JPMorgan: Buy, Sell Or Trade?

Unsurprisingly and to its credit, JPM's CEO was at pains during the call to point out that quantification of future losses is extremely difficult, as these would be the result of on-going management of the portfolio, near-term correlation changes, market trends and volatility, availability and cost of hedging instruments-- and most importantly, market liquidity. An external assessment of potential losses requires additional portfolio details well-beyond what is disclosed in the notes and its VaR loss probability distribution.

Ultimately, the underlying source of JPM's $2 billion loss is process related - specifically, poor risk management and oversight-- and Mr. Dimon owned up to this. A key implication is that estimating loss potential and corresponding impact on the bank's market valuation consequently has a high degree of error.

Furthermore, any regulatory implications have yet to be determined. Simply put, it is particularly difficult to estimate this ultimate loss externally (actually, even internally!) and estimates will have a wide error. The market has been privy to the difficulties in estimating losses in similar situations - LTCM, Swiss Re, UBS and AIG amongst others. Given all of the above and its current valuation (P/B 0.77x, P/E 7.6x), at best JPM is characterized as a trade, on either the long or short side in response to emerging details.

*For a helpful discussion of VaR, its measurement, and impact on risk and trading see "A Practical Guide to Risk Management" by Thomas S. Coleman, Research Foundation of CFA Institute, July 2011 (see here).

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