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Minyan Mailbag: JPM - One Simple Reason


Stop looking at me Swan!


Prof. Katsenelson,

What do you think of short JPMorgan (JPM) / long Lloyds (LYG) on a pairs trade?



I am not here to give advice so please take this as philosophical discussion, because that's what it is:

I am not a big fan of JPM for one simple reason: Every value manager I know that owns JPM owns it for one simple reason - Jamie Dimon. I am sure Jamie deserves the confidence, however, I have a hard time owning a stock because one person, even if that person happens to be a CEO, will turn the company around.

Also, I don't like JPM's (and Bank of America's (BAC)) trading business; a black swan type of event that never happened in the past combined with incredible leverage of a bank could bring this financial giant down overnight. In addition, I don't trust JPM's numbers as it recently digested BankOne and I am sure took plenty of charges. The company is so complex (it is also true for Citi (C) and BAC), that I could probably analyze a dozen companies instead of analyzing this one - just not worth my time.

I don't know how conservative JPM is with its lending practice. If it is, in the absence of black swan type of event, the stock could do fine in the interim.

I believe a bank with a lower dividend yield, significant exposure to higher risk consumer lending and a large mortgage origination business would be a better candidate for this type of pair trade. I cannot think of a bank that fits that description from the top of my head. WaMu used to fit this description, though I am not sure if it is the case anymore.

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