In the U.S.: Stock-Index Futures Drop as JPMorgan Reveals Losses

11 May 2012

Synthetics sure to come under further scrutiny amidst $2bn loss by U.S.’ largest bank.

U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will drop for a second week, as JPMorgan (JPM) Chase & Co. said it had a $2 billion trading loss after positions in credit securities proved riskier than expected.

JPMorgan, the nation’s biggest bank by assets, declined 8.2 percent after Chief Executive Officer Jamie Dimon said the lender made egregious mistakes and that trading losses were “self inflicted.” Bank of America Corp., Citigroup Inc. (C), Goldman Sachs Group Inc., Wells Fargo & Co. and Morgan Stanley (MS) retreated at least 1.7 percent. The Financial Select Sector SPDR Fund (XLF), an exchange-traded fund, decreased 2 percent.

S&P 500 futures expiring in June slid 0.6 percent to 1,349.2 at 8:38 a.m. New York time. The benchmark gauge has fallen 0.8 percent this week. Dow Jones Industrial Average futures dropped 76 points, or 0.6 percent, to 12,758.

“It’s a black eye for JPMorgan,” said Michael Shaoul, chairman of Marketfield Asset Management in New York, which oversees more than $1.9 billion. “It was considered to be one of the better big banks. There’s already a debate about regulation. Jamie Dimon will be in a weaker position to push back against it, JPMorgan will be in a weaker position.”

JPMorgan led the plunge in financial shares today, slumping 8.2 percent to $37.40. The firm’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure.

‘Many Errors’

“There were many errors, sloppiness and bad judgment,” Dimon said as the company’s stock fell in extended trading.

U.S. lawmakers and interest groups favoring tighter restrictions on proprietary trading said JPMorgan’s loss bolsters their case. Senator Carl Levin, the co-author of the so-called Volcker rule and chairman of the Permanent Subcommittee on Investigations, said the disclosure served as a “stark reminder” to regulators drafting the proprietary- trading ban required by the 2010 Dodd-Frank Act.

“The regulatory and political environment is already a headwind and clearly this doesn’t help,” wrote Deutsche Bank AG New York-based analysts, including Matt O’Connor, in a report. Bank of America analyst Guy Moszkowski wrote separately that JPMorgan’s losses are “very poorly timed for the industry” and will be taken by those seeking stricter regulation as “an example of prop trading dangers.”

Bank of America lost 2.2 percent to $7.53. Citigroup retreated 3.7 percent to $29.53. Goldman Sachs (GS) slipped 2.7 percent to $103.41. Wells Fargo dropped 1.7 percent to $32.64. Morgan Stanley slumped 2.2 percent to $15.25.

Biggest Gain

Financial companies in the S&P 500 have had the biggest gain among 10 groups in 2012, surging 15 percent, or almost double the benchmark measure’s advance. The group comprises 15 percent of the S&P 500 for the second-biggest weighting among 10 industries.

Earnings at financial companies in the S&P 500 grew 12 percent in the first quarter, for the second-biggest increase among 10 industries, according to data compiled by Bloomberg. That’s almost double the growth of profits of S&P 500 companies in the period. On average, 66 percent of financial companies in the benchmark gauge beat analysts’ estimates in the period.

Warren Buffett, whose Berkshire Hathaway Inc. has more than $20 billion invested in U.S. banks, said on May 5 the nation’s lenders have “liquidity coming out of their ears” and are in better shape than European rivals.

‘Fine Shape’

“I would put European banks and American banks in two very different categories,” Buffett, Berkshire’s chief executive officer, said at the firm’s annual meeting in Omaha, Nebraska. “The American banking system is in fine shape. The European system was gasping for air a few months back” until getting assistance from the European Central Bank, he said.

Banks had the biggest gain in the S&P 500 among 24 groups in regular trading yesterday, adding 1.5 percent, as European lenders rallied. Federal Reserve Chairman Ben S. Bernanke said the U.S. banking system is stronger and more resilient while still facing challenges on credit quality and liquidity.

Investors also watched economic data today. China’s industrial production grew the least since 2009 in April, new yuan loans missed estimates and inflation was below target, boosting speculation Premier Wen Jiabao will take steps to stimulate the economy.

A report today may show confidence among U.S. consumers declined in May from the highest level in a year. The Thomson Reuters/University of Michigan’s preliminary index of sentiment fell to 76 from 76.4 last month, according to the median of 68 forecasts in a Bloomberg survey of economists.

Nordstrom Slumps

Nordstrom Inc. (JWN) slumped 3.5 percent to $51.66. The U.S. chain with more than 100 namesake department stores posted first-quarter profit that trailed analysts’ estimates as expenses for e-commerce investments increased.

Nvidia Corp. (NVDA) rallied 9.5 percent to $13.60 after predicting second-quarter sales that exceeded analysts’ estimates, bolstered by demand for its new graphics chips and mobile-phone processors.

Arena Pharmaceuticals Inc. (ARNA) jumped 98 percent to $7.23. The company’s weight-loss pill gained the backing of an advisory panel, putting two obesity drugs in line for U.S. approval almost two years after regulators rejected them as too risky.


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