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Visa IPO and JPMorgan: How bad bank earnings and a runaway IPO may create the perfect trading opportunity

Posted March 16, 2008

 "A slew of bad earnings reports for U.S. banking companies may shave off another 10% off JPMorgan’s (JPM:NYSE) share price — just in time for a potential bounce of up to 15% on the Visa IPO (V:NYSE) on Thursday." — J. Christoph Amberger

+++A TFN Smart Trading Special Action Alert+++

by J. Christoph Amberger

Baltimore — (TFN): Last January, JPMorgan Chase (JPM:NYSE) announced that fourth-quarter 2007 net income had dropped 34 percent as the housing downturn hit both its investment banking and consumer businesses. At the time, the company took a $1.3 billion charge related to bad subprime mortgage investments.

Although this amount lies somewhere between the total annual gross domestic product of Belize and that of Suriname, it was less than the sums most of the pinstriped pinheads at the bank’s competitors had managed to lose in the same period. That counts for something these days.

In fact, JPMorgan managed to push through the end-of-year turbulence to post record revenue and profits for 2007. JPMorgan’s investment bankers may not be hit as hard as their competitors. "But what good is that when everyone else is burning," said one of my Frankfurt-based sources at the company on Sunday.

Last Friday, the Fed announced that it, along with JPMorgan, would provide temporary financing for Bear Stearns, the banking juggernaut that is heading down faster than the Titanic after hitting the iceberg.

If bailing out a sinking ship while you yourself are leaking like a sieve is indeed a prudent decision is a chapter all to itself…

 

In the land of the blind the one-eyed goes down, too

Despite its relative stability, JPMorgan’s stock has been hammered, right along with the U.S. banking sector.

Visa IPO and JPMorgan: How bad bank earnings and a runaway IPO may create the perfect trading opportunityIt hit 52-week intraday lows at $36.01 last Friday before closing at $36.54, down from its 52-week high of $53.25. It is now down over 32% since last May.

The stock currently has a P/E of 8.34 and probably would find the approval of the most value-oriented value investor — were it not for the simple fact that value investors currently like to plow their shekels into the gold bubble.

And for the fact that we are facing a horrible week in the markets.

 

Raining on the Easter Parade

For Tuesday, Lehman Brothers and Goldman Sachs are expected to announce numbers. They will not be good. For Wednesday, JPMorgan itself will publish its first-quarter results. They will be marginally better.

The stock prices of all these banks have collapsed since March 1. All of them are expected to announce further losses and write-downs while downgrading their expectations for 2008.

But wait, there’s more: There are the releases of U.S. manufacturing prices, first-time unemployment claims, and the Federal Reserve of Philadelphia’ s general economic index coming out on Thursday.

There is a further disruption to be expected in the markets on Friday, when European traders and investment companies begin their Easter holiday, which will last until Tuesday morning. Extended holidays like this typically result in unpredictable trading volumes.

We think the combination of these factors will put sufficient pressure on JPMorgan’s share price to shave off another 10% off its value by Wednesday.

 

Potential bounce through the Visa IPO

Other than its U.S. competitors, however, JPMorgan has a bullish catalyst waiting in the wings half-way through the week. A catalyst that could turn the bearish pressure of the first half into a short-term upside profit opportunity.

JPMorgan is the chief underwriter of Visa’s initial public offering (IPO). Visa will trade under the stock symbol V on the New York Stock exchange. With its expected Pricing Date tomorrow, 03/17/2008, and expected issue date of March 20, Visa expects to issue 406 million shares priced at $37.00-42.00.

We have already issued a TFN special report detailing strategies how to profit from the Visa IPO. Here is an additional one:

JPMorgan’s windfall from the Visa IPO deal could be enormous… almost enough to make up for its bad real estate decisions of the property boom era. It could possibly enough to warrant a temporary 10-15% share price increase between Thursday and Monday.

Our recommendation: Use lows in the share price on Tuesday or Wednesday to buy, and be ready to sell early next week as the IPO boost runs out of steam.

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Posted by J. Christoph Amberger · Filed Under Investment Strategies 

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