Event: JP Morgan (JPM) reports Q2 results tomorrow before the bell. The options market is implying about a 2.5% one day post earnings move, which is a tad rich to the 4 qtr average of about 2.4%, but in line with the 10 year average one day.
What to expect: You know the drill here, net interest margins are under pressure with the collapse of the 2-1oyr Treasury spread about 80 bps, with little relief in site. Investment banking activity has been weak, regulation hot, capital markets activity likely adversely affected by global growth concerns into the late quarter Brexit vote, and what has been a peculating European bank (stock) crisis and I am sure there are a few other headwinds I am missing, with a bright spot, loan growth.
On the flip side, JPM got a thumbs up on their capital return plan by the Fed, and announced a $2 billion increase to their existing $8 billion share buyback, and continue with expected increases in their 48 cent quarterly dividend that currently yields 3.06%, more than double that of the 10 year U.S. Treasury at 1.47%.
Valuation: On a price to book basis, JPM trades at a significant premium to its U.S. money-center peers at 1x, vs BAC and C at .6x, for good reason, given earnings and sales stability over the last few years and relatively high payout ratios.
There have not been a whole heck of a lot of official data points in the quarter just ended to get a clear sense of what business was like aside from Citi CEO Michael Corbat’s soft guide down of net income in early June at a brokerage conference, per Bloomberg, where he stated:
Citigroup Inc.’s second-quarter net income probably will be unchanged from the previous three-month period
Trading and investment-banking revenue for the period should be “up slightly” compared with the first quarter
Consensus had been looking for mid single digit growth.
Price Action / Technicals: JPM is the best performing large cap U.S. bank ytd, down only 5%, vs BAC down 20%, C down 17%, GS down 13%, MS down 15% and WFC down 11.5%. That’s some fairly healthy relative out-performance.
JPM is one of the only large cap bank stocks on the planet to have made a new all time since the financial crisis last decade, but since registering a new all time high in mid 2015, the stock has been in a well defined downtrend making a series of lower highs and lower lows:[caption id="attachment_64973" align="aligncenter" width="600"] JPM since Jan 2015 from Bloomberg[/caption]
The stock faces near term technical resistance a the downtrend near $65, near term support at $60, and long term support at $55. I suspect the stock trades between $65 and $60 following the report, barring a material guide up or down.
Oh and that circle, that’s the day that JPM CEO Jamie Dimon bought $26 million worth of stock personally in the open market. Some think that is an impenetrable level to the downside.
So what’s the trade? I think you can wait ill after the results and guidance to get a sense for the tone of management, and investor sentiment.
I am inclined to sell a rally towards technical resistance. If I thought stock would immediately decline after the print and set a negative tone for bank earnings over the next two weeks I might consider buying the Sept 62.50 / 55 put spread for about $1.50 vs $63. This position breaks-even at $61 with a max gain of $6 down at $55.
For long holders, the stock could be an attractive overwrite, as was the case last week when we detailed what appeared to be a call seller looking to add yield in Jan17 expiration, (Big Printin’ C, JPM – Bank Overdraft)