Saturday, May 12, 2012

"JPMorgan Had a $5 Billion Balance Sheet Profit on Friday" (JPM)

 Spank our bonds will ya?

From Sober Look:
With all the talk about JPMorgan's losses out of the CIO's office, nobody is discussing the money the firm made on Friday due to the accounting magic called DVA. After all, CIO's positions were (at least in principle) meant to act as an offset to this earnings volatility.

As an example the chart below shows the price action for JPM's newly minted bond (issued just last month). It's a 4% coupon bond maturing in 20 years.

Source: Bloomberg

With roughly $12bn of this bond outstanding, JPMorgan will record a gain of some $350MM based on Friday's price move just for this bond. It's important to note that this bond represents only a fraction of the $2.3 trillion balance sheet funding....MORE
On Friday JPM closed down 9.28% at $36.96, a $14.5 billion hit to market cap .  
The stock is probably worth buying, perhaps as a hedge to a short S&P position.
I know, hedging (actually a hedge against a hedge) is what Dimon says got them into this pickle but hedges, while imperfect (otherwise they'd be an arb) can be wonderful. Here's the Rondel at  Sissinghurst: