Jim Bach: The JPMorgan Chase & Co. (NYSE:JPM) stock price seems to be breaking out.
Last week, the JPM stock price hit an all-time closing high of $67.01. It’s up about 380% since the end of the Great Recession.
The story is similar for some of the other big players in financials, like Goldman Sachs Group Inc. (NYSE: GS) and Wells Fargo & Co. (NYSE:WFC). They are up about 300% and 700%, respectively, since their recession bottoms.
“JPMorgan stock has broken out from its trading range and is doing well, as many of the big financials are,” Money Morning Capital Wave Strategist Shah Gilani said.
Then he added, “So what?”
You see, what the current JPM stock price shows is that this big bank may well be on the last leg of this long rally.
We saw in the last week JPMorgan settle a lawsuit implicating the big bank – and five others– for manipulating the foreign exchange markets. The JPM stock price has done very little since then, primarily because litigation has proven to be business as usual for the big banks as opposed to a reason for panic.
“We all know the big banks are above the law,” Gilani said. “They are convicted, they admit their guilt (sometimes), and no one goes to jail – they just pay more fines.”
So, this combination of the JPM stock price breaking to new highs and the big bank swallowing yet another penalty with little pain for shareholders would seem to make JPM stock a buy.
But there are still risks. Now’s not a good time to buy JPM stock.
“I’m not an investor in JPM stock because of the near-term future banks face,” Gilani said. “With the prospect of an event that can upend financials in the not-too-distant future – my best estimate is it will start this fall – I wouldn’t touch big banks just because they’ve broken out.”
Here’s what could end up hurting the JPM stock price as early as this year…
How Regulatory Gymnastics Could Hurt the JPMorgan Stock Price
There’s an inherent risk when you buy any investment bank.
While the passage of Dodd-Frank and the implementation of the Volcker Rule have attempted to bring the regulatory hammer down on banks and bar them from taking undue risk through proprietary trading, it’s hardly doing the job. The legislation is so broadly written that big investment banks can still “trade” as long as they call it something else.
For example, a client could come to JPMorgan for a swap deal. JPMorgan could then immediately execute that trade by acting as principal for that client, until the market moves enough for another client to jump in as counterparty and take that position from the investment bank.
As JPMorgan looks for counterparty to that trade, it absorbs cash flow differences. For all intents and purposes, JPMorgan is trading. But the legal team can find a way around it.
“They get around a lot of the proprietary trading stuff that they’re not supposed to be doing by simply saying, ‘I’m not doing it. But I do have the right under Dodd-Frank to make markets and in the process of making markets, if it’s client-related, I can take a position,'” Money Morning‘s Gilani said. “So this is a very gray area.”
All it would take is one big loss for the JPM stock price to take a big hit. The London Whale trade, where JPMorgan reported losses of $6.2 billion starting in April 2012, hammered JPM stock. When all was said and done, the London Whale debacle sent the JPM stock price down 32.4%.
Those are the big, immediate risks with the investment banks. Legislation regulating the banks is heavily influenced by the bank lobby and allows for enough loopholes that JPMorgan and its ilk could find ways to trade around the legal provisions.
And those could amount to big losses that shake investor confidence in the financial system and have a devastating impact on the JPM stock price.
But, there’s an even more concerning prospect on the horizon for big banks…
The $33.8 Trillion Risk to the JPM Stock Price
The best time to buy a big investment bank like JPMorgan is at the bottom of a financial panic – like the one the United States had in 2008. Investors who bought while there was blood in the streets could have pocketed huge gains on this kind of trade – as much as 380% on JPM stock, for example.