The Coming Derivatives Crisis

Most people have no idea that Wall Street has become a gigantic financial casino. The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end. The word "derivatives" sounds complicated and technical, but understanding them is really not that hard. A derivative is essentially a fancy way of saying that a bet has been made. Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before. Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion. Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion. The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction". For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down. When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.




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The stocks and commodities are acting like they are confident in the euro's coming to a solution this weekend, lets hope so, but to stay on the safe side I would take profits as we are at the top of this range and maybe hedge a little, why leave it to chance. The US dollar is down big today especially against the Yen to a level not seen since post WWI. Looks like people think QE3 is on the way, which would be great for everything except the dollar of course.

 

Morning Update

U.S. stock futures are up strongly this morning as euro- area leaders intensified negotiations to boost the region’s rescue funds before meeting in Brussels this weekend to discuss how to end the debt crisis.

The Euro's will meet twice next week to discuss their response to the debt crisis, including a plan to deploy $1.3 trillion. Talks speeded up on combining the European Union’s temporary and planned permanent rescue funds as of mid-2012, while scrapping a ceiling on bailout spending.

This is a tenuous and fluid situation and one that's very difficult to trade in. I had some emails yesterday regarding how to make money from the coming crisis and I will put something together over the weekend but that my be too late to take advantage if the talks fail. I'll just tell you what I'm doing. Using the bear ETF's you can short the banks (SKF or FAZ), Short the euro (EUO), short small and large caps (TZA, and BGZ) and shrot commodities (SMN) but i am only putting in about 15%, and rest in cash and if the stuff hits the fan you can pile on. If they find a temporary cure through printing then the physical metals will gain on that, so this is more or less a hedge against the gold and silver (ZSL DZZ).

 The SPX looks terrible on a technical basis price below the down sloping 150 and 200dma, and the MACD also at the top of its range. We also have this volatile wedge range if you will and price is near the high end of that range with 1240 being the high. I think getting long right here is a mistake, and very risky because you don't know what Europe will do over the weekend. If things go badly we could be at 1100 very quickly, in about two days or so.

It will be interesting to see the COT reports to see what the commercial banks are doing in terms of positioning. They had gone bearish on the dollar and bullish on the euro and you see that spike and now there may be a bull flag forming and this is contrary to what I wrote yesterday. Very confusing market. Banking index is clearly showing the financial system is in trouble usually rising wedge in a long term down trend sucks new money in and rips your gut out, the problem with them is that they are so difficult to time. Just look at summer of 08 this pattern feel very familiar.

I took this from Dan Norcini's website, take a look at this informative article. It shows you how important the QE is for stocks:

http://traderdannorcini.blogspot.com/2011/10/feds-balance-sheet-not-growing-but-not.html

Have a good weekend everyone.

Please keep the name calling to a minimum

I am not a sage or a guru, I also can't see into the future, NO CRYSTAL BALL.

I knew I'd get some flack but wow.

It's just information if you think its BS carry on as before, remember this is not a paid site, I don't make money from page views. Was just trying to be helpful.