Stock Exchange should crash by June
Those into shares should UNLOAD their positions
before June, the JPM is the starting salvo
The 2 Billion Dollar Loss By JP Morgan Is Just A Preview Of The Coming Collapse Of The Derivatives Market
May 12, 2012
Michael Synder
The Economic Collapse
When news broke of a 2 billion dollar trading loss by JP Morgan, much of the financial world was absolutely stunned. But the truth is that this is just the beginning. This is just a very small preview of
what is going to happen when we see the collapse of the worldwide derivatives market. When most Americans think of Wall Street, they think of a bunch of stuffy bankers trading stocks and bonds. But
over
the past couple of decades it has evolved into much more than that.
Today, Wall Street is the biggest casino in the entire world. When the “too big to fail” banks make good bets, they can make a lot of money.
When they make bad bets, they can lose a lot of money, and
that is exactly what just happened to JP Morgan. Their Chief
Investment Office made a series of trades which turned out horribly,and it resulted in a loss of over 2 billion dollars over the past 40 days. But 2 billion dollars is small potatoes compared to the vast size of the global derivatives market. It has been estimated that
the the notional value of all the derivatives in the world is somewhere between 600 trillion dollars and 1.5 quadrillion dollars.Nobody really knows the real amount, but when this derivatives bubble finally bursts there is not going to be nearly enough money on the entire planet to fix things.
Sadly, a lot of mainstream news reports are not even using the word “derivatives” when they discuss what just happened at JP Morgan. This morning I listened carefully as one reporter described the 2 billion dollar loss as simply a “bad bet”.
And perhaps that is easier for the American people to understand. JP Morgan made a series of really bad bets and during a conference call last night CEO Jamie Dimon admitted that the strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored”.
The funny thing is that JP Morgan is considered to be much more “risk averse” than most other major Wall Street financial institutions are.
So if this kind of stuff is happening at JP Morgan, then what in the world is going on at some of these other places?
That is a really good question.
For those interested in the technical details of the 2 billion dollar loss, an article posted on CNBC described exactly how this loss happened….
The failed hedge likely involved a bet on the flattening of a credit derivative curve, part of the CDX family of investment grade credit indices, said two sources with knowledge of the industry, but not directly involved in the matter. JPMorgan was then caught by sharp moves at the long end of the bet, they said. The CDX index gives traders exposure to credit risk across a range of assets, and gets its value from a basket of individual credit derivatives.
In essence, JP Morgan made a series of bets which turned out very,very badly. This loss was so huge that it even caused members of Congress to take note. The following is from a statement that U.S.Senator Carl Levin issued a few hours after this news first broke….
“The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making.”
Unfortunately, the losses from this trade may not be over yet. In fact, if things go very, very badly the losses could end up being much larger as a recent Zero Hedge article detailed….
Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least “net” is not “gross” and we know, just know, that the SEC will get involved and make sure something like this never happens again.
And yes, the SEC has announced an “investigation” into this 2 billion dollar loss. But we all know that the SEC is basically useless. In recent years SEC employees have become known more for watching pornography in their Washington D.C. offices than for regulating Wall Street.
But what has become abundantly clear is that Wall Street is completely incapable of policing itself. This point was underscored in a recent commentary by Henry Blodget of Business Insider….
Wall Street can’t be trusted to manage—or even correctly assess—its
own risks.
This is in part because, time and again, Wall Street has demonstrated
that it doesn’t even KNOW what risks it is taking.
In short, Wall Street bankers are just a bunch of kids playing with dynamite.
There are two reasons for this, neither of which boil down to “stupidity.”
The first reason is that the gambling instruments the banks now use are mind-bogglingly complicated. Warren Buffett once described derivatives as “weapons of mass destruction.” And those weapons have gotten a lot more complex in the past few years.
The second reason is that Wall Street’s incentive structure is
fundamentally flawed:Bankers get all of the upside for winning bets, and someone else—the government or shareholders—covers the downside.
The second reason is particularly insidious. The worst thing that can happen to a trader who blows a huge bet and demolishes his firm—literally the worst thing—is that he will get fired. Then he will immediately go get a job at a hedge fund and make more than he was making before he blew up the firm.
We never learned one of the basic lessons that we should have learned from the financial crisis of 2008.
Wall Street bankers take huge risks because the risk/reward ratio is all messed up.
If the bankers make huge bets and they win, then they win big.
If the bankers make huge bets and they lose, then the federal
government uses taxpayer money to clean up the mess.
Under those kind of conditions, why not bet the farm?
Sadly, most Americans do not even know what derivatives are.
Most Americans have no idea that we are rapidly approaching a horrific
derivatives crisis that is going to make 2008 look like a Sunday
picnic.
According to the Comptroller of the Currency, the “too big to fail”
banks have exposure to derivatives that is absolutely mind blowing.
Just check out the following numbers from an official U.S. government
report….
JPMorgan Chase – $70.1 Trillion
Citibank – $52.1 Trillion
Bank of America – $50.1 Trillion
Goldman Sachs – $44.2 Trillion
So a 2 billion dollar loss for JP Morgan is nothing compared to their total exposure of over 70 trillion dollars.
Overall, the 9 largest U.S. banks have a total of more than 200
trillion dollars of exposure to derivatives. That is approximately
3 times the size of the entire global economy.
It is hard for the average person on the street to begin to comprehend
how immense this derivatives bubble is.
So let’s not make too much out of this 2 billion dollar loss by JP Morgan.
This is just chicken feed.
This is just a preview of coming attractions.
Soon enough the real problems with derivatives will begin, and when that happens it will shake the entire global financial system to the core.
You might also like:
JP Morgan Suffers ‘Massive’ Losses: $4.2
Billion Probable; May Spread to Entire Sector
Corzine Ordered $200M Moved to JP Morgan
Days Before MF Global Collapse
The Crazy Things That One Whistleblower Says Are Happening At JP Morgan Will Blow Your Mind
Showing posts with label hedge fund. Show all posts
Showing posts with label hedge fund. Show all posts
Thursday, May 17, 2012
Sunday, February 6, 2011
What Is a Mutual Fund?
What Is a Mutual Fund?
Mutual funds are investment companies that pool your money with that of other investors to buy stocks, bonds or other securities. The managers of the mutual fund use the pooled funds to buy investments that match your goals. The fund manager determines which investments to buy for the fund, and keeps track of the value of the mutual fund. When you own shares in a mutual fund, you own part of a basket of securities. The more stocks you own, the lower your financial risk if one company fails. By owning shares in a mutual fund, you diversify your investment and reduce your risk.
The Advantages of a Mutual Fund
Mutual funds make investing easier. That's the main advantage of mutual funds. Investing is difficult when you try to pick stocks on your own. You need time, training, and up-to-date information. The amount of financial news and advice is confusing. In order to diversify your investment, it takes a lot of capital to buy a variety of stocks. Mutual funds make it easier to own a diversified group of stocks. For these four reasons, mutual funds are an excellent way to invest for the average investor planning for retirement, college or other financial goals.
Despite periodic fluctuations, an investment in the stock market over the long-term pays you better than your savings account, Certificates of Deposit, U.S. Treasury bills, notes and bonds, or money market accounts.
An Index Fund Is a Mutual Fund
An Index Fund is a mutual fund that will match the investment performance of a major stock market index, like the S&P500, the Dow, the Russell 5000 and the NASDAQ 100. The Index Fund owns a basket of stocks that precisely match the stocks in the index. An S&P500 Index Fund will own the securities, and possibly index futures, to match the performance of the S&P500 Stock Index. When you own an index fund, your investment will perform as well as the index, no better and no worse. The fees to manage an index fund are lower than other mutual funds because an index fund is a passive fund which needs little management. A new investor is often well-advised to buy shares in an index fund. Vanguard, a well-known investment firm, manages many index funds.
How to Compare Mutual Funds
To compare two mutual funds, look at how much the fund earns each year. Do not compare mutual funds on the basis of the share prices, because prices depend on how many shares are outstanding. All mutual funds must report their average annual compounded rates of return for 1-year, 5-year and 10-year periods. This is called the average annual total return for the fund.
There is some concern that professional mutual fund managers do not outperform Index Funds and do not outperform other investors. The Wall Street Journal reports that separately managed accounts did better than mutual funds in 22 of 25 categories from 2006 to 2008. Morningstar, Inc said that separately managed accounts outperformed mutual funds in 25 of 36 stock and bond market categories.
Mutual Funds Are Classified by Their Investments
Mutual funds are classified by the type of investment securities they hold. The most common securities purchased by a mutual fund are money market instruments, stocks, bonds, or shares of other mutual funds. For example, a stock mutual fund holds stocks. Some mutual funds invest in more exotic instruments such as senior loans and derivatives like forwards, futures, options and swaps. A mutual fund can invest in United States securities or international securities. The prospectus of the mutual fund will explain its investment policy.
Mutual funds that invest in bonds are called bond funds. Your earnings and the risk you carry are determined by what type of bonds the fund holds. They might hold high-yield junk bonds or investment-grade corporate bonds. They could invest in the bonds of government agencies, corporations, or municipal bonds. They can hold bonds with a short-term or long-term maturity.
Mutual Funds Are Classified by Their Objectives
Mutual funds are also classified by their investment objective or focus of interest. You'll find mutual funds for capital appreciation, growth, capital preservation, large-cap, mid-cap, small-cap, emerging growth and international investment. Growth funds invest in the stocks of companies that have the potential for large capital gains. Value funds look for stocks that are undervalued. Some mutual funds invest in a particular industry or sector of the economy, like a technology fund, or a gold fund. Look at the current fund portfolio to see if its investments are right for you.
Whether actively managed or passively indexed, mutual funds have risks. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market as a whole.
How Mutual Funds Are Organized
Mutual funds are organized as either open-end funds or closed-end funds. Most mutual funds are open-end funds. These funds issue new shares and redeem shares every day. They have no limit on the amount of shares in the fund or the size of the fund. An open-end fund continues to grow by attracting more investor capital. An open-end mutual fund is the best choice for most investors.
Closed-end mutual funds are organized with a fixed number of shares. Their shares trade on a stock exchange, where you can buy them. The trading price of the shares does not always reflect the value of the assets it owns.
How to Buy Shares of a Mutual Fund
You can buy shares in a mutual fund by contacting the fund online or through a stock broker. There are many investment companies that each offer a family of mutual funds. Some of these companies are American Century, Dreyfus, Fidelity, Franklin Templeton, Goldman Sachs, Invesco, Janus, TIAA-CREF, T. Rowe Price, and Vanguard. You can contact them individually for a fund prospectus and account application. Brokers like Schwab, TD Ameritrade and E-Trade also sell shares in mutual funds.
An Exchange Traded Fund Is a New Type of Mutual Fund
An Exchange Traded Fund, ETF, is a mutual fund. Its shares trade on a stock exchange at prices that do reflect the value of its assets. Most ETFs track stock indexes like the S&P500. ETFs are more efficient than traditional mutual funds. They have lower expenses because the fund does not have to buy and sell additional securities for the fund. Here is more information on ETFs.
A Unit Investment Trust Is Different from a Mutual Fund
Unit Investment Trusts are trusts, not mutual funds. The Unit Investment Trust issues an undivided interest in specific securities. The shares of a Unit Investment Trust are not an interest in a basket of investments, but in a specific asset. A real estate trust is an example of a Unit Investment Trust.
A Hedge Fund Is Not a Regulated Mutual Fund
A hedge fund is not a regulated mutual fund. Hedge funds are private pooled investment funds. A hedge fund seeks high returns by taking more risk and may also borrow more money to invest. Hedge funds often charge a management fee of 1% or more, plus a performance fee of 20% of the hedge fund's profit.
http://www.surfersam.com/articles/what-is-a-mutual-fund.htm
Mutual funds are investment companies that pool your money with that of other investors to buy stocks, bonds or other securities. The managers of the mutual fund use the pooled funds to buy investments that match your goals. The fund manager determines which investments to buy for the fund, and keeps track of the value of the mutual fund. When you own shares in a mutual fund, you own part of a basket of securities. The more stocks you own, the lower your financial risk if one company fails. By owning shares in a mutual fund, you diversify your investment and reduce your risk.
The Advantages of a Mutual Fund
Mutual funds make investing easier. That's the main advantage of mutual funds. Investing is difficult when you try to pick stocks on your own. You need time, training, and up-to-date information. The amount of financial news and advice is confusing. In order to diversify your investment, it takes a lot of capital to buy a variety of stocks. Mutual funds make it easier to own a diversified group of stocks. For these four reasons, mutual funds are an excellent way to invest for the average investor planning for retirement, college or other financial goals.
Despite periodic fluctuations, an investment in the stock market over the long-term pays you better than your savings account, Certificates of Deposit, U.S. Treasury bills, notes and bonds, or money market accounts.
An Index Fund Is a Mutual Fund
An Index Fund is a mutual fund that will match the investment performance of a major stock market index, like the S&P500, the Dow, the Russell 5000 and the NASDAQ 100. The Index Fund owns a basket of stocks that precisely match the stocks in the index. An S&P500 Index Fund will own the securities, and possibly index futures, to match the performance of the S&P500 Stock Index. When you own an index fund, your investment will perform as well as the index, no better and no worse. The fees to manage an index fund are lower than other mutual funds because an index fund is a passive fund which needs little management. A new investor is often well-advised to buy shares in an index fund. Vanguard, a well-known investment firm, manages many index funds.
How to Compare Mutual Funds
To compare two mutual funds, look at how much the fund earns each year. Do not compare mutual funds on the basis of the share prices, because prices depend on how many shares are outstanding. All mutual funds must report their average annual compounded rates of return for 1-year, 5-year and 10-year periods. This is called the average annual total return for the fund.
There is some concern that professional mutual fund managers do not outperform Index Funds and do not outperform other investors. The Wall Street Journal reports that separately managed accounts did better than mutual funds in 22 of 25 categories from 2006 to 2008. Morningstar, Inc said that separately managed accounts outperformed mutual funds in 25 of 36 stock and bond market categories.
Mutual Funds Are Classified by Their Investments
Mutual funds are classified by the type of investment securities they hold. The most common securities purchased by a mutual fund are money market instruments, stocks, bonds, or shares of other mutual funds. For example, a stock mutual fund holds stocks. Some mutual funds invest in more exotic instruments such as senior loans and derivatives like forwards, futures, options and swaps. A mutual fund can invest in United States securities or international securities. The prospectus of the mutual fund will explain its investment policy.
Mutual funds that invest in bonds are called bond funds. Your earnings and the risk you carry are determined by what type of bonds the fund holds. They might hold high-yield junk bonds or investment-grade corporate bonds. They could invest in the bonds of government agencies, corporations, or municipal bonds. They can hold bonds with a short-term or long-term maturity.
Mutual Funds Are Classified by Their Objectives
Mutual funds are also classified by their investment objective or focus of interest. You'll find mutual funds for capital appreciation, growth, capital preservation, large-cap, mid-cap, small-cap, emerging growth and international investment. Growth funds invest in the stocks of companies that have the potential for large capital gains. Value funds look for stocks that are undervalued. Some mutual funds invest in a particular industry or sector of the economy, like a technology fund, or a gold fund. Look at the current fund portfolio to see if its investments are right for you.
Whether actively managed or passively indexed, mutual funds have risks. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market as a whole.
How Mutual Funds Are Organized
Mutual funds are organized as either open-end funds or closed-end funds. Most mutual funds are open-end funds. These funds issue new shares and redeem shares every day. They have no limit on the amount of shares in the fund or the size of the fund. An open-end fund continues to grow by attracting more investor capital. An open-end mutual fund is the best choice for most investors.
Closed-end mutual funds are organized with a fixed number of shares. Their shares trade on a stock exchange, where you can buy them. The trading price of the shares does not always reflect the value of the assets it owns.
How to Buy Shares of a Mutual Fund
You can buy shares in a mutual fund by contacting the fund online or through a stock broker. There are many investment companies that each offer a family of mutual funds. Some of these companies are American Century, Dreyfus, Fidelity, Franklin Templeton, Goldman Sachs, Invesco, Janus, TIAA-CREF, T. Rowe Price, and Vanguard. You can contact them individually for a fund prospectus and account application. Brokers like Schwab, TD Ameritrade and E-Trade also sell shares in mutual funds.
An Exchange Traded Fund Is a New Type of Mutual Fund
An Exchange Traded Fund, ETF, is a mutual fund. Its shares trade on a stock exchange at prices that do reflect the value of its assets. Most ETFs track stock indexes like the S&P500. ETFs are more efficient than traditional mutual funds. They have lower expenses because the fund does not have to buy and sell additional securities for the fund. Here is more information on ETFs.
A Unit Investment Trust Is Different from a Mutual Fund
Unit Investment Trusts are trusts, not mutual funds. The Unit Investment Trust issues an undivided interest in specific securities. The shares of a Unit Investment Trust are not an interest in a basket of investments, but in a specific asset. A real estate trust is an example of a Unit Investment Trust.
A Hedge Fund Is Not a Regulated Mutual Fund
A hedge fund is not a regulated mutual fund. Hedge funds are private pooled investment funds. A hedge fund seeks high returns by taking more risk and may also borrow more money to invest. Hedge funds often charge a management fee of 1% or more, plus a performance fee of 20% of the hedge fund's profit.
http://www.surfersam.com/articles/what-is-a-mutual-fund.htm
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