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What JPMorgan Means for Main Street

Despite a financial crisis that slashed JPMorgan Chase's (JPM) profits, investors now look to the giant bank as a pivotal leading indicator of not just the direction of the financial sector but the economy as a whole.

"It is the bellwether for the industry," Alan Lancz, president of investment adviser Alan B. Lancz & Associates, says of JPMorgan. (He owns the stock.)

The bank showed how much attention it can attract on Apr. 14, when investors cheered better-than-expected profits. JPMorgan reported earnings of 74¢ per share, up from 40¢ a year earlier. Analysts surveyed by Bloomberg predicted earnings of 64¢ per share on average. The share price rose 4.1%.

Yet many analysts and investors cited credit trends at JPMorgan as the most compelling feature of its quarterly results. In a sign that losses on mortgages and consumer loans might be easing, JPMorgan lowered its provision for credit losses to $7.01 billion last quarter, down 21% from the last quarter of 2009.

The credit improvement has broad economic implications, says Morningstar (MORN) equity analyst Jaime Peters. "More people are paying their credit cards and mortgages," she says. "That suggests people are starting to get a little bit of a grasp on this recession."

JPMorgan's improvement in credit trends "plays right into the turnaround of the entire financial and banking sector," says Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund (MPDAX).

Influence over Investors

Others are more skeptical, saying accounting changes make it easier for banks to delay recognition of losses. JPMorgan may be making profits on trading, but it is still losing money on traditional banking, says Tom Samuels, portfolio manager of the Palantir Fund (PALIX). "While the bank made money as an aggregate, it's losing buckets of money on the consumer side," he says.

While investors may differ on what the results mean, there is no doubt they command special attention. JPMorgan has assets of $2.1 trillion, 14.5% of the size of the entire U.S. gross domestic product at the end of 2009 and second only to Bank of America (BAC) among U.S. financial institutions. Chase, its retail bank, has 5,155 branches. With operations in 60 nations, JPMorgan says it ranked first worldwide in global investment banking fees so far this year. Last quarter the company's investment banking fees rose 5% from a year earlier to $1.4 billion.

The company's influence over investors can be attributed to not just its size but also its credibility and track record. "The way they maneuvered [through] the financial crisis clearly puts them at the top," says Tom Villalta, co-manager of the Jones Villalta Opportunity Fund (JVOFX). While Bank of America "still has some things to work through," he says, JPMorgan appears poised to emerge from the recession and financial crisis stronger. (Villalta's fund owns both stocks.)

JPMorgan acquired Washington Mutual and Bear Stearns on the cheap in 2008, and has taken business from other weakened rivals since then. JPMorgan's performance compared with rivals is testament to "savvy management," Morningstar's Peters says, especially that of Chairman and Chief Executive Jamie Dimon.

CEO Cautious but Optimistic

When Dimon and other JPMorgan executives talk, people listen, including regulators and investors. "Jamie Dimon is the most influential large bank CEO, and the most well-respected," Peters says.

Dimon's tone on Apr. 14 was cautious but increasingly optimistic.

"While the economy still faces challenges, there have been clear and broad-based improvements in underlying trends," Dimon said in a statement. "We believe these improvements will continue and are hopeful they will gather momentum, resulting in a strong recovery."

Dimon's success hasn't necessarily boosted his popularity off Wall Street. More than 900 people associated with Syracuse University have signed an online petition protesting the choice of Dimon as graduation speaker at the school on May 16. Like Goldman Sachs (GS), which reports earnings on Apr. 20, JPMorgan's relative success makes it a target. "JPMorgan and Goldman have shown the most foresight before, during, and after this financial crisis," Lancz says.

A strong economic recovery may or may not appear in 2010. Palantir's Samuels warns consumers remain depressed by the scarcity of jobs. "The consumer is not in turnaround mode yet," he says. Peters worries about what happens to U.S. home prices this summer, when some government stimulus to the housing market will be withdrawn. Losses on commercial real estate loans remain a concern for JPMorgan and the economy as a whole, Villalta says.

Whatever happens, JPMorgan's track record, and its role at the center of the U.S. financial system, make it the ideal place to detect any of these troubling trends early.

Steverman is a reporter for Bloomberg News in New York.

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