December 12, 2014
By Steve Blumenthal
“Unselfish acts are the real miracles out of which all the reported miracles grow.”
– Ralph Waldo Emerson
Have you watched any of the great Netflix TV series House of Cards? Set in present-day Washington, D.C., House of Cards is the story of Frank Underwood (Kevin Spacey), a Democrat from South Carolina’s 5th congressional district and House majority whip who, after being passed over for an appointment as Secretary of State, initiates an elaborate plan to get himself into a position of power. The series is primarily about ruthless pragmatism, manipulation, power, and doing bad things for the greater good.
Kevin Spacey is simply amazing. I love it when he looks into the camera and speaks directly to us, revealing who’s paying off whom or how much pork is needed to secure a particular vote. I can’t help but wonder how close this is to today’s reality given last week’s passing of legislation that puts banks’ future derivatives losses squarely on your back and mine (the U.S. taxpayer).
With this win in hand, the few big banks with the greatest derivative exposures step toward 2015 with their own version of stop-loss protection more securely in place. Washington has a culture of deal making and demands from third-party interests. I can hear my old man whispering in my ear, “Watch what they do and not what they say.” I include some great data on just how much derivative exposure exists, how it compares to where we were in 2008, and how it compares to the amount of money in stocks, bonds, and money market funds today.
Imagine Kevin Spacy looking into the camera telling us, “Sneaked it in when you were sleeping” as he slowly turns away with a smug smile. Really, if you haven’t watched the series, it is outstanding. Check it out.
I wrote a piece for Forbes this week titled “Looking Ahead to the Year That Interest Rates Will Finally Rise”. In it, I share my views on the Fed, interest rates, U.S. stocks and bonds, and the global macro landscape. I’d like to ask you a favor—can you let me know what you think about the article? Your feedback will help me. Are there things I can write that will help you help your clients? More charts or less? Please share your thoughts with me. The link is here.
Included in this week’s On My Radar:
- Looking Ahead To The Year That Interest Rates Will Finally Rise – Forbes 12-18-14, by Blumenthal
- Derivatives – Some Hard Data
- Trade Signals – Optimism No Longer, Buy the Dips – 12-17-2014
Looking Ahead To The Year That Interest Rates Will Finally Rise – Forbes 12-18-14, by Steve Blumenthal
A short clip from the article:
As a risk manager, I need to acknowledge and plan to mitigate these big, macro risks. At the same time, as a tactical manager, I acknowledge that right now the weight of evidence points to a continued positive trend for this mega bull market.
In a world of excessive debt and unprecedented Central Bank intervention, where is a global investor to go? For now, the best place remains in U.S. equities.
I share my best guess on timing, highlight a few sectors and talk about how you can participate in the market’s upside while protecting yourself from the next market crisis (whenever that might be).
Here again is the link to the article.
Derivatives – Some Hard Data
“We’ve reformed nothing. We have more leverage and more derivatives risk than we’ve ever had,” says Janet Tavakoli, president of Tavakoli Structured Finance. To this statement I agree. Here is some hard data:
- The notional amount of outstanding derivative contracts totaled $691 trillion at end-June 2014
BIS Bank for International Settlements. Source
- This is $200 trillion more than the total value of all derivatives in 2007 – the top of the great financial crisis.
- There is $237 trillion in U.S. total derivatives (Total Notional Amount of Derivatives Contracts at all U.S. Commercial Banks). Most of that is concentrated in just four large banks.
• The total estimated exposure at the top four banks is $219 trillion. Source
• JPMorgan alone has $70 trillion in derivatives on their books.
• There is $1 trillion of equity in the U.S. banking system.
• The Global Economy is roughly $70 trillion.
• The U.S. economy is roughly $17.5 trillion.
• Total U.S. Stock Market Capitalization is $23.5 trillion as of December 1, 2014 (NDR estimate of 4100 U.S. common stocks).
• Total Credit Market Debt is $57 trillion as of June 30, 2014
• Total Money Market Funds is $2.66 trillion as of November 25, 2014. Source
• Total World Equity Market Capitalization was $64 trillion in U.S. dollar terms at the end of 2013.
• Total world-wide debt was $80 trillion 9 years ago. There is approximately $212 trillion total world-wide debt today.
• When the big banks collapsed in 2008, the Fed was able to bail them out by printing trillions and buying up their bad assets. Then, they had a strong balance sheet.
• Unfortunately, the Fed is now leveraged 80-1. They hold $80 dollars in debt for every $1 dollar of capital on their balance sheet. The size of the Fed’s balance sheet is over $3 trillion. Today, that balance sheet is weak.
• In short, there is not enough money to bail out the big banks if they blow up again. You and I are now on the hook.
Capitalism without bankruptcy is simply not possible. What large bank needs bankruptcy when the U.S. taxpayer is put on the hook to bail them out? What does that mean psychologically to the traders looking to enhance their year-end bonuses?
It has been a great few years for U.S. equities. It is easy to get swept up by yesterday’s returns. The tendency is to project those returns forward. It is wise to become more defensive when others are most invested. Fortunately, many tools exist that can help you risk protect your portfolios.
Now is the time to, as Art Cashin famously says, “Stay wary, alert and very, very nimble”.
Trade Signals – Trend Positive, Sentiment Remains Too Optimistic 12-17-14
It didn’t take long for the extreme optimism to diminish. I remain in the buy the dip camp. Sentiment is nearing extreme pessimism and we have entered the seasonally favorable time of year. Oil and geopolitical risk is front and center. However, trend evidence is positive as measured by Big Mo and the 13/34-Week EMA on the S&P 500 Index.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains Bullish
- Volume Demand Continues to Better Supply – This Too Remains Bullish
- Weekly Investor Sentiment Indicator:
- NDR Crowd Sentiment Poll: Neutral
- Daily Trading Sentiment Composite: Neutral to Mildly Bullish for Stocks
- The Zweig Bond Model: Cyclical Trend for Bonds Remains Bullish
Click here for the full link, including updated charts, to Wednesday’s Trade Signals post (trend and sentiment charts)
It is the time of year when giving comes back into our global collective focus, a really good thing for humanity. I love Emerson’s quote: “Unselfish acts are the real miracles out of which all the reported miracles grow”. It got me thinking about a book I used to give out to new clients titled Random Acts of Kindness. Maybe some of the best gifts we can give come in this way. Though I think the five boys and Brianna are thinking about something that comes wrapped with a bow (well, not that the boys will even notice the bow).
Random acts of kindness: Years ago, a man named George used to give my mother $20 after their weekly AA group meeting. For a single mom with little financial sense living paycheck to paycheck, money was always tight. She was proud, yet he always insisted. I wish that he could have seen how much it meant to my mom and to me and my siblings. I got to see it, though, and I’ll never forget what it did for her. Random acts of kindness. Twenty bucks. I’ll never forget old George. I wish I could let him know just how far down the line his wonderful act of kindness has rippled, one simple act of genuine kindness.
Finally, here’s to unselfish acts that grow into great miracles! A toast to random acts of kindness! A toast to old George! And here is a toast to you!
Merry Christmas and Happy Holidays to you and those you love the most.
Have a great weekend!
With kind regards,
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
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