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Archive for the ‘TARP Funds’ Category

The derivatives market : April 2010

 

A major crisis is building in the derivatives market yet a cabal on Wall Street is blocking the formation of a clearing house that could stop the next financial meltdown, a senior official with the Kauffman Foundation said on Tuesday…

The need for disclosure in the swap markets is enormous, yet the will to act is missing because of a small cadre of special interests, said Harold Bradley, who oversees almost $2 billion in assets as chief investment officer at Kauffman…

“I believe we are in a cabal. There are five or six players only who are engaged and dominant in this marketplace and apparently they own the regulatory apparatus,” he said. “Everybody is afraid to regulate them.”…

U.S. and European officials are trying to craft new rules to regulate the $450 trillion private derivatives market in broad efforts to avoid another financial crisis…

Bradley said those efforts fall short…

Instead, he said regulators have found a boogeyman in high-frequency trading, which has taken the focus off the highly levered derivatives market…” (Emphasis added.)

“Wall Street cabal seen derailing serious swap reform”
Herbert Lash, 3/30/10
http://www.reuters.com/article/idUSTRE62T5RD20100331

“The dollar-based monetary system is no longer adequate for a larger and more integrated world economy…

Prominent developing economies are increasingly demanding to be included in any multilateral dialogue that aims to shape the new economic order…”

“Beyond the Dollar: Rethinking the International Monetary System”
The Chatham House Report, March 2010

The Federal Deposit Insurance Corp. is trying to encourage public retirement funds that control more than $2 trillion to buy all or part of failed lenders, taking a more direct role in propping up the banking system…

Direct investments may allow funds such as those in Oregon, New Jersey and California to cut fees for private-equity managers, and the agency to get better prices for distressed assets, the people said. They declined to be identified because talks with regulators are confidential…

Oregon’s retirement fund may contribute $100 million as regulators seek “the support of state pension funds to solve the crisis surrounding ongoing bank failures”… New Jersey’s fund may also participate…

The FDIC shuttered 140 lenders last year and expects the tally may be higher in 2010… Pension funds, whose 100 largest members manage $2.4 trillion, could provide capital to acquire deposits and outstanding loans from collapsed banks

Investing in distressed banks doesn’t always pay off, as the U.S. Treasury Department learned with the Troubled Asset Relief Program. At least 60 lenders skipped some of their promised dividends to the TARP fund

…The California Public Employees’ Retirement System, the largest U.S. public pension fund, said in a Feb. 16 presentation that one of its goals is to increase its “co-investments” in transactions alongside money managers…

Known as Calpers, the pension fund plans to “explore unique structures with select general partners”…” (Emphasis added.)

“Failed Banks May Get Pension-Fund Backing as FDIC Seeks Cash”
Dakin Campbell, Bloomberg BusinessWeek, 3/8/10

“Alfredo Ley, founder of Ley Investor B.V., an investment management and research firm in the Netherlands, yesterday published a fascinating review of a 1989 academic paper written by the great rationalizer of surreptitious government intervention in the gold market, former Harvard professor and former U.S. Treasury Secretary Lawrence H. Summers, now director of President Obama’s National Economic Council…

Ley’s review of that paper, headlined “From the Horse’s Mouth: Lawrence Summers on Market Manipulation in Times of Crisis,” construes the paper as an argument for government to respond to financial crises by propping up asset prices and rigging currency exchange rates, presumably also largely surreptitiously…”

“More advocacy by Obama’s top economist for sneaky market rigging”
The GATA Dispatch, 3/27/10

The Threat to Wealth, including a Threat to that (formerly most sacrosanct) category, Pensions, is just beginning, though the Markets now appear to have calmed. But that calm is The Eye of a Market Hurricane which began in 2008, and The Eye is slowly but inexorably moving.

The Megabankers have apparently encouraged FDIC’s push to use Pension Fund Assets to buy often-still-Toxic “Assets” of Failed or Failing Banks. If that Push is successful, it would result in yet another massive benefit to Megabankers.

It would remove failed or failing Assets from the banking system (to the detriment of Pensions) and leave the mega-Bankers in a position to acquire the still-performing Assets in that System “on the cheap”.

It would not be the first such acquisition nor would it likely be the last.

Deepcaster and others reported recently on a similar Mega-Bank-generated Plan to force Pension Funds to Buy U.S. Treasuries – not such a good idea in light of the U.S.A.’s prospective (by 2028) $20 Trillion plus National Debt and $100 Trillion plus downstream unfunded liabilities, for Social Security, Medicare, etc. Given this Reality it is highly likely long-term U.S. Treasuries will decline in value over the next few years.

And Deepcaster’s Long-standing claim that one goal of the Mega-Bank led Cartel’s* ‘End Game’ is the Destruction of the U.S. Dollar, is supported by the Chatham House Report referred to above which serves as a Trial Balloon. And as the degradation of the purchasing Power of the U.S. Dollar proceeds, what happens to the value of the Dollar-denominated Assets. The Answer is unfortunately clear.

The foregoing are just three more examples of the potential appropriation of Citizen Investor Assets, just as the 2008-2009 Market Crash resulted in a massive Wealth Transfer (of some $11.9 Trillion in gain(!) in the six months of July through December, 2008 – the six months encompassing the Market Crash when Investors world-wide were losing Trillions). Verify this Gain for yourself at the Central Banker’s Bank’s own website – http://www.bis.org, Path: statistics>derivatives>Table 19.

If the Investor/citizens of the U.S.A. (and nations around the world) do not stop the Musical Chairs-like “Game” of Bailouts of and Asset Grabs by the Mega-Banks in which Investor/Citizen/Retiree/Taxpayer Assets are appropriated one by one, then all will ultimately share impoverishment.

One step to stop the grab is to Audit and then Abolish the private for-profit Fed, leader of the Cartel.*

Despite the Hot Air from Washington, DC, it looks as if the chances for passage of Real Financial Reform Bills – including Rep. Ron Paul’s Audit and Abolish The Fed bills – are slim to none in this session.

Indeed, the simple solution to the “Too Big to Fail” problem is not receiving serious consideration in Washington, DC – yet. That would be, of course, to break up the Mega-Institutions and parcel out their Assets and functions to regional and state Banks.

Official Numbers       vs.      Real Numbers

Annual Consumer Price Inflation reported March 18, 2010
2.14%                              9.39% (annualized March 2010 Rate)

U.S. Unemployment reported March 5, 2010
9.7%                               21.6%

U.S. GDP Annual Growth/Decline reported March 26, 2010
0.06%                              -4.62%

Significantly, last week’s weak Bond Auction (resulting in a spike in rates) and the release of figures showing February was the worst month for new House sales ever, show that Main Stream financial Media Happy Talk about the Bullish Equities Markets and “Recovering Economy” is just so much hot air.

Sooner rather than later, these Realities are going to rear their ugly heads in an Equities Market Takedown. Facilitating that Market Takedown is the fact that Equities Markets are generally considerably overvalued, with the S&P P/E Ratio at about 23 to one.

Some of you will remember the period leading up to the Market Crash of 1987. For months, the Fundamentals and Technicals deteriorated while the Equities Markets continue to rise.

The same was true of the period leading up to the Internet Bubble Burst of 2000. The bubble “should” have burst earlier than it did. But the shorts had to wait for months before profiting.

In our view, a similar situation exists today. The Stimulus Bills plus positive Main Stream Media “spin” plus Cartel Intervention have created a “Sugar High” in the Markets. But it is highly unlikely it will last.

And it is important to note that: Market Crashes and Takedowns typically strike suddenly, before one has time to “get short, or exit longs”.

Thus, in our view we are in the Calm Eye of the Markets’ Hurricane, but that Eye is slowly, but inexorably moving. We shall soon be in the Hurricane again.

Will The Cartel employ a chunk of the $437 Trillion in dark OTC Interest Rate Contract Derivatives they have available for Market Control to fuel another Bond Rally soon?.

“We Must Break Up Big Banks and End Too-Big-to-Fail, Says Simon Johnson”
Tech Ticker – Yahoo, 4/1/10

source link see full article: http://www.financialsense.com/fsu/editorials/deepcaster/2010/0401.html

Copyright © 2010 DeepCaster LLC

Tell the people the truth about the Markets & NAMA

Do you really want to know what is really going on in the market place?
Ever heard of the “Rigged Market capitalists system”
Are you ready for this news??
Ernst & Young auditors of Anglo Irish Bank now working for NAMA ,
The same auditors for Lehman Brothers .
This is criminal , allowing this to go on, they should all be in Jail !
We must have a new Irish people’s political party that will stop this fraud in its tracks.
A political party that will prosecute all the individuals responsible for this criminal conspiracy
They must be brought to justice
We the people must have our pound of flesh!

Irish Banks Derivative trading losses

I believe that the banks Allied Irish Bank, Bank of Ireland and Anglo Irish Bank are all hopelessly exposed to huge losses as a result of Derivative trading

They should be asked to come clean and give categorical assurances on their Derivative Trading

Apart from the huge losses on their propriety /mortgages business.ie (subprime desaster),  there is another enormous source of losses from the same banks and that is their trading in the “BOND MARKET” again I believe that they have huge exposure here as well

These Banks have lent approximately 400 billion Euros and all of it borrowed from foreign banks, these funds would have had to have  “Hedging ” or have an insurance taken out ,in case of default !

So what kind of insurance did they get then if not Derivatives?

Derivatives typically have a large notional value. As such, there is the danger that their use could result in losses that the investor would be unable to compensate for. The possibility that this could lead to a chain reaction ensuing in an economic crisis, has been pointed out by famed investor Warren Buffett in Berkshire Hathaway‘s 2002 annual report. Buffett called them ‘financial weapons of mass destruction.’ The problem with derivatives is that they control an increasingly larger notional amount of assets and this may lead to distortions in the real capital and equities markets. Investors begin to look at the derivatives markets to make a decision to buy or sell securities and so what was originally meant to be a market to transfer risk now becomes a leading indicator.

These Derivatives were traded like confetti at a wedding and have about the same value now !

 If a bank goes bust, deals are just canceled and the residual amount is transferred to the legal department. Everyone can live with that. The burden is transferred from the agent (trading floor) to the principal (the shareholders). Because risk cannot be hedged properly by market professionals, it needs to be taken over by a succession of outsiders. If outsiders are not willing to play anymore (Derivative traders) or go bust, (AIG) then risk concentrates again inside the market, where it cannot be hedged and goes Bust.

So derivatives are only as safe as their underlying  risk is liquid and delta-hedgeable.

Brian Cowen was the Finance Minister who oversaw all this gambling activity at the major Irish banks and should be made accountable for the Total Destruction of the Irish financial industry 

Brian Lenihian  is colluding with the Greens to hide the catastrophic nature of the major Banks debts! Indeed I go so far as to say they may be kept in the dark as to the combined total losses which I estimate at Anglo Irish Bank to be somewhere north of 120 Billion Euros alone!

If I am wrong, then prove me wrong, by showing us the figures of Anglo Irish Bank .

Open the books let us see for ourselves

Don’t let anyone tell you that Anglo was nor dealing in Bonds or Derivative Products,

  I call on the Minister of Finance to come out on to the Dail floor and tell the Nation that the Irish Banks have no exposure to these Derivative Markets.

 But before you do I have a question for you!

Why was there this amendment made to the NAMA Legislation?

Page 15 of the draft NAMA legislation says that the definition of a “credit facility” includes instruments such as”a hedging or derivative facility.”  Section 56, starting on page 46, then defines eligible assets for purchase by NAMA as a range of different types of “credit facilities” as well as “any other class of bank asset (Derivatives) the acquisition of which, in the opinion of the Minister, is necessary for the purposes of this Act.”

Why is the National Treasury Management Agency actively looking to recruit a Derivatives Valuation Service Provider to NAMA?

And before you deny that look below!

Title: Appointment of a Derivatives Valuation Service Provider to NAMA
Published by: National Treasury Management Agency
Publication Date: 19/08/2009
Application Deadline:  
Notice Deadline Date: 08/09/2009
Notice Deadline Time: 16:00
Notice Type: Contract Notice
Has Documents: Yes
Abstract: On the direction of the Minister for Finance, the NTMA is seeking to appoint a Derivatives Valuation Service Provider to provide valuation services (the “Services”) in respect of derivatives positions which will be transferred to NAMA. It is envisaged that one firm will be appointed to conduct the valuation of derivative positions transferring from all of the participating institutions. The Service Provider appointed will be expected to: A. Interact closely with participating institutions in order to extract key data items agreed with NAMA and required in order to carry out the valuation of derivatives. B. Determine derivatives’ valuations based on market-accepted methodologies and market rates. Valuations will incorporate adjustments which will be based on the creditworthiness of the derivatives’ counterparties and which will be specified in guidelines agreed by NAMA with the service provider.

C. The Service Provider will be required to work closely with an Audit Co-ordinator appointed by NTMA. The Audit Co-ordinator will collate valuation data and conduct audits of valuations provided by the Service Provider.

D. The Service Provider will be expected to provide a certificate to NAMA on completion of all valuations which confirms that the valuation of derivatives has been carried out on the basis of a market-accepted methodology and assumptions provided by NAMA and represents a fair assessment of the market value of such derivatives.
CPV: 66000000.

Well Boys I can save you the trouble,

There is no way in hell that anybody can put a valuation on these toxic papers /contracts .

With the collapse of the AIG the effective market no longer exists

To prove my point

When Lehman Brothers declared bankruptcy, it triggered the transfer of large sums in the CDS market to insure buyers of Lehman credit default risk protection against all losses from that event. The sellers of these contracts received the Lehman debt and in return they were obligated to pay the contract buyers (the insured parties) enough money to make the buyers “whole” i.e. to give them their full investment in the bonds back as if they had never bought the Lehman bonds.

The auction for Lehman’s debt occurred on Friday afternoon and the final auction price was $8.62. This means that for each $100 initial par value, the debt is only worth $8.62. The sellers of Lehman CDSs (Derivative contracts) were obligated to pay the insured counterparties 91.375% of the bonds’ face value and, in return, they received the bonds.

Who had to foot the bill for Lehman CDSs (Derivative contracts) Why AIG of course!

There was a 92% loss on the stated value of the Lehman contracts and I would suspect that there in now no value on all other outstanding contracts .Why ,because there isn’t enough money printed all over the world to pay for all the contracts that have being entered into .

The perceived values of these Derivatives were based on “thrust” and not real true values!

  

What are Derivates????

Here is a short introduction I manages to find /compile for those of you that are interested in this the mother of all financial scams.

The current difficulties we are witnessing in the financial markets, is just one leg of a 3 legged stool that has come off .The next leg that is about to fall off is the Derivatives leg

and this is

Derivatives are contracts whose value is “derived” from the price of something else, typically, ‘cash market investments’ such as stocks, bonds, money market instruments or commodities.

An equity derivative, for example, might give you the right to buy a particular share at a stated price up to a given date. And in these circumstances the value of that right will be directly related to the price of the “underlying” share: if the share price moves up, then the right to buy at a fixed price becomes more valuable; if it moves down, the right to buy at a fixed price becomes less valuable.

1.

This is but one example of a particular kind of derivative contract. However, the close relationship between the value of a derivative contract and the value of the underlying asset is a common feature of all derivatives.

There are many different types of derivative contract, based on lot of different financial instruments; share prices, foreign exchange, interest rates, the difference between two different prices, or even derivatives of derivatives. The possible combinations of products are almost limitless. What then are derivatives used for?

Derivatives have two main uses: hedging and trading.

Suppose you have a position in a cash market which you want to maintain for whatever reason – it may be difficult to sell, or perhaps it forms part of your long term portfolio. However, you anticipate an adverse movement in its price. With a derivatives hedge it is possible to protect these assets from the fall in value you fear. Let’s see how.

As we have already said, the value of a derivative contract is related to the value of the underlying asset it relates to. Because of this, with derivatives, it is possible to establish a position (with the same exposure in terms of the value of the contract), which will fluctuate in value almost in parallel with an equivalent underlying position.

It is also possible with derivative contracts to go either long or short; in other words you can take an opposite position to the position you have in a particular underlying asset (or portfolio).

Hedging involves taking a temporary position in a derivatives contract(s), which is equal and opposite to your cash market position in order to protect the cash position against loss due to price fluctuations. As the price moves, loss is made on the underlying, whilst profit is made on the derivative position, the two canceling each other out.

Protecting assets which you hold from a fall in value by selling an equivalent number of derivative contracts, is known as a short hedge.

 2.

A long hedge, on the other hand, involves buying derivatives as a temporary substitute for buying the underlying at some future point. This is to lock in a buying price. In other words, you are protecting yourself against an increase in the underlying price between now and when you buy in the future.

Cash and derivatives markets move together more or less in parallel, but not always at the same time, or to the same extent. This introduces a certain amount of what is called hedge inefficiency, which may need to be adjusted. At other times, an imperfect hedge might be knowingly established, which leaves a small exposure to the underlying market depending on the risk appetite of the individual.

Trading

Derivatives trading, as opposed to hedging, means buying and selling a derivatives instrument in its own right, without, that is, a transaction in the underlying. For instance, a trader can get exposure to the US government bond market by buying and selling US government bond futures without ever dealing in the actual bonds themselves.

The aim when trading derivative contracts is profit, not protection.

The risks associated with derivatives are very different to those incurred in the cash markets. When buying a share for example – a long position – your maximum possible loss is the amount you originally paid for it.

Derivatives, on the other hand, exhibit a lot of different risk profiles. Some provide limited risk and unlimited upside potential.

For example, the risk of loss with a derivative contract which confers a right to buy a particular asset at a particular price is limited to the amount you have paid to hold that right. However, profit potential is unlimited.

Others display risk characteristics in which while your potential gain is limited, your losses are potentially unlimited. 

For example, if you sell a derivative contract which confers the right to buy a particular asset at a particular price, your profit is limited to the amount you receive for conferring that right, but, because you have to deliver that asset to the counterpart at expiry of the contract, your potential loss is unlimited.

Because of the wide range of risk profiles which derivative contracts exhibit, it is vital that you have a clear understanding of the risk/return characteristics of any derivative strategy before you execute it.

Leverage

Apart from the structure of the instrument itself, the source of a lot of the risk associated with derivative contracts stems from the fact that they are leveraged contracts.

Derivative products are said to be ‘leveraged’ because only a proportion of their total market exposure needs to be paid to open and maintain a position. This percentage of the total is called a ‘margin’ in futures markets; and a ‘premium’ in options markets. In this context, ‘leverage’ is the word used in all English-speaking derivative markets.

Because of leverage your market exposure with derivative contracts can be several times the cash you have placed on deposit as “margin” for the trade, or paid in the form of a premium.

Leverage, of course, can work both in your favor and against you. A derivative which gives you a market exposure of 10 times the funds placed on deposit is excellent if prices are moving in your favor, but not so good if they are moving against you, as losses will mount up very rapidly.

 3.

In other words, with leveraged positions, losses are magnified as well as gains.

Follow link to see advertisement

http://www.e-tenders.gov.ie/search/show/search_view.aspx?ID=AUG125404

What is the Bond Market??

 Bond marke

From Wikipedia,

 
 
 
 
 
 
 

The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2006, the size of the international bond market is an estimated $45 trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion.

Nearly all of the $923 billion average daily trading volume (as of early 2007) in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.

References to the “bond market” usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.

 

Market structure

Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger.

However, the New York Stock Exchange (NYSE) is the largest centralized bond market, representing mostly corporate bonds. The NYSE migrated from the Automated Bond System (ABS) to the NYSE Bonds trading system in April 2007 and expects the number of traded issues to increase from 1000 to 6000.[1]

 Types of bond markets

The Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets.

Bond market participants

Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both.

Participants include:

Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals.

Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country’s monetary policy and bond market volatility is a response to expected monetary policy and economic changes.

Economists’ views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of “in-line” data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle.

Bond investments

Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unit-investment trusts. In 2006 total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in 2006.[2] Exchange-traded funds (ETFs) are another alternative to trading or investing directly in a bond issue. These securities allow individual investors the ability to overcome large initial and incremental trading sizes.

Bond indices

Main article: Bond market index

A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Lehman Aggregate, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity and/or sector for managing specialized portfol

Bond market
   
Bond · Debenture · Fixed income
   
Types of bonds by issuer Agency bond · Corporate bond (Senior debt, Subordinated debt) · Distressed debt · Emerging market debt · Government bond · Municipal bond · Sovereign bond
   
Types of bonds by payout Accrual bond · Auction rate security · Callable bond · Commercial paper · Convertible bond · Exchangeable bond · Fixed rate bond · Floating rate note · High-yield debt · Inflation-indexed bond · Inverse floating rate note · Perpetual bond · Puttable bond · Reverse convertible · Zero-coupon bond
   
Securitized Products Asset-backed security · Collateralized debt obligation · Collateralized mortgage obligation · Commercial mortgage-backed security · Mortgage-backed security
   
Derivatives Bond option · Credit derivative · Credit default swap · CLN
   
Pricing Accrued interest · Bond valuation · Clean price · Coupon · Day count convention · Dirty price · Maturity · Par value
   
Yield analysis Nominal yield · Current yield · Yield to maturity · Yield curve · Bond duration  · Bond convexity  · TED spread
   
Credit and spread analysis Credit analysis · Credit risk · Credit spread · Yield spread · Z-spread · Option adjusted spread
   
Interest rate models Short rate models · Rendleman-Bartter · Vasicek · Ho-Lee · Hull-White · Cox-Ingersoll-Ross · Chen · Heath-Jarrow-Morton · Black-Derman-Toy · Brace-Gatarek-Musiela
   
Organizations Commercial Mortgage Securities Association (CMSA) · International Capital Market Association (ICMA) · Securities Industry and Financial Markets Association (SIFMA)

Retrieved from “http://en.wikipedia.org/wiki/Bond_market

     See also Link

(http://www.investinginbonds.com/)

The Derivatives bubble

 

 


 

Derivatives have grew into a massive bubble, some USD
1,144 Trillion
by 2007. The new derivatives bubble was fuelled by five key economic and political trends:

  1. Sarbanes-Oxley increased corporate disclosures and government oversight
  2. Federal Reserve’s cheap money policies created the subprime-housing boom
  3. War budgets burdened the U.S. Treasury and future entitlements programs
  4. Trade deficits with China and others destroyed the value of the U.S. dollar
  5. Oil and commodity rich nations demanding equity payments rather than debt

In short, despite Buffett’s clear warnings,”
in my view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

That warning was in Buffett’s 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. On Buffett’s mind also was His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street’s big shots look like amateurs. Buffett tried to sell off Gen Re’s derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a “financial weapon of mass destruction.”


A massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession. In five years comes from the most recent survey by the Bank of International Settlements, the world’s clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier’s window at a racetrack or casino, where you’d place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.

To grasp how significant this bubble is let’s look at these numbers

U.S. annual gross domestic product is about $15 trillion

  • U.S. money supply is also about $15 trillion
  • Current proposed U.S. federal budget is $3 trillion
    • U.S. government’s maximum legal debt is $9 trillion
    • U.S. mutual fund companies manage about $12 trillion
    • World’s GDPs for all nations is approximately $50 trillion
    • Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
    • Total value of the world’s real estate is estimated at about $75 trillion
    • Total value of world’s stock and bond markets is more than $100 trillion
    • BIS valuation of world’s derivatives back in 2002 was about $100 trillion
    • BIS 2007 valuation of the world’s derivatives is now a whopping $516 trillion

Moreover, the folks at http://www.bis.org/statistics/derstats.htm
BIS tell me their estimate of $516 trillion only includes “transactions in which a major private dealer (bank) is involved on at least one side of the transaction,” but doesn’t include private deals between two “non-reporting entities.” They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.

Also, keep in mind that while the $516Trillion “notional” value (maximum in case of a meltdown) of the deals is a good measure of the market’s size, the 2007 BIS study notes that the $11 trillion “gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets.”


The fact is, derivatives have become the world’s biggest “black market,” exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today’s slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.

Recently Pimco’s bond fund king Bill Gross said “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.” In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America’s leaders can’t “figure out” the world’s USD .1,144 Trillion $ derivatives.(see below)

BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic “shadow banking system” that has become the world’s biggest “black market?”

Here are some of the types of derivatives that are out there.

Have you ever heard of them?

Chances are your local bank manager hasn’t either!

But I bet his Head office has a few slick traders that are trading these on a Daly bases and I’m

Pretty sure that they must be in it up to their necks!

  • Foreign exchange contracts
  • Listed credit derivatives
  • OTC ( over the counter)
  • Forwards and forex swaps
  •  Currency swaps
  • Options on Interest rate contracts
  • Forward rate agreements
  • Interest rate swaps
  • Options on
    Equity-linked contracts
  • Forwards and swaps
  • Options on Gold & Other commodities
  • Credit default swaps
  • Single-name instruments
  • Multi-name instruments
  • Unallocated instruments
  • CDS (credit default swaps)
    CDSs are derivatives whose cost is determined using financial models and by arbitrage relationships with other credit market instruments such as loans and bonds from the same ‘Reference Entity’ to which the CDS contract refers

     

  • ABS (asset-backed securities)
  • MBS (mortgage-backed securities)
  • OTC derivatives
  • Futures

    To name but a few!

  •  According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland — the central bankers’ bank — the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

  • 1. Listed credit derivatives stood at USD 548 trillion;

    2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

    a. Interest Rate Derivatives at about USD 393+ trillion;

    b. Credit Default Swaps at about USD 58+ trillion;

    c. Foreign Exchange Derivatives at about USD 56+ trillion;

    d. Commodity Derivatives at about USD 9 trillion;

    e. Equity Linked Derivatives at about USD 8.5 trillion; and

    f. Unallocated Derivatives at about USD 71+ trillion.

 

For a more indebt information on the latest actual derivative figures please follow this link

It makes very interesting reading

Link  http://www.bis.org/statistics/derstats.htm

Source http://www.elliottwavetechnology.com

Tom Foremski at http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php

Market Up-Date January 2010

Quarterly Market Brief & Stock Pick

Sent to me by  Chris  at  www.wealthbuilder.ie

 
 

The market is currently trying to find its bearings after the spectacular run up since March 2009.

 
 

On a weekly chart the Dow Industrials and Dow Transports both indicate a definite technical consolidation line being formed. The longer the averages remain in their respective November and December ranges the more the the market will discount the March rise and focus on the new support point. According to Hamilton the greater the duration of this “line of consolidation” the more significant the direction of the trend on “breakout.” On probability the market will move North, once the earnings season indicates there are no major surprises in the offing. However, how quickly the averages approach previous highs is anyones guess but price movement is bound to be choppy due to all of the following:

 
 

A:              Will future earnings eventually justify such rich valuations.

B:              When rates start rising will the hikes be benign or aggressive due to explosive inflation.

C:              Will the Real Estate, Financial & Banking sectors “tank” on rate hikes.

D:              When will unemployment stabilise and improve.

E:              Has the market discounted tax hikes.

 
 

As always the market must try to discount such uncertainty but given the mix I see above average risk in the martket given the weak underlying fundamentals.Therefore I am happy to advise clients to hold onto their fabulous 2009 gains and await a clearer economic tablet or a powerful technical indicator.

 
 

Some folk recommend Gold or Silver but again I see major institutional manipulation which makes a traders life a misery. Trading gold makes good fundamental sense but in actuality the technical picture has been muddied by paper gold in the form of ETFs, so I have moved on.

 
 

The situation since March provides all the emanations that TARP funds found a home in equities. In other words the fix was in. The wonderful gains thus far have given “banks” great profits to repay congress borrowed funds. I use the word bank with great delicacy because they are in effect derivitave traders. For this reason the TARP funds were not used to “stimulate” the real economy and therefore cannot be found in credit card account funding or car finance deals or property mortgages or business overdrafts (no that would be too much work and risk). The funds are in hyper leveraged instruments, cross purchased. Thus this is a synthetic bull run, hence the spectacular market rise.
The sooner congress realises this the sooner the true American economy can regenerate. When will it be accepted in honour and faith that the key to recovery was, is, and will be small enterprise. History educates that small entrepreneurs create 80% of ALL NEW JOBS in America. Support them and all will go well.
Ignore them and a double dip
correction will prove inevitable due
to sustained high unemployment.

 
 

I don’t know if any of you noticed but over the Christmas, during a 7 day period, short term interest rates shot up 600% from .01% to .07% and long term rates jumped 25%. In the first days of the new year they were pulled back but short rates are sill up 200%.  This volality indicates the fact that the FED has a major job on its hands holding the “balanced quantatitative easing” story together. A lot is riding on the holding of rates down and if anyone drops the PR ball there will be hell to pay. Ergo the market is risky until the jobs situation shows definite unmanipulated improvement.

 
 

 
 

 
 

 
 

Stock Pick:

RDSA: Royal Dutch Shell plc.

 
 

Royal Dutch has regained about half of the ground lost since their 2008 peak, supported by a partial recovery in oil prices.

 
 

The refining, chemicals and natural gas lines have not snapped back as quickly as the oil pumpimg business.
However, efficiency measures have been implemented and Shell is targeting a return to growth before too long.

 
 

Expansion is on track for the oil and gas exploration business in 2011, when a couple of extra large gas projects in Qatar are due to come on stream.
These top quality ADRs should appeal to conservative investors. While the issue is untimely strong dividend income underpins the good long-term total return potential that we envision.

 
 

Fundamentals:

Dividend Yield:                                  5.5%

Financial strength:              A++

PE Ratio:                            11.0

Return On Cap:                            12.5%             

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