Analysts and the press focused on JP Morgan’s weak fixed income results today. JP Morgan has been getting squashed by its competitors from Bear to Goldman to Lehman to Merrill on this front. However, Jamie Dimon has been saying consistently that he has been reorganizing the unit and sees little value in this market and will not expose the company’s balance sheet to this risk. But it’s competitors continue to plow along with incredibly strong results.
It is hard to imagine how the fixed income results for so many investment banks could be so good. Not since the 1980s and Bonfire of the Vanities with the iconoclastic Master of the Universe bond trader/investment banker Sherman McCoy or in the 1990s when the infallible John Meriwether and the Nobel prize-filled Long Term Capital, who took on risk-free positions with infinite leverage, have bond traders graced the headlines with such stardom and performance. Both the fictional McCoy and the not-so fictional Meriwether came back to earth. We will see if the outstanding fixed income results reverse and bring these big investment firms back to earth during the next few quarters.
Today’s call was a refreshing reminder of why the investment community likes Jamie Dimon. He reiterated his position that he will not risk the company’s balance sheet to chase the performance of the other major investment banks in fixed income. The bond bull market was very mature when Dimon took control of JP Morgan Chase and he is committed to not getting whipsawed. In addition, Dimon was pretty candid about the outlook on the consumer credit business which appears to be maturing in a number of different ways. Not only in terms of growth in balances but it also appears that as baby boomers age they are beginning to pay down their credit a lot quicker. My guess is this trend began to emerge in the middle of 2005.
To offset this weakness, JP Morgan Chase is going to focus on its branch network and appears to have a lead on the other money center banks in this regard. Growth in sales of mortgage origination, credit cards and other branch-related service were very strong. The company also announced it repurchased $1.6 billion of stock in the quarter and the board approved an $8.0 billion buyback going forward.
All told, JP Morgan’s results were pretty solid and this stock has to be owned by portfolio managers who are concerned about what a bear market in bonds will do to the results of the other investment firms. This is Dimon’s baby and he wants to prove he can do it on his own. It appears that he is taking a fundamentally sound approach.
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