Which Side of the JP Morgan Trade Are You On?
J. Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When Jamie Dimon confessed that JP Morgan (NYSE: JPM) had grossly and irresponsibly handled finances a few days ago, $2 billion was the amount stated. With each passing day, however, that number grows. In fact, as of the other day, it’s grown by 50%. Now that’s some serious growth. Wouldn’t it be something to be on the other side of that trade?
That’s exactly what many investors are thinking right now. JP Morgan is now caught in a bear trap of its own making. When you or I get caught in a bear trap, it’s because we saw the market doing one thing, only to find out it was doing the opposite. But, in this case, because of the massive amount of cash being traded, they not only made the wrong decisions, they’ve built their own cage. NY Times shares:
“They were caught short,” said one experienced credit trader who spoke on the condition of anonymity because the situation is still fluid. The market player, who does not stand to gain from JPMorgan’s losses and is not involved in the trade, added, “this is a very hard trade to get out of because it’s so big.”
Recognizing that JP Morgan is stuck in this trap, investors are looking for ways to take advantage, like piranhas pursue a wounded animal. And you can’t take advantage of a caged bear from inside the cage. Thus, the best way to capitalize on the situation is to bet against JP Morgan. And, there Is a sense in which doing so, en masse, brings about greater pain for the bank while offering more potential profits for the investors. Henry Blodget reports the following:
The JP Morgan trading loss that was $2 billion four days ago is now $3 billion, report Nelson Schwartz and Jessica Silver-Greenberg in the New York Times.
Because every hedge fund in the world knows JP Morgan is stuck in a position so big that it can't unwind it... and they're betting against it.
There is speculation that this is, at least partially, responsible for the jump in damage from $2 billion to $3 billion in just four days. How high can it go? It depends how adept the piranhas are at picking at the bear in the cage before he finds a way out. The New York Times continues:
As the credit yield curve steepened, the losses piled up on the corporate grade index, overwhelming gains elsewhere on the trades. Making matters worse, there was a mismatch between the expiration of different instruments within the trade, increasing losses.
The additional losses represent a worsening of what is already the most embarrassing misstep for JPMorgan since Mr. Dimon became chief executive in 2005. No one has blamed Mr. Dimon for the trade, which was under the oversight of the head of the chief investment office, Ina Drew, but he has repeatedly apologized, calling it “stupid” and “sloppy.”
Many are espousing the reimplementation of the Glass-Steagall Act, which would put an end to banks being able to play in the markets in this way. Will this be the demise of JP Morgan? It’s highly doubtful, in light of their high profits. But it does expose them as one more in a long line of dishonest financial institutions. Furthermore, market conditions aren't healthy right now, possibly pointing to the beginning of a strong drop.
JPM's current crisis, growing distrust for financials and a weakening market could conspire to drive the price of the stock down hard. Consider carefully where you place your trust.
For your prosperity,
J. Keith Johnson
The Gold Informant
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