What To Watch For
This is definitely one of the most anticipate bank earnings call since at least 2008. People are very focused and I expect to see some volatility in the stock as headlines hit. This is a little scorecard (I will avoid calling it a “cheat sheet”) of what I’m looking for and what I would view as positive or negative.
There are 4 key components
- The headline number will probably get the least initial attention but will ultimately prove important. Consensus is for 76 cents. I am looking for a significant beat on this and would not be surprised to see close to $1.
- The whale trade loss. This is the number everyone will be watching for. It isn’t as important as the overall CIO office number. I expect $3 billion, but since there have been so many leaks that it is $5 billion, I have to run with that. Anything above $5 billion would be negative. Below $4 billion positive. I expect that there will be some component of realized losses and some element of reserves against future losses. If the headline number is bad, like $5 billion, it will be necessary to read the fine print, but if a significant portion looks like overly conservative reserving, then the market may even take that as positive
- The CIO office as a whole. The IG9 and other complex derivatives were only portions of the CIO office’s position. The available for sale book had profits waiting to be milked. I think they will have sold off a portion of this to cover about $3 billion in losses. So as a total CIO office loss, I expect the number to be around $1 billion after tax.
- Don’t forget the DVA. JPM lost 16 cents per share (or $907 million) in DVA in their Q1 earnings report. Their 5 year CDS went from 145 to 94 in that quarter. It finished June at 139. DVA also has a bond component (where spreads didn’t move as much as CDS). Since JPM underperformed, some of their hedging activity will not have gained as much as their own spread would indicate. I’m guessing DVA will be around a $500 million positive. It is likely to be buried, but I would think a big DVA number will get stripped out of the earnings when people really think about it, so would be a negative.
What is the status of the CIO office’s trades? Again need to look at several things.
- The derivative trade will have been reduced by about 50% to 75%. If only 50% has been completely unwound the market will react negatively. If 75% is gone, then it should be positive. Again, how much is kept in reserve is key as well.
- Stuck with a correlation trade. In all likelihood the breakdown of the correlation market is hampering their unwind. More dealers are shuttering correlation desks even If they still trade some tranches. JPM is likely to have tranches vs indices. They will talk about it being “neutralized” and will be largely right, but the market won’t like the sounds of that. If they took down 75% of the original notional and are only stuck running 25% as a “correlation” position the market will grow comfortable with that. If stuck with 50% we will all be sick of the “hedge vs bet” headlines and “taxpayer money” headlines by the end of the day.
- What is left in the CIO’s available for sale book. The market will not want to see this overly “harvested”. Ideally this book should be getting reduced roughly in lock-step with the whale trade. If it is all gone while the whale trade remains on the books that would be viewed as a negative. Alternatively, I think if they leave too much of this on, it will grab the attention of people saying their risk remains too high.
Several options can come out here too.
- Clawbacks. The market wants to see clawbacks.
- Some new oversight or risk committee or large trade committee. Basically some changes that give market real comfort that this type of situation won’t arise again.
- Resuming the stock buyback. Will they have done enough that they can resume the stock buyback program? I haven’t seen anyone mention this, and that would be potentially a big positive.
LIBOR. I am sure they will be asked about LIBOR, or at least they should be. I think they will be at the relatively clean end. They had low LIBOR rates during the crisis, but their stock and CDS performed the best. I think this will largely be a non event for them, but since JPM probably won’t discuss the issue, due to potential litigation, the market may be left with a bad taste in their mouth that here we go again.