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Overview: Davidson Kempner Capital Management’s 1Q14 positions

Part 4
Overview: Davidson Kempner Capital Management’s 1Q14 positions (Part 4 of 8)

Why Davidson Kempner establishes new position in JPMorgan Chase

Davidson Kempner and JPMorgan Chase

Davidson Kempner added new positions in Omnicom Group Inc. (OMC), Alpha Natural Resources Inc. (ANR), JPMorgan Chase (JPM), Brunswick Corporation (BC), and Vitamin Shoppe Inc. (VSI). It exited positions in Perrigo Co. Plc. (PRGO) and Apple Inc. (AAPL).

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Davidson Kempner initiated a new position in JPMorgan Chase (JPM) that accounted for 1.29% of the fund’s 1Q portfolio. Last quarter, George Soros’ Soros Fund Management sold positions in JPMorgan Chase and Citigroup (C).

Shares were up at the beginning of the year despite the bank paying out $22 billion in legal settlements last year and posting a drop in 4Q profits. Chief executive officer (or CEO) Jamie Dimon said in the bank’s 4Q earnings statement, “We are pleased to have made progress on our control, regulatory and litigation agendas and to have put some significant issues behind us this quarter.” Jefferies analysts were bullish on the stock, and said in January that “JPMorgan Chase recently put the largest of its litigation risk concerns to bed, which has allowed investors to re-engage to an extent.” On JPM, Citigroup, and Bank of America (BAC), the analysts noted back then that “While never free from controversy and incrementally burdened by regulation, this group offers attractive risk and return profiles. We see a path to solid EPS growth, ROA and ROE improvement, and increased capital return, providing an upward bias to stock prices and valuations.”

Results miss estimates for first quarter due to “industry-wide headwinds in Markets and Mortgage”

Shares fell after JPMorgan reported 1Q results that were below Street expectations. Revenue for the quarter was $23.9 billion, down 8% compared to the prior year. The decrease from the prior year was driven by lower mortgage fees and related income, securities gains, and principal transactions revenue. Net income for the 1Q14 dropped 19% to $5.3 billion from $6.5 billion in the 1Q13. Earnings per share (or EPS) were $1.28, compared to $1.59 in the 1Q13. The decrease in net income from the 1Q13 was driven by lower net revenue and higher provision for credit losses, partially offset by lower non-interest expense.

JPMorgan said the results were considered to be a “good start” to the year despite “industry-wide headwinds in Markets and Mortgage.” The bank’s bond trading revenue fell 21% and mortgage lending revenue plunged 84% from the same quarter last year. In 4Q13, the bank, like its other peers such as Wells Fargo & Co. (WFC) and Citigroup, saw a huge fall in mortgage income amid rising interest rates ahead of the Federal Reserve’s tapering.

The bank’s outlook for fixed income and equities said that “based on Markets revenue results to date, which reflect a continued challenging environment and lower client activity levels, it expects 2Q14 Markets revenue to be down approximately 20% plus or minus versus 2Q13. The Markets revenue actual results will depend heavily on performance throughout the remainder of the quarter, which can be volatile.” A report in the New York Post said the bank could see 10,000 more layoffs.

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Dividend raised to $0.40 per share

JPMorgan declared a quarterly dividend of $0.40 per share. The firm repurchased $0.4 billion of common equity in the first quarter and is authorized to repurchase $6.5 billion of common equity through the 1Q15.

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