JPMorgan Chase & Co. (NYSE: JPM) and the U.S. government can't seem to agree what the bank's stock warrants are worth. As a result, JPM has asked the Treasury Department to auction off the warrants publicly in order to determine a fair market price.
The JPM warrants were issued to the government under the terms of its TARP loan. Bailed-out banks have the option to repurchase their own warrants, but only if they can strike a deal with the feds regarding a reasonable price. However, many firms have complained that the Treasury is seeking too high a price for the assets -- putting executives in the awkward position of claiming that their stock just isn't worth that much.
In choosing the auction alternative, JPMorgan is waiving its right to repurchase its own warrants (it could potentially bid through the public auction process, but company executives have decided not to do so). If the stock warrants are successfully auctioned off to a third party, their exercise would be dilutive to existing shareholders.
Traders seem anxious about this potential outcome, with JPM dropping to a loss of nearly 2% in morning trading. The stock has slumped beneath short-term resistance from its 10-day and 20-day moving averages since early June, but the Dow component hasn't yet breached support at its 20-week trendline.
During the next week, JPM's technical troubles could be exacerbated by the effects of options-related resistance. With the equity trading narrowly above $33 at last check, it's staring up at two hefty accumulations of out-of-the-money call open interest. The July 34 call has 33,279 contracts in residence, while the July 35 call sports open interest of 34,792 contracts. These options are due to expire next Friday, just one day after JPM is scheduled to report its second-quarter earnings.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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