MorningWord 12/03/12: We often make fun of the financial media’s infatuation with Jamie Dimon. By all accounts, there are few CEO’s who have captained their ships with near flawless precision as Dimon has over the last 5 years, but isn’t that what they are paid the big bucks to do? There is no wonder that shareholders consider Dimon a “rockstar”, as JPM’s stock is only about 20% off of the 2007 high, vs BAC and C that are down 80% and 90% respectively in that same time period. It appears this out-performance is warranted when you consider JPM is expected to cap 2012 with a new all time high in earnings, compared to BAC and C who will earn a fraction of peak earnings, while analysts see neither getting back to pre-crisis levels for years, if ever.
Which brings me to the a story reported in the WSJ journal this weekend, suggesting that BAC has postponed plans to raise fees on checking accounts of retail clients for fear of a re-do of last year’s fiasco trying to do the same with debit card fees. What’s amazing about this is that fear of backlash from customers and regulators has made it nearly impossible for BAC to grow again. Fot instance, JPM this year will see its revenues rise 46% from 2008 levels, but earnings up 3.5x 2008 levels. In contrast, BAC earnings will be well below 2008’s; while revenues will be up from pre-Merrill Lynch merger levels, they will still be down 26% from 2009’s combined revenues. SO I guess my point is, if these guys can’t raise fees when they want to on core products, how will they ever grow themselves out of the earnings hole they are in?
With the increasing restrictions of Dodd-Frank expected to be enacted in 2013 and 2014, the levers BAC can pull for growth will be further diminished. Buying BAC at these levels is predicated on its existing value, because I don’t see much in the way of growth prospects. So the crux of the stock argument over the next year will be, is BAC’s balance sheet worth what BAC says it’s worth, with none of the myriad ticking time-bombs that investors have witnessed in the past few years? Quite a leap of faith…but I can see how those with 1-3 year time horizon are willing to make that bet.
While we lean a bit towards caution as it relates to investing in bank stocks, there are clear “have and have nots”. BAC’s 77% gains ytd appear extraordinary, but when you consider the stocks sits 80% below it’s pre-crisis levels, much less so. A couple weeks ago, I looked for a low premium/low delta way to get some short exposure on a move back below $9 (see Jan13 1×2 Put Spread here) in the coming weeks as my thought was that any investors who have bought the stock in the last 12 months could face far higher taxes taking gains in the new year than in December 2012, and this could possibly cause a scenario where everyone headed for the door at the same time. While BAC trades within a couple % of the 52 week highs and banging up against long term resistance, I am fully aware that this stock could be off the races for purely technical reasons in the new year, which is why I do not have an outright bearish bet on in the name. 2013 will likely see a continuation of JPM’s out-performance on an operating level, and BAC’s from a beta perspective.