Monday, May 14, 2012

From 37,000 feet, a view of JP Morgan and the financial markets!





From 37,000 feet, what to expect when you’re expecting a volatile investing environment!
As I write this article on Sunday at 37,000 feet, I am  flying over the heart of the United States with my thoughts being captured inside the cabin of an airplane with little legroom (a sad sign of the times) and a five-hour opportunity allowing me to attempt to prognosticate about the direction and action of the financial markets on Monday and beyond.
I am cornered in a window seat with no access to T.V. or radio that places me alone with only my thoughts, Microsoft Word and the time to try and use them both.
The action last week was choppy and the news Friday of the $2 billion derivatives loss at JP Morgan sealed the deal for the equity markets downside move. In conjunction with a move lower in stocks was a flight to quality in US government bonds bringing yields even lower than anyone would have thought possible a few short years ago!
The buzzword that they love to invoke on business news shows was that the “risk off” trade was firmly in place.
It’s more than just a JPM derivatives loss!
In addition to the shock to the markets presented by the surprise loss in a derivatives trade was that JP Morgan has, up until now, been held up as everything that a Wall Street bank should supposedly be. At the same time Jamie Dimon who has been considered the ultimate leader and manager of risk seems to have turned out to be no better than any of the rest.
Questions swirl as to whether this first loss is the last that we will see out of JPM while this episode has awoken the members of Congress who see an opportunity to demand stricter rules and conditions on financial institutions.
The question has also been posed that if the firm that has been judged the very best risk manager falls victim like this, then what might be going on underneath the hood of the other TBTF banks?
The coming week and beyond!
Much of what is going to take place in the world financial markets as trading resumes will be predicated by the action in Greece, Italy, Spain and France as the foreign catalysts along with whether any new fallout from the JP Morgan derivatives fiasco surfaces.
Derivatives, as described here yesterday, are the 500lb gorilla in the room whose impact on the markets may not be known for some time if ever.
But hypothetically if significant events such as the demise of the EU were to triggers massive payouts in the derivatives market, the results could be very, very bad for investors.
My expectation for the markets!
The last that I saw before boarding my flight was that efforts to establish a Greece government were not going particularly well and that there were fresh episodes of civil unrest taking place I believe on the streets of Italy.
The near-term impact on stocks from the JPM fallout, the angst in the EU along with tepid economic data in the U.S. in my opinion will most likely be negative.
Further down the road my assessment is that there is room for downside risk similar to what we lived through in the 2008 financial crisis
I hope that I am wrong, but in my mind the piper at some point in the near future is going to have to be paid!

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