MorningWord 2/24/16: Dimon Roughed Up $JPM

by Dan February 24, 2016 9:38 am • Commentary

Last night, on CNBC’s Fast Money program we discussed the JP Morgan’s (JPM) investor day that had the stock down 4% yesterday.  JPM CEO Jamie Dimon portrayed a calming tone, despite acknowledging headwinds to his business, having to add reserves for potential losses from oil/gas exposure and the general malaise of the global economy. Watch here:

My view is plain and simple. Managements will be as cagey as possible for as long as they can when faced with secular challenges to their businesses (that have the potential to become systemic). CEOs like Jamie Dimon have little incentive to be too honest about issues that are not specifically about their own businesses.   This is not the case in other sectors like Tech, where they has been a long history of CEOs calling turns in business cycles, and attempting to be ahead of the curve in large secular trends (John Chambers CEO of Cisco Systems in 2007 and possibly Intel’s CEO Brian Krzanich last month on trends in China).

Weakness in global bank stocks this year has been downright spooky because few can really put their finger on the reasons why some of the largest U.S. banks are down 30 to 40% from their 52 week highs. Most are considered to be far better capitalized than their European, Central American and Asian peers.  It’s my sense that the acknowledgement of the “bear case trifecta” by the best of breed U.S. bank yesterday (weak investment banking, company said capital markets down 20% so far year over year, low interest rates not helping net interest margins, and increased credit reserves) will continue to weigh on shares of U.S. banks, with a strong potential for JPM to play some catch to its peers on the downside.  JPM is the only bank stock on the planet that is above its August 2015 lows, I think it goes back to $50 in the coming weeks, if not days (read my trade here from earlier in the month), which I detailed on CNBC’s Options Action program on February 12th:

I want to be very clear and reiterate what I said last night on the program. This is not an Armageddon trade. I’m not trying to be a character in The Big Short 2. I’m merely looking for JPM to play a little catch up on the downside.

One of my co-panelists suggested that investors, or at least he, is trading the range in bank stocks like Bank of America (BAC). But to me there is no identifiable range. The stock’s breakdown below the uptrend that has been in place since late 2011, and the break below 2 year support at $15 places the stock well below any identifiable technical support to my eye:

BAC 5 year chart from Bloomberg
BAC 5 year chart from Bloomberg

JPM is quickly approaching a massive support level in and around $55, which the stock had broken on volume prior to the “Dimon Bottom” as it is being called for his purchase of 500,000 shares of the company’s stock near $53, for about $27 million two weeks ago in the open market.

JPM 2 year chart from Bloomberg
JPM 2 year chart from Bloomberg

I’ll add one more point here, Mr. Dimon is worth about $1 billion, he spent less than 3% of his net worth to goose the stock at a time when investors needed a bit of leadership. If you believe in dollar cost averaging, then Mr. Dimon was doing the right thing with his stock down at its lowest levels in nearly 2 and half years.  But the stock he just bought will never be sold. It’s gonna go in some big trust, that maybe his airs get, but likely to some sort of giving pledge.  Lets not read to much into such events.

So in some, not calling for a crash, or some sort of credit contagion, I think as many do there are massive headwinds to bank earnings, and possibly something a bit more evil going on that we have yet to fully quantify.

With the stock down 2.3% as I write, nearing that break-down level we will look to further reduce our premium at risk in the April 55 puts by selling a lower strike put in April creating a vertical, or once again turning into a calendar. Stay Tuned.