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Burned by the Best of Breed: Barry Ritholtz on JP Morgan

Breakout

It sure made sense at the time. After getting pounded last fall to multi-year lows, the nation's battered banking industry was poised for a pop. By the New Year, the market's hottest sector was turning skeptics into converts by the day, and all that was needed to get in on it was a little nerve and some money.

That's essentially what brought Barry Ritholtz, and countless other profit-seekers like him, back to the banks—and, more specifically, back into shares of JP Morgan (JPM). They saw the performance, leadership, and improving earnings, but they also had a long list of names to avoid. They therefore decided that going with the best of breed was a smart way to go.

"Banks were hot as a pistol in the first quarter," says Ritholtz in the attached video, "and we wanted some exposure without buying the Bank ETF (^BKX)." The Fusion IQ Founder and The Big Picture blogger now refers to his chosen bank as ''the best house in a not-so-great neighborhood," but also can chalk it up as a learning experience.

"The take-away lesson is: you don't want to own the best house in a really lousy neighborhood," he says, adding for good measure that "this is no longer as good of a house as people thought."

In fact, despite JPM's efforts to manage, contain, explain, quantify, and extinguish its multi-billion dollar trading bungle, they have had a hard time so far winning back converts, including Ritholtz. He explains, "The lesson you learn with cockroaches is there's never just one."

While he's reluctant to say never again regarding if he would buy banks, Ritholtz is clearly annoyed that we all—including the broader markets—have been hauled back into a swirl of uncertainty by some of the same institutions. "Banks used to be safe, boring money-making machines," he recalls. "These banks seem to now think they're hedge funds."

Of course much of JP Morgan's trading disaster and its ultimate impact is still a mystery, but regulators and plaintiffs attorneys are sure to try to fill in some of the blanks.

"If you are an FDIC-insured bank, you have no business speculating with derivatives because we, as taxpayers, are on the hook if they screw up," Ritholtz says.

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