Citigroup came out with a super bullish report on JP Morgan this morning, calling the stock an “absolute buy” despite the negative publicity surrounding the bank in light of the company’s $2 billion (with reports that it is nearly $3 billion to $5 billion) trading loss in its CIO.
The report cited several reasons for being bullish, including the fact that reports of a possible $5 billion loss from the trade is overstated, expectations that the bank will become a better risk-manager in light of the loss, and the belief that the earnings hit from the trading loss will be minimal.
Citi analyst Keith Horowitz and his team noted that they believe investors and media are using an incorrect method to estimate the losses, and reiterated the fact that ultimately there has been very little information from the bank to make such assumptions. From the report—
$2 billion loss very likely included a valuation adjustment to reflect illiquid markets. First, when JPM made its estimate of the $2 billion loss, we are confident that this mark to market hit included a valuation adjustment to estimate fair market value (which is common practice to reflect illiquid markets, and we believe mgmt has substantial flexibility here), so one mistake we see investors making is looking at the change in spread on the CDX.NA.IG.9 from the date of the 10-Q, and then adding those losses to JPM’s $2 billion estimate…this methodology will vastly overstate JPM’s exposure in our view.
Horowitz added that it is near impossible to quantify the losses from the trade accurately, and that the trade is also a lot more complicated than just one position on the IG Series 9.