Trading Trump Part 1 - Financials

12:54 AM


Summary:

- Short Financial stocks, selected, only JPM at the moment

- Look for breakout


There was a good amount of movement in the Spider (Trader talk for the SPX500) during the election period. The initial price factored into the market was initially for a Hillary win, proceeded by the market selling off in fears of Trump winning, proceeded by a rally to an all-time high after the Trump indeed did win, erasing all fears of the Trump win.

To this effect, does the recent movement post-election make any sense? It is hard to say.

Looking at the spider for a broad view of the sentiment of the market might not be the most accurate given that it is a market weighted average http://www.investopedia.com/terms/p/priceweightedindex.asp) index and is weighted more heavily to the bigger companies.

Another way to take one step deeper is to look at the heat map (as seen below), this breakdown the various sectors and gives us a good look at the sectors that have benefited from this election.




Part 1 Financials - Overall Short position but not willing to risk

Repeal the Dodd-Frank and Jamie Dimon was considered for the post of the FED chairperson. This caused an understandable rally in the financial stocks.

However, after reading the book "Makers and Takers" & "Why We Want You to Be Rich: Two Men, One Message" plus watching some of Donald Trump's interviews, this may really be a question of credit availability to the regular man in the street.

Dodd-Frank was designed to reduce the risky lending practices that use to exist, I believe Trump, coming from a real estate background sees this as a bad thing because he sees first hand in his business the freeze in credit to the regular joe. This was elaborated in one of his older interviews with Pierce Morgan, he said he does not understand why people with actual income cannot get a proper loan.

Therefore it is important for us to differentiate the two aspects of Dodd-Frank

1) Relaxing the credit structure and requirements to reduce risky lending
2) Reduce the financialization of assets, this is in the realm where derivatives lie and where the Mortgage Backed Securities were birthed from.

One such crazy example of this financialization is not allowing the banks to speculate or hold on to metals like aluminum. There is this huge issue where JP morgan held so much that a report emerged alleging JP Morgan Chase & Co. owned over half of the aluminum traded on the London Metal Exchange

All this to make money. This affected companies such as Coke and Pepsi who actually require these raw materials for which were being speculated on.

Will Trump dismantle Dodd-Frank to this point? Unlikely. One of his first marketing points for his campaign was that he was not in involved with the large banks. Unlike Hillary.

Given this scenario, share prices may have rallied erroneously to reflect an expected increase in derivative income.

While there will be an increase in loan income, it is best then to look at banks with a differential between loan and derivative income to best reflect this thesis.

Looking at the Comptroller of the Currency report on Derivatives, JPM seems to have benefited the most in the last quarter from Derivatives making a total of US$2.8 bil in 2Q2016 in relation to net income reported by the bank' total Net income applicable to common stockholders at $5.7 bil (representing over half of possible income).

It is easy to see why the expected increase in derivative income would have such a significant effect.


Unless we see a significant increase in commercial banking lending as well as consumer & community target, this coupled with increasing yields, it is unlikely for JPM to return the increased relative P/E expected of this spike in price. 

Target: JPM a minimum reversion back to initial pre-election prices, at $67.70, a $9 correction over today's price.

Thesis likely to be realized on clarification of the Dodd-Frank or earning announcement reports.

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