The Chart You've Been Dying to See (or maybe not)

Here's the chart related to the offending credit default swaps that caused the egg on the face of JP Morgan Chase and CEO Jamie Dimon, courtesy of Felix Salmon and Scotty Barber @ Reuters.

This chart shows the spread on the CDX NA IG 9 index (i.e., the synthetic index on which JP Morgan’s Bruno Iskil was selling enormous amounts of protection) minus the spread on the index’s constituent bonds.

Three things jump out here. First, the basis is negative, not positive. That means that the obvious trade was to buy the underlying bonds and hedge by buying protection on the index. That obvious trade, if held to maturity, should always make money. Iksil was funding that trade, by selling protection on the index.

Second, the chart is going up and to the right. Since Iksil was selling protection, that means the market was moving against him. Or, to put it another way, the obvious trade makes money when it expires at zero, and as the chart moves towards zero, Iksil loses money on a mark-to-market basis.

Finally, the move doesn’t seem to be all that huge — only about 30bp in this quarter. Which doesn’t seem remotely enough to cause a $2 billion loss. Still, Iksil managed it somehow.

And CEO Dimon and the other big-bucks risk management overseers @ JPMC missed the obvious risk of the transactions, with Dimon calling it a "tempest in a teapot" a month ago when the story started to surface.  Maybe these guys aren't as smart as they think and would have the world believe.

JP Morgan Chase and Other Too-Big-To-Fail Banks

In thinking about the JP Morgan Chase situation, three problems come to mind immediately.

The first is the inability of the managements of these too-big-to-fail institutions to fully comprehend and monitor what is going on.

The second is the inability of the regulators to fully comprehend what is going on in an entity the size of JP Morgan Chase.

And third, and most importantly, these too-big-to-fail banks have short institutional memories. They quickly forget what led to their problems the last time it got tough for them. Eventually, they look to the US taxpayer for help when the going is tough (whether in the form of direct assistance or, what we have now, a near-zero interest rate environment to pad their profitability and capital levels at the expense of savers who need a return on their deposits).

JPMC and its likes (the too-big-to-fail banks) shouldn’t be allowed to act like hedge funds (even though in the current instance the offending transactions look more like bets than hedges against risk).

I keep seeing comments from various commentators on various websites to the effect that JPMC should be able to do what it likes with its “own” money. But this is either depositors' funds or shareholders’ money (retained earnings). What should really happen when JPMC has excess funds (i.e., those assets which aren't going be used to facilitate the growth of the nation's economy through lending activities) is the following: invest those excess funds temporarily in safe assets (US T-bills come to mind) until they can be deployed into loans or distribute the portion of those funds which are retained earnings to the shareholders who can then choose to invest in whatever asset classes they choose under their own decision regimens. If hedge fund investments are what they want, then let them make conscious decisions to invest in hedge funds, without any Federal (US taxpayer) guarantee of the investment.


But here we are again with a too-big-to-fail bank losing $2+ billion of its “own” money — and under the leadership of CEO Dimon who is one of those most vocal against limiting the banks’ proprietary trading under proposed regulation/legislation.  What did CEO Dimon learn about risk management from our most recent financial crisis?  Nothing?


The shareholders, bondholders and managers of these too-big-to-fail banks should pay the price for “mistakes” such as JP Morgan Chase’s recent fiasco. However, the US taxpayer remains on the hook just as in the 2007-2008 financial crisis.


It’s time we revisit the separation of real banking activity and everything else that banks want to do. This might eliminate, or at least restrain, much of the burden that is now placed on US taxpayers to correct the “sloppy” and “stupid” decisions (CEO Dimon’s own adjectives) that have been made by the too-big-to-fail banks in the post-Glass-Steagall era.

IS TOO BIG TO ALLOW!

The Greek Tragedy Continues

US equity markets will start the day lower as the Greek tragedy continues ...

UPDATE:  Close of Market
The pre-open expectation was fully realized.  U.S. stocks closed at more than three-month lows Monday as investors worried about Greece’s potential exit from the Eurozone.

I'm still expecting some favorable US econ data tomorrow through Thursday to help offset the market struggles related to the "Greek tragedy."

The JP Morgan Chase Trading Fiasco

A month ago when this story started to surface, JP Morgan Chase CEO Jamie Dimon called it a "tempest in a teapot."  Now he calls the trading strategy employed "sloppy” and “stupid."  Which is it?  Or, in fact, does CEO Dimon even know what goes on in his "too-big-to-fail" bank?
Should CEO Dimon be escorted out of JPMC along with his "sloppy” and “stupid" traders and risk-management execs?  I'll leave that to the shareholders and board of directors.  But, at a minimum, CEO Dimon should resign from the NY Fed if not from JPMC as well.      
                      

One would think after the fiasco of the 2007-2008 financial crisis, the too-big-to-fail (“TBTF”) banks would have learned a lesson about risk management --- but, no, here we are again with JP Morgan Chase losing $2+ billion of their "own" money --- and under the leadership of CEO Dimon who is one of those most vocal against limiting the banks' proprietary trading under proposed legislation.  (As an aside, the TBTF banks of vintage 2007-2008, including JPMC, are now even bigger than they were at the beginning of the financial crisis.)


The shareholders, bondholders and managements of these TBTF banks should pay the price for "mistakes" such as JP Morgan Chase's recent fiasco. However, the US taxpayer remains on the hook just as in the 2007-2008 financial crisis. 


Banks have been granted their "franchises" and given preferential treatment to serve the needs of the nation's economy and to facilitate the movement of funds between individuals/entities wanting to have a relatively safe haven for their excess liquidity (aka, depositors) and those needing to borrow those resources.  Proprietary trading of the TBTF banks’ "own" funds has little place in this economic environment --- the portion of those funds srepresenting retained earnings hould be distributed to the shareholders who can then choose to invest in riskier asset classes under their own decision regimens. If hedge fund investments are what they want, then let them make conscious decisions to invest in hedge funds, without any Federal (US taxpayer) guarantee of the investment. Any other "excess" funds (representing depositors' monies) should be invested in safe assets (e.g., US Treasury bills/bonds) until theOne would think after the fiasco of the 2007-2008 financial crisis, the too-big-to-fail (“TBTF”) banks would have learned a lesson about risk management --- but, no, here we are again with JP Morgan Chase losing $2+ billion of their "own" money --- and under the leadership of CEO Dimon who is one of those most vocal against limiting the banks' proprietary trading under proposed legislation.  (As an aside, the TBTF banks of vintage 2007-2008, including JPMC, are now even bigger than they were at the beginning of the financial crisis.)


The shareholders, bondholders and managements of these TBTF banks should pay the price for "mistakes" such as JP Morgan Chase's recent fiasco. However, the US taxpayer remains on the hook just as in the 2007-2008 financial crisis. 


Banks have been granted their "franchises" and given preferential treatment to serve the needs of the nation's economy and to facilitate the movement of funds between individuals/entities wanting to have a relatively safe haven for their excess liquidity (aka, depositors) and those needing to borrow those resources.  Proprietary trading of the TBTF banks’ "own" funds has little place in this economic environment --- the portion of those funds srepresenting retained earnings hould be distributed to the shareholders who can then choose to invest in riskier asset classes under their own decision regimens. If hedge fund investments are what they want, then let them make conscious decisions to invest in hedge funds, without any Federal (US taxpayer) guarantee of the investment. Any other "excess" funds (representing depositors' monies) should be invested in safe assets (e.g., US Treasury bills/bonds) until they can be deployed into lending activities.


This approach would take much of the burden off US taxpayers to correct the " sloppy” and “stupid" decisions (CEO Dimon’s own adjectives) that have been made by the TBTF banks in the post-Glass-Steagall era.
y can be deployed into lending activities.


This approach would take much of the burden off US taxpayers to correct the " sloppy” and “stupid" decisions (CEO Dimon’s own adjectives) that have been made by the TBTF banks in the post-Glass-Steagall era.

This Bear Looks Greek to Me

The Greek electorate effectively rejected the Eurozone bailout last weekend and, as a result, equity markets took a nosedive during the week as resurfacing Eurozone debt woes welcomed back the bears on Wall Street.  Political turbulence in Greece has sparked a wave of worry, with many fearing that the nation will have to face default unless the opposing parties agree to implement the proposed austerity measures.

On the domestic side, economic data releases remain mixed; the latest consumer sentiment index came in better than expected, however, the labor market remains fragile.  But next week may be more encouraging as several significant US economic reports will be forthcoming Tuesday through Thursday --- perhaps less tepid than those we've seen in the past couple of weeks.

Given the potential for better data releases in the near-term, I'm fully invested in equities in my more aggressive portfolios heading into next week.

How Does It Feel to be Unemployed or a Part of the Underclass?

How do the unemployed or the less privileged in our society feel today? I can only imagine maybe like this ...

OMG - The Repubs Move Further to the Cliff on the Right Side of the Road !

 

Senator Richard Lugar of Indiana was defeated soundly by a Tea Party-backed candidate in the Repub state primary yesterday.  This is most unfortunate for the Country --- especially if the Repubs are able to hold Lugar's Senate seat in November.

Senator Lugar was one of those "lost breed" Repubs who, while solidly right of center on political issues, still saw it in the Country's best interests to negotiate and reach some middle-road agreement with Dems from time to time in order to address the significant problems confronting our Nation.

With the defeat of Senator Lugar, the Repubs have moved closer to being the extremist party for which "principle" (aka, myopic stubbornness) outweighs "economic patriotism" (which I'll define for this limited purpose as the willingness for Repubs and Dems to compromise on critical issues in order to advance the Country's economic standing in the global economy and advance our on-going, but weak economic recovery --- in other words, for Repubs to be the "loyalist opposition").

And, if the trend continues that the Repubs move closer to the extremist right, we're all in danger of falling off that conservative cliff --- and it won't be pretty ...

UPDATE - 12:23 PM ---
Here's an excerpt about Lugar from an article in today's The National Journal by Matthew Cooper:

"But he had a style that could only be called senatorial.  He raised the debt ceiling, voted for omnibus legislation, worked well with colleagues and had a courtly manner that was more PBS than Drudge.  Famously, he was Richard Nixon's favorite mayor but the thing to know is that by being mayor--having to make sure the cops were paid and the trash got taken out--he had to be more pragmatic than a lifetime legislator.  When he got to the Senate in 1977, as Nicholas Reindl noted, there were three members who had been born in the 19th century and had voted on Social Security. Lugar was a link to a different time, not a golden age of bipartisanship, but at least one where filibusters were for break-glass-in-case-of-emergency moments and shutdowns were not a handy tool."

It's All Greek to Me

"Investors woke up Monday to a “worst-case” scenario in Greece after voters punished mainstream, pro-bailout parties in parliamentary elections, potentially creating a political vacuum that could fan doubts over the country’s ability to meet the terms of its latest bailout and remain in the euro, strategists said."

You might want to buckle up for this market ride ... but after this morning’s (or perhaps the next couple of days') downward market reaction, think "buying opportunity."

A Bit of Diversion for Extroverts, Introverts and Ambiverts Alike

This is one of those posts that has nothing to do with the intersection of politics and financial decision-making. The TED video is worth 19 minutes of your free time --- and if you don't have 19 minutes of contemplative time, well then ...

Sell in May and Go Away?



I'll let you know in September...
(or perhaps sooner)

But since I'm 85% invested now in equites, I will be setting conditional stop losses for several holdings (especially those that are leveraged ETFs) @ 1390 on the S&P 500 --- just to protect the inherent gains (currently, the YTD return on my most aggressive portfolio is > 30% vs. ~ 12% on the S&P 500).

Are We Really Interested in "Taking Care of Our Own"?

A significant number of American voters seem to believe that the unemployed don’t really want jobs because they would prefer to live off unemployment insurance, food stamps or other social benefits.

Many of these same voters are also drawn to a particular austerity strategy: cutting taxes for higher-income individuals and cutting unemployment insurance and other social benefits for low wage earners and the unemployed.  This strategy makes perfect sense if you believe that most people who are struggling to pay their bills aren’t trying hard enough.

But, the social safety net is not a hammock that unemployed workers can luxuriate in.   A New York Times/CBS News poll conducted last fall found two-thirds of those receiving benefits said the amounts received were not enough to pay for basics like housing and food.  Contrary to the apparent belief of some American voters, the unemployed aren't getting rich off unemployment insurance and food stamps.

The argument that most people who are unemployed and struggling to pay their bills aren’t trying hard enough appeals for various reasons.   It absolves believers of any responsibility for other people’s hardships.   It lends credence to the assertion that the labor market would work just fine if it weren’t jammed up by a social safety net.   And this argument does contain a partial truth: some people probably do shirk their responsibility.   They do let access to unemployment benefits, food stamps or disability insurance reduce their job search efforts.   But the number who fall into this category is minuscule compared to those who really want to work and can’t find a job.

The unemployed want jobs badly enough.  But some Americans don’t seem sensitive to the problem and don't seem to care much about helping the unemployed in the process of getting back to work.

Bruce Springsteen’s recent album, “Wrecking Ball” includes the song “We Take Care of Our Own.”  The problem is, it’s not clear that some American voters really believe that philosophy.

"Where are the hearts that run over with mercy…”

“Where’s the work that’ll set my hands, my soul free…”

A Picture is Worth a Thousand Words

One reason manufacturing jobs will not be coming back to where they were ---

Carried Interest Revisited

A little biased, but mostly accurate ---

Listen to the Market Pundits or Flip a Coin?

So, you want to follow the advice of your favorite market pundit?  After all, they make the really big bucks and have all that experience, not to mention those big research staffs to analyze every real-time market move along with every fiscal/monetary policy decision in ascertaining the timing and direction of future equity and bond market movements.

You might want to flip a coin instead.  Over time, the probability of  your coin-flip decision being correct would be 50%, better than most of the market pundits touted as such by the financial media.

Here's a table, prepared from analyses by CXO Advisory Group, that shows the accuracy rate of the market predictions of 18 investment advisors who are touted by the major financial media outlets (CNBC, Fox Business News, Bloomberg TV, etc.) and the financial press as market experts.

(You can get into the "weeds" of these scores and see more ratings at the CXO guru website ---http://www.cxoadvisory.com/gurus/.)

Next time you hear or read about a market forecast (timing or direction) by one of the investment pundits, consider their opinion as only one of the inputs into your financial decision-making.  Maybe even consider it as a contrarian input.

In a future post, I want to highlight how mutual fund managers perform compared to market indices.  Here's a clue --- the vast majority of mutual funds do not perform as well as their benchmark indices.  Moreover, those mutual funds that do perform better in one year don't usually (or can't) replicate that better performance over time.  Buying a benchmark ETF (e.g., SPY or IVV to replicate the S&P 500 index) may be your better investment alternative over time.

Does the Market Have You Stressed?

If the market has you stressed out (or even if it doesn't), relax in one of these hoodies --- artwork by my son Brandon (you can find him on FB @ http://www.facebook.com/profile.php?id=568836417
and his artwork @ http://www.facebook.com/profile.php?id=568836417#!/profile.php?id=568836417&sk=photos).

The hoodies and other products containing Brandon's artwork can be found @ http://society6.com/BCW620.