What Is JPMorgan Trying to Tell Us?

06/06/2012 12:14 pm EST


Mark Hulbert

Senior Columnist, MarketWatch

If you are an investor in the big banks like JPMorgan Chase, Mark Hulbert of the Hulbert Financial Digest thinks that you need to pay attention to one important lesson from this fiasco.

Learning from JP Morgan. Mark Hulbert joins us now. Mark, were some lessons learned with this one?

Well, that’s right. A lot of people are trying to draw lots of lessons from the fiasco.

I’ll leave a lot of that to others, I mean, looking at what it means about Jamie Dimon’s personality in particular, but what I think it suggests from a broader investment point of view is rather profoundâ€"and fewer people are drawing that lesson, which is that it means that few of us really know or can know what’s going on at these banks.

I think that suggests that the banks are far riskier than anyone has imagined. Look at it: everyone would admit, whatever else people say about him, that Jamie Dimon is a very, very smart guy, and yet he didn’t know how bad it was. And if Jaime Diamond doesn’t know how bad it is at one of the best-run banks in the planet, then you can bet that you or I have no clue.

We have always assumed that outside rating agencies like S&P or Moody’s or investment advisors who look at it on a full-time basis as a lot of Wall Street analysts do, that they are able to come up with some sort of insight into what’s going on. I think the answer or the lesson to draw is know that we are fooling ourselves if we think that we can really assure ourselves that they are not incurring huge risks because some of the smartest people looking at it still didn’t know a month prior to this loss that there was that risk.

Was his management style too hands-off, perhaps?

Well, I don’t know. He’s known as a micromanager, so I don’t know. I just think that it’s probably more likely that it’s impossible, given the complexity of some of these trades, to know what the risks are.

So what are you hearing now? What are the top advisors saying about the financial sector now?

It’s interesting. You’d think that JP Morgan (JPM) may have fallen out of favor and that some other banks now are perhaps emerging, but the top performers still like JP Morgan more than any other banks.

Let me qualify that. They don’t like any banks right now except JP Morgan, and they don’t like JP Morgan all that much. It’s sort of a lukewarm endorsement that you’re getting from them. I think the general message of the top-performing advisors is that perhaps other sectors are more worth looking at than the financial sector, and banks in particular.

Well, let’s talk sectors. Now, banks led the last bull market in 2007. Might that happen again?

Well, that’s a very good question, because if indeed the top performers are right and the banking sector is not going to do well and you’re looking for it to lead the next bull market, that’s pretty bad news, right? Because we’re not going to get another bull market.

But the good news is that rarely does the same sector lead two bull markets in a row. In fact, Ned Davis Research, which is the firm I owe the debt to for the research that is this insight, basically looked at every bull market back for the last four to five decades and looked to see which sectors were at the top of each of those bull markets. In no case is the same sector at the top of two of those bull markets in a row.

So I think what we are probably doing in making the case of looking at the financial sector, thinking it’s going to lead us out of this crisis, is not that it doesn’t have a lot of problems or that it can’t affect the economy, but rather, thinking that they will be the leader of the next bull market is probably wrong.

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