David R. Kotok
May 11, 2012
JP Morgan has been the darling stock of the financial markets. It has now jilted its lover. Scorn by markets will result.
The details of JPM’s loss and revelations fill the news so there is no need to repeat them here. The big question: is it idiosyncratic or systemic?
Regulation hungry politicians claim system failure. They have been given an opportunity to do the political “I told you so” dance step.
Analysts debate whether the derivative trading failure limited to JPM only or are their other shoes to drop. This discussion will rage for days.
Meanwhile JPM will trade with a cloud for some time and until revelations are complete. If Jamie Dimon took the largest loss reserve first, he will be restating smaller numbers. Then the markets will quickly resume their love affair with JPM. If there is a subsequent charge against earnings and additional revelations beyond today’s release, the markets will punish JPM and the other large banks.
We remain overweight financials but not the big banks. Our preferred sub-sector has been and is the regional banks. Our largest weight within the financial sector is the regional bank ETF. The symbol is KRE. We have rebalanced and added to that position several times. We remain fully invested in our US market ETF accounts.
We do not own JPM singly because we only use ETFs. JPM is an example of how an ETF strategy allows an investor to gain diversification within a sector as well as within the broader market. JPM is a large weight in certain ETFs but it is not the only weight.
For some discussion of the financial sector and of the issue of weights in ETFs, see our new book “From bull to Bear with ETFs.” The links to obtain it are on our website, www.cumber.com. Or go direct to the Amazon Kindle Store and search under the title.
David R. Kotok, Chairman and Chief Investment Officer