JPMorgan Chase CEO Jamie Dimon
The penalty for laying a big egg on Wall Street used to be a 10 percent markdown. Now, it’s 20 percent or more. Facebook as a new issue shoulda come in at $28, not $38, and it woulda closed in the low thirties with no Congressional hearings. Prior to its London caper, JPMorgan Chase sold at 10 times earnings power, now an also ran carrying a 7 multiplier.
Psychologists explain this as the syndrome where you fill too much space and end up battered black and blue. Fifty years ago, you couldn’t find financials in terms of GDP. Wall Street was a tiny village. Now it’s 9 percent of GDP, 15 percent of the S&P 500 Index with a boatload of embedded regulators and dozens of congressmen vying for airtime and tomorrow’s headlines.
JPMorgan as a whale got noticed, then harpooned, not for $3 billion in paper losses, but $40 billion in market value blubber. This is an enormous comeuppance. Call it 25 percent on a market capitalization over $170 billion. The stock’s now worth $125 billion and has given up all of its 32 percent gain this year.
Wells Fargo’s market capitalization stood at $177 billion six weeks ago, now ticking at $170 billion, hardly changed. Wells deals mostly in mortgages, not a major player in derivatives, deals, stock brokerage and underwriting, now the twelfth largest capitalization in the Standard & Poor’s Index. The House of Morgan has slipped down several rungs, resting below Intel and nearer Merck.
Citibank, which was number 25 on the S&P 500 Index Hit Parade, with a market cap of $102 billion, has broken badly below the top 25 list, now ticking at a $78 billion valuation. So far, Citi shows no black swans surfacing nearby so its 25 percent schmeiss is in pure sympathy with JPMorgan.
The market is placing a huge “complexity” discount on loose jointed Tier One capital market players including Goldman Sachs and to some extent Morgan Stanley, whose Facebook pricing fiasco will go down in financial history text books.
One of the precious national resources is our capital markets distribution capacity for financing corporations as well as bringing successful ventures like Facebook public. Actually, Facebook didn’t need new capital to run its business but it did sell a lot of peanuts to hungry but foolish investors. (See last week’s column.) It cashed out early investors and management, but nothing wrong with that.
Unfortunately for me, Facebook’s advertising revenues on the Internet stuttered some of late and this took down Apple and Google. The ramp in smart phone advertising lags expectations. Microsoft’s joint venture with Barnes & Noble’s Nook e-book business centers on Microsoft’s need to build up content revenues with its Windows 8 intro just months away.
Financials were nearly 15 percent of the S&P 500 Index but the sector seems headed towards 12 percent. Only JPMorgan and Wells Fargo remain in the top 25 listing. Take JPMorgan down another 20 percent and it sinks into some kind of purgatory, below a $100 billion valuation. Exxon Mobil and Chevron are the only 2 energy names among the top 25, but they are non-performers year-to-date, in minus territory.
For better or worse, I believe $90 a barrel is the right clearing price for oil based on supply-demand projections which favor supply. The U.S. actually could become a nearly self sufficient energy country in a decade, but it’s premature to factor this into our balance of trade deficit which is largely oil imports, some 8 million barrels per diem.
If financials are chancy investments and most of technology sucks because all the analysts missed the tech spending cutbacks surfacing what’s left to like? Cisco and Qualcomm could slip below the top 25 line, too, while PepsiCo, Coca-Cola and General Electric shine. GE is still a cheap property and money managers like to hide in KO and PepsiCo even though per capita consumption for cola drinks is depressing.
As bank stocks shrivel away, I keep refreshing my valuation and earnings model. There are two kinds of bank stocks. Some, like Wells Fargo and PNC Financial sell at premiums to tangible book value running over 50 percent. Wells and PNC don’t do capital markets like Citi, Bank of America and JPMorgan.
Several Tier One capital market players, including Goldman, sell at deep discounts to net tangible assets per share. Morgan Stanley, Citi and BofA sell closer to 50 percent of tangible book value, but nobody cares. If a busload of regulators at JPMorgan missed their London derivatives caper who knows when or where the next shoe drops?
Jamie Dimon’s bank now ticks at a slight discount to book. The stock dwells in the “nobody cares” category, its premium gone, maybe forever. What about a deeper discount? Anything’s possible. Is this an overreaction to a trading loss up to $3 billion? Everything else equal, the answer is affirmative, but macro storm clouds fill the sky.
Euroland's mess is not going away. The European Central Bank would need to invest another trillion euros in all the sick banks in Greece, Spain and Italy. Why they don’t insure small depositors’ savings accounts is a mystery to me.
Runs on banks there are probably next month’s headlines. Don’t expect international players like JPMorgan and Citi to rally while all this misery plays on.
The cross check on book value is perceived bank earnings this year and in 2013. Valuation ranges from a price-earnings ratio of 6 times earnings to a 10 multiple for 2013. The 6-times bracket embraces Citigroup, Morgan Stanley and Bank of America. Oops! I left out JPMorgan. Analysts are carrying this pony at $5.40 a share next year. Actually, analysts project substantive earnings growth for all banks in 2013.
I’m not so sure. First, capital markets are choppy, embracing investment banking, underwriting, brokerage volume, money management assets and certainly trading which is in risk on, risk off no-man’s land currently.
Big gains taken into the earnings stream from the flow back of loss reserves are over. As for pure banking, the outlook for net interest margins is flat at best. The Treasury bond yield curve turns flatter and flatter. Money market rates remain in the sub-zero category for years to come.
Finally, the outlook for lenders is neutral, at best. Compared with previous recovery cycles, loan growth is a huge disappointment. This is tied to the deleveraging by individuals plus the corporate sector’s close to the vest capital spending and investment plans. Liquidity in the corporate world has never been so ample for over 50 years.
Loan growth is also more conjectural because of the huge runoff in portfolios of non-core assets and acquisitions. This is particular to JPMorgan, Citigroup and Wells Fargo and could take years to accomplish.
Even without black swans paddling towards banks, the macro environment is neutral, at best. Viscerally, the Street’s earnings projections are too rosy. Banks should never sell at more than 60 percent of the market’s valuation. I’ll admit we’re there, but show me the catalyst to turn me on.
Too early to be a contrarian player in bank stocks when at my back I hear, “It’s the flat yield curve, stupid!”
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Martin T. Sosnoff is chairman and founder of Atalanta Sosnoff Capital, LLC, a private investment management company with $7 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street, Humble on Wall Street and Silent Investor, Silent Loser. He was a columnist for many years at Forbes Magazine and for three years at The New York Post. Sosnoff owns personally and / or Atalanta Sosnoff Capital owns for clients the following investments cited in this commentary: JPMorgan Chase, Citibank, Goldman Sachs, Morgan Stanley, Apple, Google, Microsoft, Exxon Mobil, Chevron, Qualcomm, PepsiCo, General Electric, PNC Financial and Bank of America.
Martin Sosnoff: mts@atalantasosnoff.com
