TUESDAY MAY 15, 2012
Shocked!
I am shocked, absolutely shocked, that Greece was unable to form a government!
POSTED AT 11:02 AM
MONDAY MAY 14, 2012
New Regulation
The trading losses announced by JP Morgan last week managed to achieve the "too big" part, but it did not come anywhere near the "to fail" part of the now ubiquitous "to big to fail" political slogan. Yes, a $2 billion loss is big. But JPM is estimated to generate nearly $100 billion in revenue and earn $18.7 billion in earnings this year. Clearly, these losses, while big, are very manageable. But that won' hold the politicians back. Congress is now debating legislation that would prohibit any bank from trading in anything that might result in a loss! That will fix everything!
POSTED AT 02:57 PM
FRIDAY MAY 11, 2012
More Regulation?
In the aftermath of the JP Morgan trading loss, there is no shortage of politicians calling for more regulations. No surprise there. Of course, it raises another question. Isn't JP Morgan already regulated by the Federal Reserve Bank? And didn't the Fed just a few months ago conduct a "stress test" on the largest 19 banks in the U.S.? And didn't JP Morgan easily pass that test? Where was the Fed?
Recent news in the market have raised interesting regulatory questions in other industries as well. For example, the CEO of Chesapeake Energy is under fire for having personal interests in the firm's energy projects. It is apparent that many of these projects were "off balance sheet." Anyone remember Andy Fastow and Enron? Shouldn't "off balance sheet" constitute a dirty word in regulatory land? One has to ask how the SEC could allow the Chesapeake debacle in a post Sarbanes-Oxley world?
Perhaps the answer is not more regulation, but the proper enforcement of current regulation!
POSTED AT 02:23 PM
FRIDAY MAY 11, 2012
A Letter to Jamie Dimon
Dear Mr. Dimon:
I am writing to express my disappointment in the results of your London's office "hedging" portfolio. Last night, JP Morgan announced that it would be taking losses of at least $2 billion in its Chief Investment Office. This comes just three weeks after you described the rumors of such losses in the trading portfolio as "a tempest in a teapot."
This event is disappointing on multiple fronts. First, the sterling reputation of JP Morgan as the only large, dare I say "to big to fail," bank to substantially avoid the worst of the financial crisis of '08-09' has been tarnished. Second, this event encourages and emboldens the regulators in Washington and enables them to say, "I told you so!" You have been the leading spokesman for the banking industry and have provided well needed guidance and constraint for the the regulators and the implementation of Dodd-Frank. The apparent lack of risk management at JPM indicates that the regulators might be on to something. If "Big Banks" can't manage their own trading risks, regulations may be needed to protect the banks from themselves. The facts are that JPM will remain profitable this quarter and for the year, JPM is projected to generate $24 billion in revenue in the 2nd quarter alone! The estimated loss represents less than 10% of quarterly revenue, hardly enough to cause any long-term impairment or the failure of JPM. Unfortunately, the damage is irreversible. The political sharks smell blood!
Finally, the lack of risk management is disconcerting for its lack of common sense. I acknowledge that the credit markets are enormous and complex. Many credit markets, for example European sovereign debt, are greatly stressed. Trades measured in the hundreds of millions are routine. Many risk management tools, such as VAR (value at risk), have limitations with a portfolio the size of JPM's. That said, your head trader is infamous for his gargantuan trades in a gigantic market. Hedge funds are afraid to get in his way. He has earned the moniker "The Whale", and I don't think it refers to his waistline! Doesn't common sense tell you that when your lead trader is considered "the whale" in a huge marketplace that there may be too much risk? And since when has a $2 billion loss equated a tempest in a teapot?
Sincerely,
Kenny "Big Trades" Entenmann
POSTED AT 12:09 PM
WEDNESDAY MAY 9, 2012
Freddy Kruegar the Wimp!
For quite some time, I have been comparing the death defying European debt crisis with Freddy Krueger and other movie monsters. I have come to the conclusion that this comparison is unfair...to the movie monsters! After all, Freddy Krueger survived to make "only" nine Nightmare on Elm Street movies! Compared to Greece's ability to roil the financial markets, Freddy is a wimp!
The Dow has lost over 4% in the last six days based on fears emanating from Europe. Recent elections in France and Greece have unsettled the markets and have sent shock waves through Europe as the established "austerity" plans are being attacked. The general sense coming out of the Greek election is that austerity is painful! Well, duh! No one volunteers for austerity. But what is lacking is a viable alternative to austerity. The winning politicians offer many "solutions," but they all boil down to having some one else pay so austerity can be avoided. Unfortunately, the "some one else", i.e. Germany, does not want to pay for other people's sins.
So, at least in the near term, Europe will be the focus of the markets. Spanish and Italian bond yields are on the rise again, raising the concern of future defaults. The ten year U.S. Treasury note's yield has dropped from 2.378 on March 19th to 1.80% today, reflecting this fear in a classic flight to quality trade. And fears of a worldwide economic slowdown are apparent in commodity prices, as oil has dropped from a high of $109.77 on Feb. 24th to $95.75 today.
It is beaming apparent that Europe is facing a Japan like "lost decade." Hopefully, it won't drag the rest of the world's economies down with it.
POSTED AT 10:02 AM
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KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES
Ken is a Senior Vice President and the Director of Investment Management Services at Alliance Bank, N.A. He has more than 25 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.
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