Why The Algorithm Is Bearish On JPMorgan

At a global level, the scale of change in the banking industry since 2008 has been unprecedented. In the face of significant headwinds, banks have been trying to restructure themselves and rehabilitate the industry. JPMorgan Chase & Co. (NYSE:JPM) has been a focal point of debate on the American banking industry, with CEO Jamie Dimon stirring heated discussions about bank regulation and opportunities and challenges in global finance. The industry has suffered major reputational damage while the regulatory rulebook has been rewritten.


At the beginning of this month, President Barack Obama stated in an interview with the Marketplace radio program that further reform is needed and some of the changes could include “restructuring the banks themselves.” While praising the four-year old Dodd-Frank law requiring large banks to hold bigger capital cushions as well as the tightening of consumer protection rules, he also singled out bank trading desks as being a particular area of residual concern. JPMorgan Chase and Goldman Sachs Group Inc. (NYSE:GS) shares subsequently increased when the banks reported better-than-forecast earnings, but this was overshadowed by the Federal Reserve’s concerns about valuations among social-media and biotech companies causing the S&P 500 stumble.

There have been encouraging signs from JPMorgan Chase, such as its expanding profit margins, increase in stock price over the past year, enticing valuation levels and overall reported performance in the second quarter but is now the best time to invest? According to our time series analysis algorithm forecasts that shares will slide in the 1-month and 3-month time horizons but rebound in the 1-year time horizon. The numbers posted were not as bad as feared, as JPMorgan Chase beat analyst’s already depressed estimates of a $5.4 billion forecast by posting a $5.9 billion profit. However this figure is almost 8% weaker than the $6.5 billion profit reported in Q2 ’13. JPM can be a solid component of a well-diversified portfolio but due to industry wide headwinds, it may be a better option to put the stock in a watch list for the time being before adding shares.

A Broader Look At The Industry – Trading Units Taken-Aback

A recent research report by Credit Suisse analysts highlights that fixed-income, commodities, and currencies trading units (FICC) generated $80 billion in 2013 down 44% from a peak of $144 billion in revenue for the top 10 banks in 2009. This number is also down 15% year over year, representing the lowest revenues post crisis. Weaker G10 rates and securitization revenues deleteriously impacted revenues. Figure 1 shows reported core fixed income trading revenues based on the top 10 players including JPMorgan Chase, Citigroup (NYSE:C), Goldman Sachs, Deutsche Bank, Bank of America (NYSE:BAC) and major players.

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