Weekly Recap & Outlook – 05.11.12

Tower Private Advisors


  • JPMorgan debacle
  • Modest economic improvements in a quiet week
  • Joke of the week: What do you call a bad Spanish bank? A Spanish bank (heard on Bloomberg radio)

“And Max said NO!”

Farewell, Maurice Sendak

Capital Markets Recap

Top Stories

In the April 13, version of the Weekly Recap & Outlook, I mentioned the London Whale, the name of the JPMorgan trader who had amassed huge positions in derivatives. It went like this:

Messrs Dodd and Frank must have their undies in a bunch over news that JPMorgan has, “transformed the bank’s chief investment office [sic?] in the past five years [hmm...see chart below - GPS], increasing the size and risk of its speculative bets…” The Company hired a new Chief Investment Officer back in 2006 with the doomed-to-failure name of Achilles Macris (I am not kidding.) The same Bloomberg story goes on to say that, “some of Macris’s bets are now so large that JPMorgan probably can’t unwind them without losing money or roiling financial markets.” That refers to the positions of the so-called London Whale, a London-based derivatives trader who was given the moniker, presumably because he can upset the whole financial world with a flip of his metaphorical tail, which might give new meaning to the phrase, tail risk.

Whale, this week the whalers got the whale, as JPMorgan announced it had lost north of $2 billion as a result of trades in its Chief Investment Office. The daggers came out across the blogosphere. Here’s a sampling of posts from today (I’m not sure who’s being pilloried, JPM or Jamie Dimon):

  • JP Morgan–Aaaaarrrrgggghh – Cumberland Advisors via The Big Picture
  • JPM announces major losses on its “hedges” – The Big Picture
  • Oppenheimer: The Damage to JP Morgan is ‘Mainly Psychological’ – Business Insider
  • How Jamie Dimon Got To Be the Most Admired Banker in the World – Business Insider
  • Jamie Dimon Should Resign in Disgrace – Clusterstock
  • WSJ Names Two Hedge Funds That Profited from the JPMorgan Blunder – Clusterstock
  • 5 Hedge Funds That Are Getting Smoked by JPMorgan – Clusterstock
  • What JP Morgan’s Stunning $2 Billion Loss Means - Clusterstock
  • Dennis Gartman: Jamie Dimon’s Pristine Reputation Has Been Irreparably Sullied – Clusterstock
  • Why What Jamie Dimon Doesn’t Know is Plain Scary – Zero Hedge
  • Does Jamie Dimon Even Know What Hedging Risk is – Zero Hedge

There’s this notion that if traders know another firm is in trouble, they’ll be like sharks smelling blood, and will start circling for the kill, which amounts to taking the other sides of trades the company’s involved in. In the Long Term Capital Management crisis, firms purportedly looking to buy the company came in to examine LTCM’s book and, in the name of due diligence, it was suspected noted the trades they had on, and took the other side, accelerating the company’s demise. I don’t mean to suggest this will lead to the company’s demise. Their capital level has 12 zeroes after it. In the conference call after the market closed, however, Jamie Dimon minced no words in one sense…”bad strategy…badly executed…egregious mistakes,” and minced plenty of words in another sense, namely, that the company’s results could “easily get worse this quarter and there will also be a lot of volatility next quarter.” That seems to indicate that the company hasn’t unwound all its trades related to the London Whale. That sounds like a foreshadowing of the foreshadowing highlighted above in nuclear red.

Jamie Dimon has been a vocal opponent of the Dodd Frank act–probably the Volcker rule in it, which is intended to prevent banks from trading their own funds, and as such, this would seem to be a poorly timed story, and should embolden proponents of Dodd Frank. This makes JPMorgan the poster child with what’s wrong with the biggest banks. As the Financial Times put it, “…the mark-to-market losses came in the bank’s chief investment office, a unit set up to invest excess deposits…” The same story quoted Carl Levin, Democrat senator, as saying the loss was “just the latest evidence that what banks call ‘hedges’ are often risky bets.”

The stock reacted horribly. Mind you, it was no Green Mountain Coffee Roasters (-40%+) overnight on May 3, but it fell by almost 10% on the largest trading volume in at least six years–and those six years include the bankruptcies of Lehman Brothers, Bear Stearns, and many others.

Certain moving averages tend to provide support (i.e. stopping/slowing declines) and resistance (i.e. stopping/slowing accents). Market technicians argue that case, and they–oh, include me–don’t really know why. The market faithful, however, the Fundamentalists, the Efficient Ominiscient Market Hyopthesis folks, insist that moving averages only work because people expect to work…whatever. The stock’s low today was $36.62; the 200-day moving average–arguably the most carefully watched–was at 36.6561…yesterday. See for yourself.

Finally, to end this walk through this vale of tears, there were a couple of memorable quotes on Bloomberg radio today. The first came from Rich Yamerone, who trotted out an old saw, “there’s never just one cockroach,” but the better one came from a name I didn’t catch, and as you’ll gather, it came in the context of viewing JPMorgan Chase as the best of the banks, and Jamie Dimon as the best of the bankers:  “it’s like thinking your neighbor’s a Sunday School teacher and finding out he’s a lap dancer.”

It was in this context that we received notice of a conference call with Dr. David Kelly, Chief Market Strategist at JPMorgan Asset Management. The subject of the May 16 call is, “Market Call: Investing Through a Bumpy Ride.” While the irony of the timing is delicious, here are the bullet points of the call. They serve as a summary of the major concerns of investors:


  • The impact of a deeper European recession on financial markets
  • Whether softer growth in the U.S. should really raise recession fears
  • Whether politicians have too much at stake to allow the “fiscal cliff” to occur
  • The fact that a “sell in May” strategy has only really worked during the last two years [GPS: oh, really...?]
  • The twin realities of overly conservative investors and valuation opportunities

4:34 pm…Fitch downgrades JPMorgan to A+ [from AA-] and puts it on Watch Negative, suggesting that the most likely direction of further ratings action is downward.

This Week

At least two economic sentiment indexes were released, the Small Business Optimism index, from the National Federation of Independent Business, and University of Michigan Consumer Confidence. Of course, there’s overlap between the two–at least theoretically–as, undoubtedly, some folks surveyed in the U of M survey are small business owners and vice versa. Still, it’s remarkable how similar they look, directionally. Consumers, however, are clearly more spastic.

The monthly JOLTS report (Job Openings Labor Turnover Survey) for March was released today. It showed a jump in the number of job openings, from an upward-revised 3.565 million in February to 3.737 million in March. As you can see below, it jumped to the top of the regression channel, which had been on the chart before this month’s figure. The biggest jumps were in Construction (+31.5%), but which is the smallest of the groups measured, and Manufacturing (+20.3%); the only shrinking openings were in Government (-6.5%). Here’s the overall index.

Initial Jobless Claims fell by a 1,000 this week, stabilizing a big drop from last week and returning the indicator to the bottom end of the range it’s been in since the beginning of the year. The closely-watched four-week moving average turned down, but it probably couldn’t help but turn down after last week’s–oh, I’ll say it–plunge. There is still the slightly postive upward–which is bad–trend to deal with, but it’s almost flat.


Next Week

Key indicators to watch


  • Consumer Price Index
  • Industrial Production
  • Capacity Utilization
  • Initial Jobless Claims
  • Leading Economic Indicators
  • Minutes of April 25, 2012, FOMC meeting


Regional surveys

  • Empire State Manufacturing index
  • Philly Fed

Housing indicators

  • NAHB Housing Market Index
  • MBA Mortgage Applications
  • Housing Starts
  • Building Permits
  • Mortgage Delinquencies
  • MBA Mortgage Foreclosures

As a reward for making it this far…



Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors



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