Derivatives Market

Derivatives Market

The market for derivatives is enormous representing an estimated $235 trillion in the United States and $707 trillion globally. The main types of derivatives in the United States are Interest rate swaps at $204.6 trillion, FX $26.5 trillion, Credit Default Swaps $15.2 trillion, Equity $1.6 trillion and Commodity $1.4 trillion.

While netting is 90.8% of the total exposure, the size of the positions are $78.1 trillion for J.P. Morgan, $56 trillion for Citibank, $53 trillion for Bank of America, $48 trillion for Goldman Sachs, and $1.79 trillion for Morgan Stanley.

According to the European Banking Authority (EBA), the largest bank exposure to sovereign debt is listed below.

Bank Country Value of Sovereign Debt (In Billions)

Intesa Sanpaolo Italy $ 59.20

BBVA Spain $ 58.10

Unicredit Italy $ 50.10

Santander Spain $ 45.90

BNP Paribas France $ 35.50

Dexia Belgium $ 21.80

Commerzbank Germany $ 17.30

Credit Agricole France $ 14.80

HRE Holding Germany $ 11.10

Barclays Great Britain $ 10.10

Deutsche Bank Germany $ 9.50

As sovereign debt becomes a further strain on European bank balance sheets as interest rates climb, the ECB as already provided around $1 trillion dollars from the LTRO.  However, it looks like the money borrowed from the ECB will be used to pay off bank debt maturing this year.    

The final round of voting in France will be May 6^th with Sorkozy trailing as I am writing this piece.  The recent problems surfacing in the Netherlands will result in further issues for the E.U. over the summer as elections will likely result in further change creating uncertainty.  I decided to purchase UUP-PowerShares DB US Dollar Index Bullish as a play on the collapse of the Euro.  I view the situation as only a “matter of time” and willing to say that the Euro crisis is over a $2 trillion dollar problem and the IMF will likely be involved as the dominos fall over one-by-one under the weight of short-term debt burdens in the banking system and over $1.7 trillion dollars of refinancing needed this year by E.U. members.

French Election

With the economic house of cards in Europe collapsing, one of the major themes is the political turnover in Greece, Italy, and now the election in France on April 22nd will take front and center stage.  The politicians have been the target of European citizens who are causalities of severe downturn hitting the E.U.  The election outcome in France is meaningful and if Sorkozy is defeated it may be a major inflection point.  German and French leaders joined as major allies trying to hold the entire region together.  As France and Germany have the strongest credit ratings in the European Union, other investing outsiders may view the election as an example of how an individual country in the E.U. is unwilling to help other members.  The recent increase in bond yields in Spain is showing how bond investors are starting to view sovereign risk as an important theme in the E.U.    

Collapse of the Euro

Last evening, the news release of existing home sales was weak in the U.S. and job claims were 386,000 this morning. The rate of new job creation has seemed to slow again. While the Spanish auction concerns continue to be an issue with the European market, the King of Spain was off elephant hunting while telling citizens to tighten their belts.  Headlines like this (I can’t make this up), have me very concerned about how detached world leaders are from the major underlying economic problems.  My near-term concern is the collapse of the Euro, and I am looking at DXY as a play on the collapse of the Euro.  While this issue will weigh on global economic growth long term, the trend in the Euro and Europe should be down as the general population suffers from unemployment. 

S and P 500 Short-Term Peak

The market has recently peaked and is turning down.  Major concerns in Europe seemed to be dismissed by the "talking heads" on television now used to the World Central bank interventions to "bailout the market" every time liquidity becomes an issue.

Using technical analysis to help, the recent bounce from the low at 1360 has now retraced 50% of the move down.  The next move down will be equal to around 100 S&P points to the downside.  With the technology group appearing to leading the downside, the recent IBM and Qualcomm earnings releases lead to more short-term concern. The next wave down should lead the market to 1290 area.

Welcome to the Emerald City!

Hello everyone!

First, I am excited to start sharing my thoughts and opinions with everyone.  With over 32 years of experience in investments and the financial industry, I have tossed around the idea of creating a forum or blog where I can interact with people from all over the globe to benefit investors. Also, I want to welcome and listen to other opinions to exchange knowledge.  The Internet is an amazing tool for communication, and I am hoping I will be able to contribute by being able to intrigue anyone interested in macro economics. The world economic environment is in a constant state of change.  I want to share some of my real life experiences in the investment industry with others to highlight developing themes.  My ultimate goal is to create a unique forum of ideas that you won't find anywhere else.