010:

To me, it’s obvious that in a world where the 10 year Treasury yield is 1.6%, banks are struggling to generate meaningful returns, and they’ve resorted to trading groups like JPM’s CIO group to maintain their earnings power.  It’s why the financials sector has not been able to hold on to any rally since May 2009 (in fact, the banks trade lower than where they did 3 years ago).  Astute investors see any earnings pop as ephemeral, with little change in the underlying structural issues.

Over the next year, I will look to JPM as a good shorting vehicle on any market pops, as I expect the Whale ordeal to have the same long-term impact.  No matter what the bank’s executives tell me…

Again, nothing has occurred to change my opinion.  If anything, I’ve become more convicted on this view given the Barclays LIBOR scandal and recent central bank actions.

JPM reports earnings on July 13th.  It’s implying a 4.5% move vs. an average move of 2.1% over the last 8 quarters.  Analysts are still expecting earnings of $0.79 even with the Whale losses.  I think the actual Whale loss number is not that relevant.  It’s the future outlook that’s the core of my bearish thesis.  Analysts have 25% earnings growth modeled in for 2013, which seems sky high to me.

Finally, European stress has not left this market.  The Euro made 2 year lows today, and European banks are down almost 10% from their highs just earlier this week.  Given my concerns over global growth, coupled with European financial weakness, JPM remains a vehicle of choice for me.

With volatility elevated ahead of earnings, and given my existing long put positions in JPM, I don’t want to buy more premium.  Rather, I am going to add to my short position by selling an August call spread:


TRADE: JPM ($34.00) Sold the August 35/37 call spread for $0.65
  • Sold 1 August 35 Call at 1.15
  • Bought 1 August 37 Call at .50


Break-Even on August Expiration:

Profits between 35.65 and 35, make up to .65, max gain 35 or below of 0.65

Losses of up to 1.35 between 35.65 and 37, max loss of 1.35 at 37 or above


Trade Rationale:

I don’t think earnings is a huge event for JPM, so I would rather sell premium into the event, especially given my existing long premium trades.  Rather, I think this is a secular theme of weakness that will continue for JPM.  I view $35 as massive resistance given the recent breakdown from that level, and I would be surprised if the stock retests that level within the next couple months.