Vol. V, No. 24


Financial Services Insights and Intelligence

FIRST WORD: My talk this week with Jamie Dimon. Jamie Dimon and I usually get together for a chat once a year, only this year our conversation was delayed on account of the pandemic and Jamie’s recent medical issues. But we finally spoke by phone on Tuesday, as he was heading into Manhattan for his first day back at his office. It was a great conversation. As is typical with him, Dimon didn’t plunge right in to talking about what’s going on at JPMorgan or what he’s been through personally, but instead asked me some questions about what I’ve been up to. Then we got into what’s happening in his world. Some highlights:

His health. “I am one very lucky man,” he said about his emergency heart operation. He’s fully recovered, his heart suffered no damage, and he doesn’t have heart disease. Dimon said he’d walked five miles the day before, and if you saw the picture of him visiting a Chase branch in Westchester in the New York Post last Friday, you can tell he’s in great shape.

The coronavirus’s impact on the company. JPMorgan had plans for dealing with a pandemic, but not a global pandemic, yet it smoothly adjusted to 150,000 of its employees shifting to working from home globally. The toughest adjustment was figuring out a way that all the company’s call center employees could work from home, but even that got done. Dimon does feel the company’s senior management team benefits from physical proximity, which enables them to casually share ideas and exchange information. As for longer-term effects of the virus, Dimon says he thinks that many customers’ shift to digital banking will now happen faster and be permanent. Future branches will likely be smaller, and the company might evolve to more of a hub-and-spoke branch network. In addition, more employees will shift to working from home permanently. He has questions about what changes like this (which are of course happening at other companies, as well) will mean for the future growth of major cities, and whether the pandemic will lead to another cycle of large companies moving to the suburbs.

Buying JPM stock? Dimon has made some incredibly well-timed purchases of his company’s stock over the years, so I asked if he had thought about buying some now, during this recent period of weakness. He said he did, but then cited the fact that he’s 64 and has never sold a share despite pleas from advisors to diversify as being the restraining factors. He then went on to repeat comments he made at a recent investor conference about why he feels JPMorgan is a “very valuable company.”

Retirement? Investors, analysts, and journalists have been asking Dimon about his retirement plans for as long as anyone can remember, and his stock answer has become kind of humorous: “I am planning on being CEO for the next five years.” That’s the answer I got, too, right before he described the excellent management he has in place, adding that it includes no shortage of capable potential successors.

Credit and CECL. Like any sane and reasonable person, Dimon was against the adoption of CECL from the get-go, because he expected it would make bank earnings even more pro-cyclical. Sure enough, that’s exactly what’s happened. JPMorgan had a big loan-loss reserve increase at Day 1 of its CECL adoption, another big increase through the loan-loss provision in the first quarter, and Dimon has said a few times that another large addition will happen in the second quarter, but by then the economic impact of the credit problems caused by this recession will be largely behind the company. In his letter to shareholders this year, Dimon wrote, “We don’t know exactly what the future will hold—but at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008.” Dimon stressed that the company is always planning for a recession, and he reminded me that it never reported a quarterly loss in the last recession and actually reported earnings of $25 billion in 2008. He may not like the impact that CECL accounting has on reported earnings, but Dimon is not at all concerned about the company navigating through this storm. I think he’s a little surprised at the level of investor concerns about how high credit costs will peak.

Fiscal programs. Dimon was very supportive of the fiscal and monetary actions that the government has undertaken, but he believes there will be consequences as some inevitable fraud is exposed. The tradeoff was getting dollars out quickly and into people’s hands versus a more tightly controlled program that would take longer to implement. He is concerned there were some bad apples among the banks who ushered through PPP loan applications without doing any due diligence on the borrower.

Entry into new markets. JPMorgan Chase has of course begun a multi-year branch expansion program into new markets, including Boston, Philadelphia, and Washington, D.C., that has received much media coverage. Dimon couldn’t be happier with the results: profitability is achieved sooner than expected, each new branch in a new market performs better than the one before it, and the impact on all the company’s other businesses is stronger than anticipated. I have heard him say all that before, and when I asked if entering the top 25 MSAs was sufficient, or whether the company would target the top 50, he just said it will keep going, as operating in more markets provides more diversification of risk for the company.

Machine learning and A.I. When I asked about the company’s use of machine learning and A.I., Dimon rattled off several areas, such as risk, compliance, and fraud detection, where the use is having a noticeable positive impact.  “Its use will touch everything,” he said, and make the company more nimble while also lowering costs.

New York City is opening up, Jamie Dimon is back in his Manhattan office, and world is starting to normalize. All good! But there’s still a long way to go.

TRUE WORDS: I hereby declare Expedia and IAC chairman Barry Diller to be our Man of the Week. Here’s what he had to say on CNBC last Friday: Here’s what he had to say HH”[Earnings] guidance is a bad business. We’re out. We’re not doing it anymore. It keeps companies doing dumbass work. . . . The whole thing is nuts.” As an investor—likely one of many—who finds guidance to be totally useless, I say, amen to that!

A DIFFERENT DIRECTION: Charlie Munger . . . Stanley Druckenmiller . . . David Tepper . . . Warren Buffet . . . Howard Marks . . . the list goes on and on! A lot of really smart investment minds have gotten this market totally wrong, no? If nothing else, it’s a helpful reminder that near-term stock-market predictions are basically useless, no matter who’s making them.

EAGER: Meanwhile, on Bloomberg on Tuesday, there was this:

Which is the smart money, again?

TOO BULLISH?: I tend to all-season bullishness, I admit, but must say that I’m at a loss to understand, given that the S&P 500’s earnings this year won’t be anything close to what the stock market was expecting when it was making new records a few months ago, and that next year’s earnings likely won’t be, either, how Ed Yardeni can expect the market to hit a new high in the next few months. But he does. Necessary proviso: Ed Yardeni is no dummy.

LOWER: As if to underscore the above, the futures on the S&P 500’s 2021 dividend are still well off their pre-pandemic highs.

DISSONANT: A reminder that we all live in our own worlds, watching our own separate movies. Even though everyone sees the same economic releases and reads the same economic news, 87% Democrats polled by Gallup believe the economy is in a recession, against just 48% of Republicans who do. Crazy.

BIG BOUNCE: Well that sure didn’t take long. The Citi Economic Surprise index is already back to where it was before all hell broke loose.

LOOKING EXPANSIVE: Recession? What recession? Dr. Copper keeps on chugging higher:

PLAYING CATCH-UP: As the stock market keeps on rising, spare a thought for the nation’s beleaguered sell-side equity strategists, whose yearend targets for the S&P 500 keep getting overrun by the index’s actual, here-and-now price. On Monday as the S&P 500 was topping 3,200, for instance, Bloomberg noted that the sell-side’s average price target for it was just 2,933, the widest price-vs-target gap since Bloomberg started keeping records in 1999. This chart isn’t the clearest one ever drawn, but does illustrate the situation, just the same:

And lest you’re tempted to think those targets might actually be a sign that strategists really do think that the stock market will decline between now and yearend, you’re clearly not aware of the buy-the-dip, stocks-are-always-headed-higher mentality that has pervaded the sell side for as long as anyone can remember.

READY TO GO: Another indication of post-pandemic optimism. Just 17% of people surveyed by professional-services provider TMF Group say that, once the outbreak ends, they believe it will take over a year for their company’s operations to be back to normal. Meanwhile, over half think it will only take six months or less.

FINANCIAL ANXIETIES FALLING: Still further signs of budding optimism: just 12.6% of people surveyed by the Federal Reserve were worried they wouldn’t be able to make their minimum debt payments in May, down from 16.2% in April, which was a seven-year high. People earning between $50,000 and $100,000 showed the most improvement, with 10.3% expressing concern, down from 15.9% in April.

 AWFULLY PESSIMISTIC: Too far, too fast? I’m talking about the direction of earnings estimates. FactSet reports that the bottoms-up estimate for the S&P 500 for 2020 has fallen by 27% since the recession began, while the 2021 estimate has been cut by 16%. Have a look:

Given that the lockdowns are ending and that small signs of economic recovery have already started to appear, that seems a tad severe, no? In any event, once the economy really does pick up in earnest, it’s entirely possible that companies could be facing earnings bogeys that won’t be too tough to beat.

NO HELP: Speaking of earnings estimates, Fisher Investments’ Ken Fisher makes the entirely sensible observation that investors who point to the market’s currently elevated P/E valuation as a reason to avoid stocks—David Tepper comes to mind—are mainly blowing smoke, since a) P/E ratios have zero value in predicting stock prices over any time frame that investors should care about, and b) in this particular environment, a recession, no one knows for sure what the S&P 500 will earn over the next few years anyway. Depending on the timing and pace of the recovery, it might be a lot, or it might be a little—which means that relying on a forward P/E to make a judgement about stocks right now is especially useless.

TURNABOUT: It wasn’t all that long ago, you might recall, that some of the nation’s most eminent financial titans were denouncing cryptocurrencies as being useless or worse. Given that, if you’d asked me what portion of large institutional investors own cryptocurrency assets now, I’m not sure what number I would have come up with, but I’m pretty sure it would have been a lot lower than 36%.

ODDLY EXUBERANT: You have to admit, one usually tends not to see headlines like this in the middle of recession-hobbled stock markets:

CROSSCURRENTS: Good heavens. The federal government’s various liquidity-relief efforts have caused the savings rate to rocket past even where it was during the Second World War, when rationing rules essentially forced people to save whether they wanted to or not.

It’s hard not to get the sense (for me, anyway) that as all this new cash floods into the financial system at the same time that the Federal Reserve tries to freeze the yield curve in place without taking much input from the financial markets, that sooner or later something is going to break. Don’t ask me what it will be, though.

THE BIG MISS: Last week’s surprising employment report is a useful reminder that most government data isn’t cast in stone, but is instead derived from surveys, which (especially in a volatile time like this) can yield softi-ish numbers that can be highly variable and yield surprises. Unfortunately, these inherently imprecise numbers often get loaded into (also) imprecise models to calculate supposedly precise numbers to determine things like, say, a CECL-derived loss reserve. It’s all nuts. In 2018, Liberty Vittert, a statistics professor at Harvard, wrote on theMandarin.com that “there is error any time we model something—or, in other words, make a prediction. What statisticians need to be better at explaining, and what the public needs to be better at understanding, is that none of these numbers are exact.” Amen! Bankers can help in this effort by, say, not fielding questions from analysts on their upcoming second-quarter earnings conference calls about the specific items, like the peak unemployment rate, that went into their second-quarter CECL reserve calculations. The analysts are thinking of the modeling all wrong. All models provide are estimates based on imprecise inputs, not facts.

THE NEXT RECOVERY LEGISLATION: Explain to me again how a further extension of federal unemployment insurance, currently being considered by Congress, will help speed up the recovery. Just the reverse is more likely. Renmac estimates that anyone making less than $62,000 would do better continuing with state and federal unemployment benefits rather than going back to work. What kind of incentive is that?

BUSINESSES ARE FORMING: It’s nice to see that, even in the recession, business formations are still rising.

BETTING OR INVESTING: I somehow doubt that the erstwhile sports bettors who’ve lately flocked to Robinhood so they can run up the prices of bankrupt companies such as Hertz and J.C. Penney as a way to get their gambling fix are going to end earning the sorts of returns they’re surely dreaming about. I mean, duh.

MONITOR THE PROTESTS: The crime-and-safety app Citizen has recorded over 600,000 first-time users over the last week, which moved it to fourth in daily Apple downloads from 744th. The app was launched in 2016 under the name Vigilante, originally sought to make 911 more transparent by giving people a way to monitor crime by viewing police reports in real time. It’s is now powered by user reports as well as a custom police radio reader. The app updates users on demonstrations and law-enforcement activity. Citizen says 70% of its users say the app makes them feel safer.

UNITED COMMUNITY: Lynn Harton moved to United Community Banks in 2014 to become the company’s president and heir apparent to the legendary Jimmy Tallent. He took over as CEO in 2018; since then, the company has continued to perform at a very high level. Last year, United Community earned 1.5% on its assets on an operating basis, and 15.8% on its equity. Hartin and I spoked recently. Here are some highlights of our discussion.

Going back to work. United Community is headquartered in Georgia, which has been one of the more aggressive states in opening up, so Harton described a different operating environment for his company than I’ve heard from others. He mentioned that the bank has a loan to a hotel in nearby Myrtle Beach, S.C., and said the hotel was back to a 97% occupancy rate last weekend. The economy in the Southeast is not like eastern Pennsylvania’s.

Three Shores Bancorp acquisition. On March 9, the company announced the acquisition of $1.5 billion Three Shores Bancorp in Florida. The franchise is not your typical commercial-real-estate-lender-funded-with-purchased-money banking franchise. It has felt to me from the moment of the announcement like this is the right business mix, the right management, in the right markets, bought at a reasonable price.  A deal even I can like.

Truist fallout. The bank operates in markets where there is meaningful overlap between BB&T and SunTrust, so it has naturally picked up some management talent in the creation of Truist.

PPP. United Community originated $1.1 billion in PPP loans, an impressive amount.

Loan payment deferrals. The company granted deferrals on about $1 billion of loan balances. Harton told me deferrals had essentially stopped four weeks ago.

Size. Harton was at BB&T as it grew from $2.5 billion in assets to $110 billion, and has his opinions on what worked well there and what didn’t. When I ask how he keeps the bank’s community-bank culture as it grows, he gave me a very Walmart-management type answer. “I spend half my time trying to grow the company bigger and half my time trying to stay small.” It looks to me like Harton is doing an excellent job balancing both.

NEXT WEEK: On Friday, the Conference Board will release its Index of Leading Economic Indicators for May. The consensus looks for a monthly change of +2.4% vs -4.4% in April.

THE LAST WORD: Amy is constantly reminding me to relax and “appreciate the moment,” so lately, that’s what I’ve been trying to do. This week was incredibly enjoyable, on both a business level (except for the market’s volatility) and a personal level. From a business perspective I had six one-on-one conversations with bank CEOs I not only have the utmost respect for as CEOs, but also whom I simply enjoy as individuals: Jamie Dimon (JPMorgan), Lynn Harton (United Community), Kelly King (Truist), Ken Mahon (Dime Community), Larry Mazza (MVB Financial), and John Turner (Regions). I learned so much from these six individuals and enjoyed a few laughs that I should have paid for the education and entertainment. Intertwined in these calls was Piper’s drive-by high school graduation ceremony and a couple of parties celebrating Piper and her friends. Piper is the youngest of my four, and the only woman. I love the three boys, and relate to them in a different way, as we do more things together like play golf—but Piper is special. She came into my life when she was a sweet, five-year-old girl, and I have watched her grow into a terrific young woman.  Naturally, I’m proud Piper graduated, had great grades, and is headed off to Clemson (her first choice), but those accomplishments pale in comparison to the pride I feel for her as being a smart, strong, and compassionate person. What a great week for me to relax and enjoy all the moments.

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Edited by Matt Stichnoth.

Copyright © 2020, Second Curve Capital LLC

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