Anatomy Of An Overreaction

JP Morgan announced that it lost $2 billion due to either a flawed hedging strategy or just bad trading.

Some reports cite that the loss is more like $1 billion when you account for the gains made on the other side of the hedge which the initial strategy was trying to protect or offset.

My question is to ponder whether JP Morgan’s stock price has overreacted.

The market capitalisation of JP Morgan prior to this news was approx. $161 billion.

It’s stock price has fallen near 14%, meaning it’s market cap has fallen $23 billion and now stands at $138 billion.

I’d like to compare it to BP’s 2010 Macondo oil rig disaster in the Gulf of Mexico.

Sadly, 17 men died as a result of this explosion and it crippled parts of the Gulf Coast economy, not to mention the environmental damage caused.

Prior to the rig explosion, BP stock was trading at $60 per share and its market cap was $190 billion.

2 months later, the stock had fallen to $27 and it market cap was $86 billion.

Today, BP’s stock price has risen 40% from that June 2010 low but more importantly, it’s stock price recovered the decline that it suffered following the sinking of the oil rig, within 4 months.

The financial settlement costs for this disaster is estimated to be near $8 billion.

Both companies; are making a net profit of approximately $25 billion per annum, have P/E estimates of between 6 & 7 for the next fiscal year and are trading just below their book value.

JP Morgan’s error doesn’t seem to be systemic, life-threatening nor open to punitive lawsuits.

Assuming that the JP Morgan loss will be $2 billion, the ratio of the financial loss compared to the fall in the company’s value matches the decline experienced by BP.

It looks like an overreaction.

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