Big banks are big mess. Run away!June 28, 2012: 12:38 PM ET
The fun never ends with JPMorgan Chase (JPM). Shares fell nearly 4% Thursday following reports that the loss tied to its bad hedge (or is it a trade?) may now be $9 billion.
This should not come as a big surprise to anyone following the story. JPMorgan Chase CEO Jamie Dimon first said back in May that the loss was $2 billion. And not long after that, experts were claiming that the loss would grow. In fact, my colleague Maureen Farrell spoke to people two weeks ago who suggested that the loss could be as high as $8 billion. Perhaps Dimon needs to go back in front of the Senate and House again?
Will the loss reach 11-figure levels? Perhaps. But you know what? It almost doesn't matter at this point. When JPMorgan Chase reports its second quarter results on Friday, July 13 (beware of ladders, black cats and London Whales!) many (including Fortune's Stephen Gandel) think that Dimon will essentially kitchen sink the quarter. The bank will get all the worst of its losses out of the way so it can move forward.
That would probably be a smart move. But the JPMorgan Chase drama further hammers home a point I've been making repeatedly for a while: the big Wall Street banks are all opaque black boxes that should be avoided. Some traders got
suckered tempted into buying the big bank stocks as they were surging in the first quarter of the year on the hopes that things were improving in the U.S. and Europe.
But with concerns about the U.S. job market resurfacing, there are legitimate worries that credit quality could start to decline. And we still don't know with any certainty whether big banks can withstand a chaotic Lehman-like event in Europe. Sure, a Greece exit from the euro now seems to be far less likely, but growing worries about the financial health of Spain and Italy dwarf the fears of more problems in Greece.
Investors still don't really know just how much exposure the Wall Street giants have to Europe. It's one thing to look at their holdings of sovereign debt. But that's not the whole picture. The still murky world of credit default swaps and derivatives could easily burn the big banks.
And if the once infallible JPMorgan Chase can screw up like this, who's to say that there aren't similar (or worse) problems yet to be disclosed by other banks with massive trading operations.
With that in mind, it's telling that JPMorgan has had a chilling effect on the whole sector. The Financial Select Sector SPDR exchange-traded fund (XLF) was down more than 1.5% Thursday.
Shares of Wall Street competitors Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) are all down Thursday and have all slid in tandem with JPMorgan since the initial disclosure of its loss in mid-May. Bank of America (BAC) also dipped on Thursday but it has curiously outperformed its rivals in the past month and a half. Shares are roughly unchanged since Dimon's mea culpa tour began.
Still, the bottom line is this. Don't invest in anything you can't understand. Even if JPMorgan is still the best of the big banks --a point that's now debatable ... Wells Fargo (WFC) or US Bancorp (USB) may now deserve that title -- why would you want to take on the risk of owning something that could easily blow up on a moment's notice?
I recently taped a series of second half outlook videos with Josh Brown (aka The Reformed Broker) and Lee Munson, of Portfolio, LLC in New Mexico. (I've dubbed Lee the Albuquerque Assassin because of his deadly wit.) The videos will be published over the next few days. But in one on banks, Munson argues that just because Dimon may still be the best Wall Street CEO and JPMorgan Chase may be less bad than the likes of Goldman Sachs, BofA, Morgan Stanley and Citi doesn't make Chase a compelling buy. I agree.
You can argue all you want about how cheap JPMorgan and other big banks look based on their earnings expectations or book value. But many bank stocks that are cheap, are cheap with good reason. And bank bulls also can't deny the fact that earnings estimates have plunged in recent weeks. The outlook for financial firms with Wall Street exposure is not good.
Analysts now expect JPMorgan to earn 85 cents a share in the second quarter, down sharply from a year ago. But two months ago, the consensus estimate was for a profit of $1.24 a share. Second-quarter earnings expectations for Goldman Sachs have fallen from $2.74 a share in late April to $1.83 now. At Morgan Stanley, forecasts have dropped from 51 cents a share two months ago to 43 cents. You get the picture.
So if you still like the banking sector, there are far safer ways to play it. In a recent Money Magazine column, I pointed out that several mid-sized regional banks that didn't take bailout funds in 2008 and 2009 are better bets.
The problem with the megabanks (and the reason why Congress and regulators are cracking down on them) is that they are now insanely complex. But banks like UMB Financial (UMBF) and Commerce Bancshares (CBSH), two Kansas City banking cousins -- literally ... their two CEOs are cousins -- and San Antonio's Cullen/Frost (CFR) all pay solid dividends, have a much smaller percentage of bad debts on their books and won't blindside you with trading blowups from across the Atlantic Ocean.
Call me a traditionalist, but I like it when banks simply loan money and take deposits. That may be boring. But boring beats billion dollar losses any day of the week.