Tuesday, May 22, 2012

Earnings Heads-up: "JPMorgan Facing 2007 'Kitchen Sink' Times Again?" (JPM)

From Carney at CNBC:

Remember the kitchen sink?
A few years ago, investor expectations of bank earnings were said to be “at rock bottom.” Bank analysts and journalists explained that the banks would report a “kitchen sink” quarter, in which they would take heavy losses and start “laying the groundwork for a strong recovery,” as a BusinessWeek story put it.
That was 2007. 

In hindsight, the financial crisis might look like an easy call. But at the time it was fraught with controversy.
Those of us making the argument that losses might be much worse than banks were letting on were derided as fear-mongers, tools of short-sellers, or simply na├»ve. As one person asked me when I questioned whether Citigroup’s [C  26.92    0.67  (+2.55%)   ] write-downs went far enough, how on earth could we imagine that we understood the balance sheets of banks better than the bankers?
It’s kitchen-sink time again. Citigroup said yesterday that investors are getting carried away selling shares of JPMorgan Chase

“A lot of investors’ concerns have gotten to extreme levels,” wrote Citigroup’s Keith Horowitz in a note to clients. He describes the stock as an “absolute buy.” 

In a note issued last night, Goldman Sachs also declared JPMorgan Chase [JPM  34.01    1.50  (+4.61%)   ] a “buy” and described the 20 percent decline in the bank’s stock a “valuation overshot.” Goldman predicts the shares will recover “once investors become more comfortable with the size and scope of the CIO losses." It also predicts the dividend will not need to be cut. 

Note the implicit assumptions: that the losses are less than they seem; that the market is getting the price of JPMorgan stock wrong; that the clarity will show the bank is better off, rather than worse. 

“The company will increase its dividend 20 percent this year, its earnings will be higher this year, and up 15 to 20 percent next year, so I think we’ve done the overselling by more than a little bit,” Bove said on CNBC’s Worldwide Exchange this morning. 

All this confidence in JPMorgan Chase is based on practically nothing....MORE