Scary Derivatives

credit risk problemsAfter Monday's rather strong rebound, traders responded by selling for most of the day on Tuesday, in which the Dow closed lower just over 160 points. Such a day of trading is creating a lot of concern for bull investors who were hoping to continue to see the "green shoots" of recovery in the economy. Unfortunately, I believe we are just in a temporary stabilizing period, only to be followed by more downward trending data, deepening this recession/depression. It has gotten to the point where I cannot count all of the problems and economic woes that the global economy is faced with, and unfortunately, I don't see very many feasible solutions, other than time and letting nature take its course. Of course, the government needs to step in and intervene on matters of critical concern, however, they also need to let some things fail. It is part of the capitalistic economy we live in. People and businesses will fail. It is from learning from our past failures that we usually succeed.

Right now, we see markets flirting with really dangerous technical indicators. For the past two months, we have almost perfectly traded in a "head and shoulders" formation for the S&P. Currently, we find ourselves right at the barrier which has shown quite a bit of resistance in times past. For the past couple weeks I have been saying that the 880 level was the very critical number to watch, which we are dangerously flirting with, having the S&P close today at 881. I believe that if we do break that through that level and sustain, we can easily find ourselves back in the 700 levels. Although, tomorrow will most likely be a profit taking day with the possibility of a rebound, I believe that number will be breached by the end of the week.

One other big issue we are faced with is still the problems with the banks. I know we rarely hear much of bank failures anymore, since many have now proven to generate so called "strong earnings", however, there are some very dangerous risks that many of these institutions still face.

crashmarketstocks podcastA big problem for many of them are derivatives. From the above chart, you can see the large risk that several of the big banks have with derivatives in relation to their assets. Goldman Sachs has credit risk to the tune of almost 10 times its capital. That is absurd. The latest estimates are quite alarming. Last week, the OCC issued its latest report, estimating the total amount of derivatives to be at $202 trillion. As bad as that sounds, the global number is estimated to be $592 trillion, which when compounded over six years is a growth of over 34% a year! Such risk is very alarming to me and causes great concern for many of the banks.

Today, most of my portfolio performed very well. Heading into earnings, I will be making adjustments to move towards companies I feel will be struggling this quarter. LVS and MGM are ones that are definitely on my radar for shorting here soon. As commercial real estate continues to struggle, I would expect them to get thrown into the mix. I will be doing a premium podcast (subscribe here) this evening, discussing other possible investments I will be looking to take. The tides have definitely turned. Happy Trading $4.95 trades + 65 cent option contracts. No minimums. No catches. No, seriously.


  1. Anonymous Says:

    Lvs seemed like it was a sure profit to short at 11 but now that it's below 7, wouldn't it be dangerous to short something that has been known rally strong on good news? Also what are your thoughts on the reverse split with faz?

  2. Finance Fanatic Says:

    Indeed, in which I also shorted it at 11. But remember, it got as low as $1.38 only a few months ago. Those levels are very possible to be reached again