NEW YORK ( TheStreet) -- If you've ever made a speculative investment and underestimated the risks, you're in good company. It's somehow comforting to small investors to realize that betting on an economic recovery or the winds of change in the economy can entice even "The King of Wall Street." JPMorgan Chase ( JPM) admitted Thursday they incurred $2 billion in losses when an enormous trading gamble using Credit Default Swaps backfired.
Like many investors, JPM has been buying corporate bonds in a bet that the economic troubles in the U.S. and around the globe would cause those bonds to soar in value. Follow TheStreet on Twitter and become a fan on Facebook. To make matters more dangerous, one of the financial behemoth's London-based traders made bets in the derivatives market by selling the insurance-like CDS products. That meant JPM was taking on the responsibility of covering the risks of those traders who bought the CDS. It's like watching a scene from the Academy Award-winning documentary " Inside Job" or reading a newly revised version of Michael Lewis' book The Big Short. The CDS contracts that the JPM trader was selling were tied to an index of companies. In April, the cost of the CDS derivatives began to soar as that index of companies began to tank, and this apparently contributed to the huge trading losses. CEO Jamie Dimon told the media on Thursday that the approximately $2 billion in losses were partially offset by nearly $1 billion in gains on securities. As is true for all investors and speculators, Dimon admitted that market volatility at the present time may cause more losses. He estimated those additional losses may add up to another $1 billion.
|JPMorgan Chase CEO Jamie Dimon|
Fresh Look at BanksSo how does this boondoggle present opportunity? Let's look at the one-year chart of the Financial Select Sector SPDR ETF ( XLF). The top 10 holdings comprises a "who's who" of the financial services sector including JPM, Wells Fargo ( WFC), Berkshire Hathaway Class B ( BRK.B) and Citigroup ( C). From late November 2011 until April 2012 the XLF made an epic move higher, outperforming even the most optimistic forecasts. It still trades well above its 200-day moving average. It could correct another 8% and still be above the 200-day average price.
In spite of the fact that the nation's largest bank by assets is being rocked by losses so big that some are calling for Dimon's resignation, the shares of JPM are well off their lows of the day. Still, this huge error in fiscal responsibility may cause an ongoing correction in the banking and financial service giant's stock (here's the one-year chart for JPM) and a few of their peers. Paradoxically, this setback for JPM may cause some of it's more financially conservative competitors like US Bancorp ( USB) to look more attractive to investors and traders. USB shares were up almost 1% in mid-session trading Friday even as shares of JPM were down over 7%. Two other financial/bank stocks that may benefit from the JPM mess are Warren Buffett favorite Wells Fargo ( WFC) and, on my radar screen, BB&T Corp. ( BBT). BBT is a Winston-Salem, N.C.-based financial holding company for Branch Banking and Trust Co. that provides various banking and trust services for retail and commercial clients. If you want to learn more about BBT, I strongly urge you to visit their user-friendly Web site to see why they've been so profitable and have plans to continue to please their satisfied shareholders. BBT pays a 2.6% dividend and is priced at around 11 times forward earnings. USB pays a 2.5% dividend and trades at almost exactly the same forward price-to-earnings ratio as BBT. Both USB and BBT are currently near their 52-week highs, which should encourage investors to buy on pullbacks or any unexpected market weakness between now and the historically weaker stock market months of September to October. Of the three JPM competitors mentioned, WFC pays the highest dividend (2.7%) and has a more modest forward P/E ratio of around 9. Potential investors may want to wait to see if the JPM situation and the economic crisis in Europe may present a better buying opportunity, say close to $30-per-share.
The 800-pound gorilla in this article of course is JPM and it might eventually prove the best opportunity. Given the current correction in the price of their shares, it could be purchased at around $36.70, would offer a dividend yield of 3.27% and be trading at a forward P/E ratio of close to 6.