Betting Against JP Morgan’s Jamie Dimon
Sunday, July 22nd, 2012: We certainly live in interesting times. Especially if you follow the stock market as closely as I do. I have loved the market since I was 13, and that is a very long time. In all of those years, I have never witnessed a time in which seen so many factors could move the market as I see now. There is everything from the fall of Europe, the weakening of China to the very real possibility that the U.S. will actually fall off the “fiscal cliff.” (That is, the raising of taxes for hundreds of millions of Americans come December 31st unless Congress and the president acts—and how often does Congress actually “act” in a way that helps financial markets?).
In this new tumultuous environment, things can—and do—change very quickly. For example, news came this morning that the IMF (International Monetary Fund) has made the decision to discontinue payments to Greece. While the cable news channels have not picked up on this story at all, this could be a huge event that leads to Greece leaving the Eurozone. No one knows exactly how that will play out, but the chances are that it would be a huge mess as Euros get converted to Drachmas, the value of which would have to be determined. Greece is already in a “depression,” says the newly elected Prime Minister Antonis Samaras (and Spain, Europe’s fourth largest economy, is following in the footsteps of Greece. We know this because their bond yields have risen to the “insolvent” level of 7.2 percent, meaning no one will lend them money).
All of this turmoil has turned me into a different type of investor in two key ways. One, I am now more trader than investor. No more “buy and hold.” Now its buy and watch closely. Also, for the first time, I now short stocks. That is, I bet on certain stocks to go down. Which stocks am I shorting? The first stock I shorted was Facebook. That’s because I live by a rule that lies at the intersection of my work life and investing life: “if it isn’t a book, it isn’t a stock.” What does that mean? Although social media is huge and getting even more popular, people tend NOT to buy books on the topic. They don’t need to. They know how to “friend” someone on Facebook or send a tweet without a book. Sure, a couple of social media books did well, but 90 percent of them were dead on arrival. When Facebook’s IPO came out, I went short on the stock about a week later and have held that position ever since.
But the more interesting stock I shorted next was JP Morgan Chase with its “fortress” balance sheet (that’s how CEO Jamie Dimon characterized his company). After the huge “London Whale” loss was announced a couple of months back, I shorted the stock because of the “cockroach” theory. What’s that? If you see one cockroach in the kitchen you know there has to be more (meaning JP Morgan has more problems than the one bad trade). However, I didn’t stop at JP Morgan. Because of the recession sweeping across Europe (and on to our shores next, I predict), I shorted most of the big banks including Bank of America, Morgan Stanley, Citigroup, and Credit Suisse. I figured that the banks would be hit the hardest if the bottom fell out of our economy. I have only added to those positions since.
But it is important to put things in perspective. Perhaps 75% of our savings are in stocks (in long positions), bonds and cash. Only a quarter of the whole are in short positions, and even in that account I am long my favorite stock, which are eBay and Pfizer (among others). I think of my short portfolio as a hedge against an “end-of-the-world” scenario.
But back to JP Morgan Chase. Last Friday it was announced that CEO Jamie Dimon and his wife purchased 500,000 shares of JP Morgan stock on Thursday and Friday. That means that I was adding to my short position while the executive—who supposedly knows the company better than anyone on the planet—was betting the other way. I was shorting 1,200 shares while he was buying 500,000 (talk about David versus Goliath). However, not only am I not deterred I plan to increase my short position today. Why? Well, for a few reasons. I can’t help but recall the time that Jeff Immelt, CEO of General Electric, went on TV telling investors that someday they will look back and see how lucky they were to purchase GE stock at $30-something per share. Since then—and one huge financial crisis in 2008—the stock traded at $5 and change. Today GE trades at $19 and change. That means CEOs are not as infallible as we would be led to believe. In fact, the opposite could be true. Dimon is a very smart CEO (as evidenced by his expert testimony in front of both houses of Congress). However, he is not exactly objective about his firm. Besides, macro events like Europe will move his stock and there is nothing he can do about it.
Only time will tell who was right. For the record, as a long term investment I agree with Dimon. His company will do well; that is, as long as an investor has a 3-5 year time horizon. But in the short term? I didn’t even mention the Libor investigation hanging over most of the banks. That’s too inside baseball and this blog posting has gone on long enough.