(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 more than $ 330 billion, and its chief executive, Jamie Dimon, are expected to release their fourth-quarter earnings on Jan. 15 before the opening of markets. However, rising stock market volatility, falling 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 a Fed too aggressive and slowing growth likely to trigger a recession. The 10-year Treasury interest rates have thus fallen from around 55 basis points compared to the beginning of October to around 2.70% as of December 31st. 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 net interest income in the fourth quarter. In the third quarter, the 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. The US Pending Home Sales Index dropped to its lowest level since 2014. JPMorgan experienced 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 value of about 16% from the peak of 2018, its valuation based on the book value in relation to the tangible price has decreased significantly, but is 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 very optimistic for the stock, with the number of calls exceeding the put options being around 3 to 1 with 12,000 call contracts outstanding. The long period of overlap suggests that the stock price could go up or down 8% over the $ 100 exercise price, placing equities in the range of $ 91.85 to $ 108.15 by at 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 chart is also extremely bearish with a high level of technical resistance at $ 102. The stock also has a firm downward trend that has been in place since July. If the equity fell below the technical support at $ 94, they could fall to $ 87.
The relative strength index has also been steadily declining since the beginning of 2018 and suggests that momentum is still in focus. 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 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 the manager of the company's exclusively managed long-term thematic 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.