JP Morgan Earnings Preview: Trading Loss to Be Quantified

On Friday morning, JP Morgan Chase JPM is expected to report second quarter earnings of $.78, a nearly 40 percent decline from the same period last year. JP Morgan will also give an update on its trading loss and the expediency of the winding down of losing positions in the conference call.

Analysts have been trying to figure out the exact size of the trading loss at JP Morgan as the bank has been rather discrete with specifics. When first reported by the bank, the trading loss was around $2 billion, however that had nearly doubled in the month after. An analyst at ISI also estimated the losses to be as much as $9 billion, however many expect the real number to be somewhere between $4-6 billion.

In the second quarter of 2011, JP Morgan reported about $ 4.8 billion in income, so the trading loss could well wipe out any profits should they swell to this level. However, due to the fact that JP Morgan's debt and CDS spreads have widened, they will be able to book a gain due to the Debt Valuation Adjustment (DVA). This accounting mechanic allows banks to book losses on their own bonds as gains as the cost of buying them back in the open market falls. However, these gains must eventually be reversed as bonds mature at par.

Friday also marks the deadline for JP Morgan to turn over documents relating to the energy market manipulation charges that were levied against the bank in June. It will also be interesting to see if CEO Jamie Dimon comments on the recently escalated Libor rigging scandal, as it has already cost Barclays BCS CEO Bob Diamond his job and has led to Deutsche Bank DB laying off lots of traders.

According to Bloomberg, JP Morgan is expected to report Adjusted EPS of $0.78 on sales of $21.736 billion. ROE is also expected to be reported at 7.402 percent.

Disclosure: I am long JPM