(Note: The author of this fundamental analysis is a financial writer and a portfolio manager.)
JPMorgan Chase & Co. (JPM), the largest US bank with a market value of over $ 330 billion, and its chief executive, Jamie Dimon, are expected to release their fourth-quarter earnings on Jan. 15 before markets open. However, the rise of the stock market volatilitylower interest rates and weak home sales could weigh on the bank's fourth quarter results.
Overall expectations for the fourth quarter tended to fall. Since the beginning of December, estimated profits have fallen by 3% and estimated revenues by 2%.
Bank faces external headwinds
In the fourth quarter, yields dropped sharply, and stock market volatility accelerated sharply. Investors worry about too aggressive a strategy Federal Reserve and that slower growth can trigger a recession. This resulted in interest rates on Cash at 10 years fall of about 55 base points from early October to around 2.70% on 31 December. In addition, two-year yields fell nearly 50 basis points to 2.5% at the end of the year. Falling interest rates could have a negative impact on the bank's fourth quarter results. net interest income. in the third quarterThe bank said rising interest rates helped push net interest income up 7 percent to $ 14.1 billion from the previous year.
Falling interest rates in the fourth quarter helped lower mortgage yields, as the 30-year national average dropped 45 basis points to about 4.5% by the end of the year. Lower rates could help stimulate the real estate market and slow down the bank's loan growth in 2019. However, the bank is unlikely to help in the fourth quarter as home sales considerably slowed down. United States. House sale index pending has fallen to its lowest level since 2014. JPMorgan recorded a sharp 16% decline in its home loan business in the third quarter; the downturn in real estate will probably weigh more on that.
JPMorgan could see a drop in interest rates and volatility in the stock market, which would boost the revenues of its investment banking division. Falling stock markets may have contributed to the increase in stock trading volumes for JPMorgan in the fourth quarter. The stock market had a strong third quarter with a turnover up 17%. At the same time, declining yields would suggest investors buying bonds, which could help the troubled fixed income group of the bank, which saw its turnover fall by 10% in the last quarter.
Longer-term prospects are lower
Analysts estimate that JPMorgan will have a much weaker year in 2019, its turnover to increase by 3% compared to a rate of 14% in 2018. In addition, the profit should increase by 7% in 2019, against 44%. % last year. The outlook for 2020 is worse, with profits and revenues rising by less than 1%. Even worse, JPMorgan's 2019 growth is expected to be much slower than its competitors, Citigroup and Bank of America, whose earnings are expected to grow by 13% and 11% in 2019, respectively.
The stock can fight in 2019
With a stock of around 16% on its 2018 high, its valuations using tangible book value price considerably down but still not cheap at 1.88. If this multiple were to return to the historical range, the valuation could fall to 1.6. The stock is also more expensive than the other two banks of financial centers, Citigroup and Bank of America.
The expiry options on March 15 are bullish on the title, with the number of call exceeding puts about 3 to 1 with 12,000 open call contracts. the long ride suggests that the stock could increase or decrease 8% from the exercise price of $ 100, placing the stock in a trading range of between $ 91.85 and $ 108.15. here the expiration. The bet suggests a bullish outlook for the title after the fourth quarter results. However, the long-term view is more bearish if one uses the January 17, 2020 exercise price options at the $ 100 exercise price. This strike price shows that put options exceed calls with a ratio of more than 2 to 1, with nearly 13,000 open put options.
The technical charter is also extremely bearish with a high level of resistance at $ 102. The stock also has a firm downward trend that has been in place since July. If equity is below the technical level support at $ 94, it could fall to as little as $ 87.
the relative strength index The trend is also down since the beginning of 2018 and suggests that the momentum is still at the rendezvous. There does not seem to be a reversal of the trend on the horizon.
JPMorgan and its shares are likely to experience difficulties in 2019 as the risks of global economic slowdown continue to threaten the bank's many critical business areas. Factor taking into account a sharp valuation of the stock, a long-term view of options and a troubling technical table, 2019 is not easy for the company or the title.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment advisor and manager of the Company's exclusively managed long-term growth portfolio. Kramer generally buys and retains shares for a period of three to five years. Click here for the biography of Kramer and the holdings of his portfolio. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of securities, investments or specific investment strategies. Investments involve risks and, unless otherwise stated, are not guaranteed. Be sure to consult a qualified financial advisor and / or tax professional before implementing any of the strategies described in this document. Upon request, the advisor will provide a list of all recommendations made over the last twelve months. Past performance is not representative of future performance.