JPM and the Market: Downside Risk Increasing

A few weeks ago, I suggested the JPM would be an important stock to watch as a bellwether for the averages. The 2 year technical chart and the 5 year charts shown here suggest real danger. After that post of early this year, JPM moved up but to a lower high. It has now broken its 50 and 200 day moving averages (smoothed = sma) to the downside for the first time since 2008. Fundamentally, its 2010 estimated EPS have begun to erode.

Goldman Sachs also has a similar chart; its EPS are almost irrelevant as it manufactured 2009 Q4 earnings by shrinking bonuses severely. BAC, which had a weaker rebound than GS or JPM relative to its 2008 high stock price (though a larger bounce off the bottom), is close to the same sort of technical breakdown.

On the 5 year chart, $40 has been an important support level for JPM, with $30 the next level.

That the above is happening with the yield spread at extremely high (favorable) levels is an unequivocally bad sign. None of this is determinative or permanent, of course, but the bear case is concisely and well made lately; see Comstock Partner's latest, Banks Are Not the Only Problem, and involves both sentiment and fundamentals.

Short-term, the apparent salvaging of the Bernanke nomination is going to lead to short-covering and buying tomorrow, one would think, but insiders know he has been a disaster for the economy and the markets. He is like the doctor who kept treating Michael Jackson's addiction. Who knows how many times the doctor bailed MJ out of trouble? Eventually MJ met the fate of so many addicts. Gentle Ben may be well-meaning, but dropping debt "money" out of helicopters is running out of potency.

Debt and credit are just promises, promises; air; words; intangibles. Neither the borrower nor lender has a secure position.

Only through a true ownership culture (forget the bogus Bush version built on mortgage fraud as we have now learned) and one of thrift and prudent lending on straightforward terms, a society in which finance plays a small and non-dominant role, can a healthy economy and truly attractive financial markets come to pass.

Currently finance is in a permanent world in which one has to suspect disbelief in order to make an investment. Thus short money is at zero.

We are in a financial Bizarro world. But charts are factual. The Fed can't spin them.

Ignoring a chart breakdown of JPM as well as of GS, is quite a gamble.

Copyright (C) Long Lake LLC 2010

Financial Stocks Deteriorating

I recently warned that market watchers should watch JPM. It, BofA, and of course Citigroup have begun to roll over (Citi of course has indeed rolled over). (To a lesser degree, so has SPY.) This is dangerous in the setting of very wide spreads, which helped goose the stocks in their mammoth rallies this winter-summer. In the same manner, Markit's CMBX index has begun to break down.

A curent, thorough and relatively calm review of the bear case for stocks and the economy is found at the site of Comstock Funds (short-sellers) in Why We Remain Bearish.

The intermediate and long-term gold charts show more underlying strength. Bloodied bulls who fundamentally "believe" in gold as the one monetary asset not based on debt can console themselves with the knowledge that typically long-term bull markets have relatively slow and relatively steady uptrends (excluding blastoff phases when beginning) and short, sharp sell-offs. Stocks are tired and steadily losing momentum, having rallied to resistance; gold is undergoing profit-taking and aggressive short-selling.

Nothing, of course, "has to be", and the current times are without precedent, as may be the amount of market manipulation. So investors and traders are both advised to be more humble than usual.

Also relevant is the advice:

Illegitimi non carborundum.

Copyright (C) Long Lake LLC 2009

JPMorgan Chase Stock and the 10 Year Treasury

In followup to yesterday's post about the importance of watching JPM, here is a 5-year chart showing the close correlation between its stock price and the 10-year Treasury yield. The higher the yield, the higher the stock price.

Bears on JPM might be safer with the 7-10 year Treasury ETF with the stock symbol 'IEF'.

Bears on the 10 year Treasury might want to express that point of view by being long JPM.

Copyright (C) Long Lake LLC 2009

JPM Churning; Bias to the Downside?

Attached you will see a 5-year chart of the politically most favored large financial company, JPMorgan Chase. Click to enlarge.

Strangely, the "feed" into Yahoo continues to list Chase Manhattan at the top left.

The stock is churning, having gone nowhere for 4 months while the averages have moved up. This is despite very wide spreads between cost of funds and lending rates and rates available to JPM for the purchase of Treasuries.

On a multi-year basis, the stock is churning as well. It is essentially unchanged from 5 years ago, even though its competitive position is vastly enhanced. The nominal dividend is expected to be increased substantially, its CEO is being considered for Treasury Secretary, and all should be looking rosy.

Yet the untrained eye can see a series of lower highs the past couple of years.

I would watch JPM as an extremely important indicator of the health of the financial system and the direction of the market. Financials have led the averages up, down and up again the past 6 years.

In addition to the chart and JPM's failure to respond to ideal financial conditions the past several months, my quite-alterable caution relates to Northern Trust (NTRS), a simpler large financial that quickly repaid the TARP funds that were probably forced on it but whose stock has taken a nosedive after flirting with strength. I watch NTRS as a canary in the coal mine of large financial companies. It is simpler, without all the extraneous derivative stuff that makes JPM and its cohorts completely unanalyzable. (I also watch UMB Financial = UMBF, a well-regarded regional bank holding company which stock has almost completely sat out the moonshot in the financials but which actually looks as though it may be a "buy" now or soon.)

Back to JPM. Not shown, but off a huge move from the bottom in fall 2002 to the peak in 2004, JPM chart looked much like the current one. It then penetrated a rising 200 day moving average to the downside and went flat to down for a year and a half, and the stock market underwent a year-long sideways consolidation for a year before resuming its seemingly inexorable uptrend.

Combining technical with fundamental analysis and earnings estimate outperformance, yours truly likes few stocks, uppermost amongst them McDonald's and Ross Stores now that each has corrected from their highs, but they probably are not predictive of much. On the other hand, I have no interest in JPM as a stock from either the short or long side, but I do feel that all investors should watch it carefully.

An unrelated market note: The jobs number Friday smells like one that will be revised lower. ADP's real-time data and other data such as that from TrimTabs (a recommended read), the ISM, etc. point to it being an upside outlier. Nonetheless, the truly vast amount of money-printing out of the Fed has to go somewhere; I just give earnings due to money-printing a very, very low P/E ratio and the resultant economic activity fueled by those earnings no staying power: that's NO real staying power in my opinion. So to me this remains the mid-1930s or 1970s show: dealing with tough times the wrong old-fashioned way: currency debasement. (It's time to suck it up, America/Mr. President, and recover the right old-fashioned way, with hard work and thrift, not with more and more government subsidies.)

With JPM as a critical implementer of this misguided policy.

Copyright (C) Long Lake LLC 2009

JPMorgan Madoff?

Seen on Jesse's Cafe Americain, a disquieting article from the Daily Mail in London titled Customer probe: Blair bank targeted in 8.5 bn pound FSA probe:

The bank where Tony Blair is an adviser is the target of an unprecedented probe involving billions of pounds of customers' funds, the Daily Mail can disclose.

JP Morgan Chase, whose chief executive Jamie Dimon last year recruited the former prime minister as an adviser, is being investigated by the City's watchdog, the Financial Services Authority for allegedly failing to keep track of £8.5billion of clients' money.

The FSA has called in a top firm of accountants to examine the bank's London activities after evidence emerged that JP Morgan had mixed customers' funds with its own. . .

AIG Financial Products operated out of London. It would appear that after Sarbanes-Oxley passed, the Anglo-American financial industry moved much of the truly bad stuff to London.

Bernard Madoff was a founder of NASDAQ. NASDAQ was the epicenter of at least as great a concerted stock fraud - the stock craziness of the late 1990s and beyond-- as was ever created.

No serious effort at financial reform is emanating from the Obama administration. TARP I, passed by the Senate, was ignored and instead we saw TARP II. The Public-Private Investment Partnership (PPIP), announced with much fanfare several months ago, is not in evidence.

The Bank of England finds matters so dangerous that last week it continued "quantitative easing", i.e. printing money to finance deficit spending.

Big Finance as currently configured thrives on volatility. Whether prices go up or down is immaterial to it. In fact, under current rules for options grants in the U. S., optionees want the stock price to temporarily drop, because they are limited in how many option shares can be granted.

Meanwhile, stocks of Big Finance companies have gone wild on the upside without the traditional dividend support, and with 100% opaque financial disclosure. No "investor" in these stocks has the faintest idea of the nature or quality of the assets on their balance sheets, and none is forthcoming. Yet, a new era of prosperity is tipped by the financiers to be on the way now that the hurricane has allegedly past.

We shall see, but anyone who truly trusts these companies to act in the interests of anything except themselves and the individuals running them is making quite a leap of faith.

Copyright (C) Long Lake LLC 2009

Li Whiz!

Infectious Greed links today to a Wired article, "Recipe for Disaster", about the origins of the CDO mess. The piece highlights a mathematical formula developed by Dr. David Li. More interesting perhaps is a WSJ article linked to in the Wired article from 2005 about the same topic: "Slices of Risk: How a Formula Ignited Market that Burned Some Big Investors".

The 2005 WSJ article begins:

When a credit agency downgraded General Motors Corp.'s debt in May, the auto maker's securities sank. But it wasn't just holders of GM shares and bonds who felt the pain.

Like the proverbial flap of a butterfly's wings rippling into a tornado, GM's woes caused hedge funds around the world to lose hundreds of millions of dollars in other investments on behalf of wealthy individuals, institutions like university endowments -- and, via pension funds, regular folk.

Please read the whole thing. It is astonishing, 3 1/2 years later, to see that the WSJ was reporting that the three largest U.S. banking institutions had about $3 Trillion of exposure to CDOs and credit default swaps, the underpinning for which related to a theoretical complex mathematical formula (which is shown, incomprehensibly, in the Wired article). Dr. Xi's own ambivalence about his formula comes through, as does, in retrospect the arrogance, greed and stupidity of the financial companies that knew they were risking vast sums of money they did not have.

Now that these companies, Citigroup, BofA and JPMorgan Chase, are all being kept "alive" by taxpayers, it is even more maddening to realize that all their risks were disclosed long ago.
This makes the call by such interested parties as Bill Gross of PIMCO (the world's largest bond fund) to protect those who own corporate bonds of these companies nothing but self-serving claptrap. Every systemically important owner of the bonds issued by these financial holding companies knew or should have known that these were risky bonds.

No one but depositors should be protected from the insolvency of these companies. The sooner the guillotine falls, the better. And it looks as if Europe's big banks are in the same boat.

The good news is that all this is intangible stuff. The gamblers who lost need to pay the price. For every losing bet, there is a winner on the other side. Losing gamblers who can't pay their debts can suffer the consequences by working things out with the winners who can't collect. Government, through its various powers, needs to make this process happen ASAP and has been way behind the curve for years.

The productive capacity of the world is undiminished. The powers-that-be need to let failing companies fail and work together day and night to cancel out enough debt and other aspects of the over-financialization of the Western world so that normal business can continue and resume.

The shape of the financial markets is indicating that the more basic the asset, the better. Thus, gold and governmental debt show strength. Unpredictable, hidden "stuff" such as that within JPMorgan Chase and GE Capital are seeing money rush out. Unlike GE stock, which might go to zero, oil has a real use and will not go to zero so long as modern civilization as we know it exists.

So long as business and government continue to flail away and thus fail us, the debt deflation will continue. In that situation, short-to-intermediate highly secure credits, such as U.S. Treasury debt or demand deposits in a strong bank with FDIC coverage in addition, appear to be appropriate for funds that are not allocated as pure risk capital.

Copyright (C) Long Lake LLC 2009

A Screed on Citi . . . and a Comment on JPM

Bloomberg.com reports: "Citigroup Reports $8.3 Billion Loss, Splits Into Two"

With an online straight face the writeup quotes Peter Sorrentino, a money manager who manages OPM (other people's money) and has lost them money because the fund he manages owns Citigroup shares. Mr. Sorrentino says, "It looks like a kitchen-sink quarter. Sweep it all in there and get this behind us.”

DoctoRx here. Bloomberg should have gone to someone who was short "C" rather than long it for a comment. In "Getting Better All the Time?" (Jan. 13, 8:16 AM) I stated that any individual who was long "C" was a "gambler" and any money manager who had been net long "C" was worse. The stock was about $5.60 then and is down about one-third in just three trading days. Yet it allegedly is valued by the market at $21 B. That's still real money.

Here are some additional comments about Citi.

Nouriel Roubini told me last month that Citi has continued to value its subprime CDO/CMO holdings way above market, at over 60 cents on the dollar.

When I became a Smith Barney client, I already banked at Citibank. Naively, I assumed that the coordination between Citibank and Smith Barney would make matters easier for us. But no!

Sandy Weill had never bothered to integrate Smith Barney with Citibank. You cannot make this stuff up. So Smith Barney used PNC as the correspondent bank. In 8 years with Smith Barney, it never affiliated with Citibank, or if it did so, no one bothered to tell me. Once I was on the phone with a Smith Barney stockbroker. His computer caught fire. More than twice, different SB brokers complained to me how antiquated their hardware and software were. Two brokers each were responsible for billions of dollars of client money. Yet neither one got his own Bloomberg terminal. So any half-way sophisticated question could not get a quick answer. Was that good for business? I think not.

Without going into details, I can comment on other points that make me wonder why Smith Barney was propounded as a jewel in the Citigroup firmament.

It would appear that with Smith Barney allegedly having been a crown jewel at Citigroup, the rest was, overall, costume jewelry.

NOW, we read in today's news that the all-stars at Citi are splitting the company into two companies. The term "creating shareholder value" is left out of the article (mercifully). Given that Citi knew the "dance" had ended a year-and-a-half ago, is the timing just perhaps a bit late here?

With "C" still retaining a $21 B market cap, there has to be lots of selling pressure from institutions that want to get out before the market cap goes the way of Fannie and Freddie, which is to say much closer to zero. My guess is that many individual investors of Citigroup will stick with the stock under the theory that it is not worth selling now, and perhaps it will come back significantly. I thus continue to believe that the risk-reward is not favorable toward Citigroup stock even at the current price.

SUMMARY:

Citi/Sandy Weill was/were the public prime mover for the repeal of the Glass-Steagall Act in 1999. Robert Rubin championed this legislation while Treasury Secretary and soon after leaving Treasury, joined Citi as co-chairman. Now, we have a credible source, Institutional Risk Analytics, allege that Mr. Rubin is in contact with Mr. Geithner up to several times a day.

From a financial standpoint, this appears to be a change of administration but may well not represent a real change from my standpoint as an investor. (Social policy may be a different matter where there may be real change from the new Administration, but this is not a political blog.)

Citigroup and Robert Rubin have been at the epicenter of the boom and the bust. I think that the rise and near-collapse of Citigroup is a more consequential matter in the sweep of history than were the collapse of Bear, Stearns or the bankruptcy of Lehman Brothers.

EPILOG:

Is JPMorgan Chase next to break down? Given the history of Mr. Morgan, the Panic of 1907, the subsequent formation of the Federal Reserve system in 1913, and the fact that the truly bad news is now "out" re Citigroup and BofA, this is also a historic and fraught topic. Both the JPM stock chart and the company's fundamentals are pointing downwards . . .

EPILOG 2: As I finalize this post, JPM stock has suddenly down 7% after a marginally up opening. Honest, I wrote this pre-open!

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