Tag Archives: credit default swaps

Short All Bounces In Deutsche Bank Stock – It’s Still Insolvent

Deutsche Bank has never had as safe a balance sheet in the past two decades and there is no basis for media speculations on clients leaving.  –  DB CEO, John Cryan in Bloomberg

So John, are you willing to make those statements under oath?  The funniest  report I saw today was that Deutsche Bank gave Tesla a $300 million credit line to fund Tesla’s vehicle leasing program (LINK).   No wonder DB is insolvent.  It’s willing to lend against collateral that spontaneously combusts.  Not to mention the fact that Tesla back-end loads the terminal value of its vehicles on its leases in order the minimize monthly lease payments.  Whoever approved that deal at DB is smoking strong weed.

Rumors about Justice Department multi-billion dollar fine settlements do not fix big bank insolvency. DB was insolvent before the Justice Department mortgage securities fine was conceived. Any legal fines levied by any Government will end up in line with the rest of Deutsche Bank’s creditors. Unless, of course, Grandma Merkel and her band of merry thieves agree to bailout the technically bankrupt bank. But that won’t occur until DB stock is well below $10.

We saw this same trading with Enron, Bear Stearns and Lehman when those stocks approached $10. I was short and made a lot of money on Enron and Bear – and I held my shorts through rumor-driven bounces in the stock like the one propelling DB’s stock today.

This trading activity with the stock is designed to trigger aggressive short-cover buying which enables position-dumping by the big boys who are still heavily long DB stock. The rumor that drove DB stock over $13 was tweet from a French press agency which “confirmed” that the DB was near a settlement with the Justice Department for $5.4 billion instead of the original $14 billion levied. A short-while later the French press agency back-pedaled on the assertion.

The more relevant information to consider is the signal being flashed in the market for DB’s credit default swaps.   The cost of insure DB’s junior bonds for one year surged to 625 basis points today.   This inverted the “curve” for the cost to insure DB’s bonds, as the cost to insure the bonds for five years was 505 basis points.   The same is true for one yr. vs. five yr. swaps on DB’s senior debt, which were trading at 270 basis points vs 241 basis points respectively:   DB Stress Signal Reemerges – Bloomberg

A credit default swap the costs over 600 basis points to purchase is analogous to a triple-C rated U.S. corporate bond.  Company’s with the “triple-hook” credit rating in the current insane financial system are semi-dead corpses with electric stimulation paddles being applied in an attempt restart the heart.  These are bonds that have a greater than 70% chance of eventually defaulting.   In other words, investors who are willing to pay over 600 basis points for one year of default protection on their DB junior bond position believe that the risk of DB defaulting in the next 12 months is exceptionally high.

If the German Government was not lurking in the background, these credit default swaps would be priced at well over 1000 basis points over the equivalent Treasury yield.  On the other hand, DB CEO, John Cryan, stated on Friday that DB’s balance sheet is safer than at any point in the past two decades.  That at least the third time DB liquidity rumors have been denied and we know what that means…

I don’t know if this reminds more of Jim Cramer pounding the table on Bear Stearns stock at $62 shortly before it plunged to $2 or Lehman CEO, Richard Fuld, proclaiming that Lehman had billions on highly liquid assets about 5 weeks of ahead of the stock plunging to near-zero (graphic from Zerohedge):

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Orwell’s “2016:” The System Is Completely Rigged

It is what it is – and what “IT” is, is that we’re living in the vision of the future laid out by George Orwell 70 years ago.   The markets are rigged, elections are rigged; Congress is completely owned by wealthy corporations and individuals;  the power of the Oval Office is owned by wealthiest and most ruthless corporations and individuals:  Wall Street Big Banks, Big Oil, Big Defense, Big Pharma and Big Tobacco.

Most Hillary Clinton supporters know she defines the word “criminality,”  but will vote for her as a vote against Trump.  Think about how absurd that it is.   The system is so completely rigged that even individual thought-process has been hijacked.

Looming on the horizon is a massive financial system nuclear melt-down.   It’s not a question of “If” but of “when.”  It looks like Deutsche Bank will be the catalyst that triggers the daisy-chain of hidden nuclear financial bombs.

In today’s episode of the Shadow of Truth, we explore the degree to which the rigged financial, economic and political system is approaching an event of collapse:

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It’s A Truth Or Dare Stock Market

Hi Dave, I purchased a box of silver eagles on SD Bullion today! I also did the 250 strike on Amazon! Great report on Amazon! I’m really excited about the coins! Thanks for the help! I feel like I have taken a big step in protecting my family!  Thanks, Jeff

I received that email yesterday from a subscriber to my Short Seller’s Journal.  He made a $7500 profit on AMZN puts that I had recommended.  He took the profits plus part of his original capital and bought a box of silver eagles from Silver Doctors (SD Bullion is the best source to buy silver eagles based on price and reliability of service – I receive no benefit from saying this but I’ve been buying silver for over 15 years and I know how to differentiate between good and bad coin dealers).  He rolled the rest of his capital from the original AMZN put trade into the January 2017 $250 puts, which could end up being a home run.

There’s a rumor floating around the market that Google is looking at buying AIG. Remember AIG?  AIG is the big insurance company that was taking insane risks in the subprime mortgage derivatives market.  It blew up in 2008 and, in the process, had technically blown up Goldman Sachs.  Ex-Goldman CEO, Henry Paulson,  was strategically inserted into the Treasury Secretary post specifically to make sure that Goldman was bailed out when this happened.

AIG was also saved by the taxpayers.  It’s businesses were reinflated by the Fed’s QE and it’s stock ran from $20 to a recent high last of $64.  Carl Icahn, the quintessential stock operator took a stake in AIG in October and had been trying to force a break-up of the company.  The stock is down over 18% since Carl announced his position in the stock.  The Google rumors started flying around about a day ago. It has to be one of the most retarded ideas I’ve seen floated in quite some time.  It reminds me of the “clicks and eyeballs” analysis to justify the bloated valuations on internet stocks back in 1999.

Carl Icahn makes mistakes.  I took other side of one of his mistakes in the late 1990’s when he decided that taking control of the badly failing Stratosphere Casino in Vegas was a good idea.  His idea failed miserably and I made a lot of money for Bankers Trust from shorting the daylights out of the Stratosphere first mortgage bonds, which ultimately were worth zero after trading as high at $110 (110% of par value).

My point here is that something not being mentioned anywhere is going with AIG’s financial stability.  The credit default swap rate on AIG bonds has mysteriously shot straight up:

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I have no idea what has the CDS market spooked. But I know from 1st-hand experience that credit markets tend to have information and “see things” well before the stock market sees it. Accounting disclosure, by design, has become catastrophically opaque in the financial sector. Anyone who has only access to the SEC-filed financial documents is seeing no more than a sliver of the truth about what is going on at AIG, or at any financial company for that matter.

Whether or not this will turn out be big mistake for Icahn remains to be seen. But anyone who is jumping on AIG because there’s a rumor that Google should buy it is ignoring the signal being broadcast by the CDS market.   Often rumors designed to juice a stock are “coincidentally” floated at a time when someone privy to inside information decides that it’s time to get out of Dodge and needs an influx of “dumb” money to buy the stock so he can exit.  The CDS market is suggesting this could be the case with AIG.  We know Icahn is dumping AAPL right now…

This is the type of analysis and insight that subscribers to my Short Seller’s Journal receive on a weekly basis. At some point I will wade knee-deep into AIG’s financials and see if I can figure out why the CDS market is so spooked because I know the original factors which sunk AIG the first time around have likely reappeared, in a different form, and AIG could well be an epic short opportunity.

Global Economic And Banking Collapse On Deck

Always love your analysis. A friend shared with me one week of your short sellers journal and I was impressed. GLNG took an extra week after you published it but it did start dropping.  I’m very experienced in options. Just ordered it for your short picks…I don’t really need the info of how to play options… just like your research and analysis. – “Colin” – SHORT SELLER’S JOURNAL (link)

All eyes are focused on Deutsche Bank.  Rightly so, for the most part.   “As you said, Deutsche Bank is blowing up” (Dr. Paul Craig Roberts in an email to me this morning).  It was reported this morning that the bank’s CEO released a memo to employees in which he assured the “troops” that everything was fine.   Most people do not remember this but I’ve been cursed with a great memory for certain details.  Jimmy Kayne, the CEO of Bear Stearns, when Bear blew up gave the same type of pep talk to Bear employees shortly before Bear was flushed down the toilet.  Reaching even further back in the annals of epic corporate fraud induced collapses, Ken Lay gave the exact same kind of pep talk to his people right before Enron collapsed.

As the adage goes, once a rumor is denied at least three times, the fact-basis of the rumor has been confirmed.

But it’s not just DB – it’s the entire western banking system.  While DB stock was getting pummeled yesterday, it escaped everyone’s attention that Morgan Stanley stock was down over 7% as well.   Bank of America stock was hit 5.4%.  Goldman Sachs as drubbed Untitlednearly 6%.  Today Credit Suisse stock is getting hit 7.7%.   These banks all have one common denominator:  an exceedingly high degree of exposure to Euro-debt credit default swap counterparty risk.   Include RBS and Barclays on that list as well, both of which are headed for the credit default swap waste bin unless the Fed and the ECB decide to print enough digital money to keep them alive.   The most stunning collapse in stock price is perhaps Credit Suisse (green line) which had been the best performing stock among the group until mid-July.  Wonder what changed?   Nearly as a notable as CS is Morgan Stanley (dark purple), which has managed to stay out of the media but it clearly exhibiting signs of extreme underlying financial distress.  Most might not remember, but Morgan Stanley should have been one of the primary casualties of the 2008 de facto collapse but it was quietly re-monetized so that it could continue fleecing the public by raking in big fees from the huge volume of “Club Med” European credit default swaps that it sells.

It’s nearly impossible to identify the specific root cause of the obvious banking system melt-down that is occurring. By design the use of OTC derivatives  by the banks has been completely obscured and hidden from sight.   As was evident from Jamie Dimon’s admissions during the “London Whale” crisis at JPM, even the people running these banks do not have a full understanding of the magnitude and degree of risk buried in the big bank balance sheets.  Since the Central Banks get their bank-specific information from the banks, it means that Central Banks therefore do not fully understand the scope and severity of the problem either.

That fact alone should be enough to frighten anyone paying attention out of the banking system and into the relative safety of precious metals.

I was chatting with a close friend of mine in NYC.  He lived with me through the turbulence at Bankers Trust (Proctor and Gamble derivatives lawsuit, Long Term Capital exposure, etc).  He stayed on and worked at Deutsche Bank and then at Lehman.  He knows when something is irrevocably wrong at these banks.  His comment to me this morning was that “something is blowing up behind the curtain in the banking system and it has to be the derivatives.”

Of course, the reason the derivatives are blowing up is because the underlying credit instruments from which they are “derived” are melting down as well.  We know about energy, industrial commodities and high yield – all of which the banks above have heavy exposure – but I would also suggest that auto loans and mortgage paper (luxury housing bubble pops) are starting to crack hard too.  Banco Santander has been one of the more aggressive auto finance lenders and its stock has is down 50% since April and down 38% since early October.  Capitol One down 25% since early December.

The message is clear:   the credit markets are beginning to accelerate in their collapse.

 

Glencore Stock Got Smoked Again Today

All we need now to pound the final death-nail into Glenron’s stock is for Cramer to issue an “all’s clear, time to load up on Glencore stock” call on Mad Money.

Down 4% on no meaningful fundamental news:

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Glencore has announced that it plans on “liquidating” some of its inventory in order to pay down its debt. Again, this article referenced Glencore’s debt load as $30 billion. But as I demonstrated with a graphic from Glencore’s financials, the Company has $50 billion in debt outstanding:

GlenronCF Debt

The $30 billion debt number is the number that Wall Street pimps and the financial media want market to believe, even though this number assumes that Glencore can sell its inventory at current market prices. Well, I’m hearing a lot of “noise” about this, let’s see it happen. If I were running a commodities hedge fund I would be shorting copper, zinc and iron ore futures ahead of this alleged inventory liquidation.

I think this report out of China is likely what spooked the markets and triggered the sell-off in Glencore stock – Steel demand evaporating at unprecedented speed:

On Wednesday, the deputy head of the China Iron and Steel Association warned that demand for the ferrous metal was waning fast. “China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed. As demand quickly contracted, steel mills are lowering prices in competition to get contracts,” Zhu Jimin, deputy head of the China Iron & Steel Association, said on Wednesday at a briefing in Beijing.

Glencore is a commodities-based debt and derivatives roach motel.  I would not be surprised if a lot of funds/banks with long-side exposure to Glencore credit default swaps – as in, Deutsche Bank – start shorting the crap out of Glencore stock to try and hedge their leveraged exposure to Glencore.

And with the global economy – including the United States – quickly sliding into a nasty recession, I can’t wait to see what kind of nonsense spews out from December’s FOMC zoo gathering to justify another rate-hike deferral.

Greece Mattered To Hedge Fund Algos – Retail Sales Starting To Plunge

Dr. Paul Craig Craig Roberts called it three days ago after if become obvious – via the IMF report on Greek debt – that the U.S. had started to flex its muscles in this situation:

Victoria Nuland has already paid a visit to the Greek prime minister and explained to him that he is neither to leave the EU or cozy up to the Russians or there will be consequences, polite language for overthrow or assassination. Indeed, the Greek prime minister probably knows this without need of a visit.  – Paul Craig Roberts, LINK

The financial implications of a Greek default are obvious once you consider the off-balance-sheet OTC derivatives side of the equation.  There’s no question that the biggest exposures to this have been incurred by Deutsche Bank (see the sudden firing of the CEO) and the big U.S. banks who dominate the OTC derivatives game.

But Dr. Roberts explains why Greece is important to the U.S. effort to keep NATO together. While the IMF functions as the cover-story for the financial terrorism the U.S. inflicts on the world (please read “Confessions Of An Economic Hit Man,” by John Perkins), NATO plays an even more important role for the U.S. in that it functions as a “front” for the mechanism by which the U.S. attempts to impose its military terrorism and political hegemony on the entire globe.

Meanwhile, the economic condition of the United States continues to deteriorate beneath the surface of the most reckless and wanton money printing and market intervention in the history of the world.

The latest data from Bank of America shows retail sales ex-autos are tanking, despite the absence of a polar vortex (source: Zerohedge – click to enlarge):

RetailSales

As you can see, there’s actually been a well-defined downtrend in retail sales ex-autos since early 2013.  And the latest data from BofA, based on credit card data, shows a curious drop in June. Note that credit card data is based on actual sales transactions, as opposed to the Census Bureau data – brown line – which is based on unreliable data estimates and mystical seasonal adjustments.

Please also note that most gasoline sales are done with credit cards.  With the price of gasoline higher in May and June, I have no doubt that the retail sales ex-auto and gasoline would likely be negative.

Several other manufacturing metrics continue to show that the real economy continues to tank.  In fact, Marketwatch of all propaganda sources has reported that the manufacturing sector is in a “technical recession” – LINK.  Moreover, the latest data in June showed real average hourly earnings had declined in May from April.  How is at all possible that the job market is “strong” if the price of labor falls?

Perhaps this is why Chicago Fed stooge, Charles Evans, was out yesterday whining for a delay in rate hikes until mid-2016 – LINK.  While Dr. Roberts predicted the resolution of the Greek “crisis” based on the “background” presence of the omnipotent United States Government, I have successfully forecast no rate hikes this year based on the omnipresence of rapidly deteriorating economic data.

The housing market is next…

A Derivatives Bomb Exploded Within The Last Two Weeks

I’ve never seen so many sophisticated Wall Street’ers this scared in my entire career.  – This comment comes from a very well-connected Wall Street/DC insider and is in reference to how illiquid the bond markets have become

Something deep and dark has transpired behind the Orwellian “curtain”  used by the elitists to hide the inner workings of the financial markets, especially with regard to big bank balance sheets and OTC derivatives.  What’s happening right now reminds of the movie “Jurassic Park.”  You can hear and feel the monster coming but you can’t see it yet and you don’t know it will pop up in your face or how big it is.

It was the sudden firing of Deutche Bank’s co-CEOs this past weekend – The Brown Stuff Is About To Hit The Fan – that prompted me to spend more time analyzing a sequence of events which indicate to me some sort of derivatives position, possibly at Deutsche Bank, has exploded.  In addition, the stock and bond markets have been emitting some curious signals which reflect that fact that something happened in the global economic and financial system.

Let’s look at some charts first (click on any chart to enlarge).  The first graph below shows a 1-yr plot Dow Jones Transportation Average vs. the S&P 500:

DJTvsSPX

As you can see, the DJ Transports and the S&P 500 were tightly correlated until the end of April 2015. The Transports hit an all-time high on October 25, 2014, which is about when the Fed formally ended its QE program.  The DJT began to underperform the S&P 500 at the end of April.  Since then it began to diverge quite negatively from the S&P 500.   The DJ Transports are largely made up of trucking, railroad and delivery services stocks.  This sector of the market reflects the heart-beat of economic activity, especially as it relates to consumer spending in the United States.  The Transports are down 9.4% from its all-time high.  I wrote about the collapsing U.S. economy a week ago:   LINK  The behavior of the Dow Jones Transports is the market’s confirmation that the U.S. economy is contracting.

A collapsing global economic system will exert an unanticipated and extreme amount of stress on highly leveraged financial systems.  This stress is “magnified” by the enormous amount of derivatives which are connected to the disastrous amount of global debt.

An even more curious chart is the relationship between the yield on the 10yr Treasury bond and the DJ Transports:

DJT_TNX

As you can see, the yield on the 10yr Treasury bond has been trending higher since the beginning of February while the DJ Transports has been trending lower.  Notice a problem?   In a “clean” market – i.e. a market free from Central Bank and Government interventions, interest rates and the DJ Transports should be positively correlated.  If the economy is contracting, as reflected by the direction in the DJ Transports, the yield on the 10yr Treasury should be declining – not rising.  You can see that when the DJ Transports ran up to an all-time high, the 10yr yield spiked up, reflecting the markets perception that the U.S. economy might be strengthening.

It does not make sense that the 10-yr Treasury yield is moving higher – quite rapidly – while the DJ Transports are tanking – quite rapidly.  In the first week of June, the yield on the 10yr Treasury bond spiked up from 2.09 to 2.40, a 14.8% move.  This is a big move for yields in just 5 trading days, especially in the context of a rapidly weakening economy.   Worst case, 10yr yields should have remained flat.

I believe the illogical movement in 10yr Treasury yields reflects the fact the Fed is losing control of its tight grip on the bond market and longer term interest rates. Note that German bunds have also experienced a similar spike up in interest rates and volatilty.  In the context of my view that there was a derivatives accident somewhere in the global banking system in the last two weeks, it could well have been an OTC interest rate swap bomb that detonated. 

As of the latest OCC quarterly report on bank derivatives activity (Q4 2014), JP Morgan held $63.7 trillion notional amount of derivatives, $40 trillion of which were various interest rate derivatives.  If you look at the ratio of interest rate derivatives to total holdings for the top 4 U.S. banks, they all own roughly same proportion of interest rate derivatives as percent of total holdings.   Deutsche Bank is reported to have about a  $73 trillion derivatives book. If we assume that ratio of interest rate derivatives is likely similar to JP Morgan’s, it means that DB’s potential derivatives exposure to interest rates is around $46 trillion.  I will elaborate on this below.

But first, one more graph related to interest rates:

10yrTreasuryPrice

This graph shows the price of the 10yr Treasury bond futures contract going back to May 2014.  Interestingly, the price of the 10yr moved abruptly higher after the Fed ended QE. This is the opposite of what many of us would have expected.  It wasn’t until early February that 10yr bond price began to decline (yields move higher).  As you can see on the right side of the graph above, the 10yr bond price plunged below the blue uptrend line. The 10yr bond price also crashed through its 200 day moving average – an ominous technical signal.  Both of these events happened within the last week.

Again, I believe that this action in the bond market is pointing to the fact that the Fed is losing control of the markets. I also believe that the catalyst for this loss of control is a big derivatives accident of some sort in the last two weeks.

Another clear indication that something has melted down “behind the scenes” recently is an ominous market call by self-made hedge fund billionaire Paul Singer, founder and CEO of Elliott Management.  In his latest letter to investors, released the last week of May, he stated that the best trade in a generation is to short “long term claims on paper money.”

A savvy investor like Paul Singer would not make a public market call like that unless 1)  he had already positioned his fund accordingly  2)  he had some sort of insight about what was happening “behind the scenes” either first-hand or from insiders who were in a position to give him information and 3) he was 99% certain that his insight and information was correct.  In other words, it highly likely Singer had already made huge position bets for his fund and his own money which would capitalize on a systemic disruption of some sort (Elliott Management was one of the hedge funds with which I dealt when I traded junk bonds in the 1990’s. I knew them to be methodical and always looking for inside information).

Finally, I believe that whatever type of financial explosion occurred is related to the sudden firing of Deutsche Bank’s co-CEOs, Anshu Jain and Jurgen Fitschen.  Fitschen is the equivalent of corporate executive abortion.  He’s under investigation for tax evasion and on trial for giving false testimony in a long-running legal battle related to the collapse of the Kirch media conglomerate, one of Germany’s biggest media empires.  It’s incredulous to me that he wasn’t fired a long time ago.  It tells us just how recklessly this bank is managed by the Board of Directors.  It also suggests a grand failure by German bank regulators.

It’s the firing of Jain that caught my interest.  In a management shake-up a little over two weeks ago, Jain was given more power by the Board and shareholders.   So why was Jain suddenly and unexpectedly fired less than three weeks after having been given more control over the bank?

As I wrote yesterday, Jain’s raison d’etre was to build Deutsche Bank into the world’s largest derivatives dealer.  On May 26, it was announced that Deutsche Bank had reached a settlement with the SEC for improperly valuing its its risk exposure to its Leveraged Super Senior trades book of business (credit derivatives).   This in and of itself was not the cause of the Bank’s reversal on Jain.  But  I can guarantee that this is just the tip of the iceberg with regard to fraud and risk exposure connected to Deutsche Bank’s derivatives business under Jain’s stewardship. We found out in 2008 that bank CEOs and CFOs not only lie to each other and their employees, they also lie to regulators.

I referenced Deutsche Bank above in connection to big bank interest rate derivatives exposure.  I believe that the high volatility in the global fixed income markets has triggered some kind of derivatives blow-up at Deutsche Bank.   While the smoking gun points to some kind of interest rate-related derivatives melt-down, it could also have been related to Greece sovereign debt credit default swaps or energy-related derivatives.

While I’m fairly certain that all the evidence points to Deutsche Bank as the source of what I believe is a derivatives accident that has occurred in the last two weeks, don’t forget that the majority of banks and hedge funds globally are linked directly or indirectly through the “magic” of OTC derivatives and counter-party default risk.  We saw this “natural” law of derivatives risk in action in 2008 and recently when a small German bank blew up from its exposure to an Austrian bank which choked to death of Greece-connected credit default swaps.

There’s other signals which I didn’t cover, like the fact that the S&P 500 is has dropped 2.5% in the last 10 trading days since hitting an all-time high May 21.  In addition, the US dollar index has plunged 170 basis points in the last six trading days.  This is a huge move for a currency in such a short time period.  Having said that, regardless of which bank and what “flavor” of derivative may have blown up, I believe that something big and hidden melted down in global financial system during the last two weeks.

This could be the start of the big financial markets inferno that many of us have been expecting for quite some time.

My best advice for anyone who wants to protect themselves financially is to get as much money OUT of the system as you can.  It’s up to you whether or not you convert your cash into physical gold and silver, but I think at this point only an idiot would leave his money in the system and denominated in paper dollars.

 

 

Argentina And Banco Espirito: What About The Derivatives?

Argentina is interesting because of the legal issue surrounding the specific Government bonds on which it might default.  I called Banco Espirito as a likely bankruptcy after the stock exhibited Enron-esque characteristics.  As that one unfolds, it looks like the entire corporate structure above the bank and with the bank itself is engulfed with fraud.

And now we find out that Goldman Sachs plugged its client base with BES bonds and stock:  LINK.  Classic

The more interesting question in both cases has to do with the credit default swap derivatives.   While the default could trigger $29 billion in bondholder claims, Bloomberg ran a story a couple days ago that suggested the default on  this one bond issue could trigger $120 billion in credit default claims:  LINK.

The details are buried in the bottom of the news report.  Since I have not seen anyone mention the $120 billion, I assume that – just like with the footnotes to financials statements – I guess no one read the full article.

However, it’s not the $120 billion in CDS claims that are visible.  The real danger lurks in the “daisy-chain” of hidden counterparty default that could trigger a big meltdown.  Remember AIG/Goldman?  That melt-down – which triggered the big bailout banks – was likely triggered either by the Bear Stearns or Lehman collapse.  The former happened several months before AIG and Goldman.  When Bear collapsed, Bernanke assured us it was isolated and contained.  “Shalom Ben!” – how did the statement work out for you?

The S&P futures are down 15 points right now on the back of the Argentina/BES news.  It’s not because of the news itself.  It’s because of the related skeletons in the closet that are connected to the events that may be poised to jump out…

Better check the bond and derivatives holdings of your favorite bond fund – you know, the bond funds that your genius investment advisor has you invested in because “they have a good yield.”

Banco Espirito Santo Holding Company Takes A Dirt Nap – Files BK

Please note how this news was not reported until late in the afternoon EST time and well after all the markets around the world were closed for the weekend except  the NYSE.  It would have definitely rained hard on the European markets if the news were released during those market hourse:   BES Files BK

The Wall Street Journal reported it at 3:28 p.m. EST.

Interestingly, it would seem that the ratings were given a heads up yesterday, as S&P and Moody’s “coincidentally” downgraded the credit ratings a day ahead of the filing:   BES credit downgrade.

My only question is:  “Who holds the credit default swaps, baby?!”   Better check your bond mutual fund SEC filings…

Black Swans?

You never know what will trigger an bull market and what will trigger a bear market .   – Marc Faber on CNBC

Faber goes on to say in his comment on CNBC that you can only know what triggered a bull/bear market after the fact.  That is the definition of a “black swan.”   There hasbeen a lot of speculation in the last year about what the black swan would be that would trigger the next market collapse.  Of course, once a candidate for the Cigno Nero is identified, that takes it out of contention, right?

The collapse of Banco Espirito Santo, Portugal’s 2nd largest bank, could well prove out to be that black swan, as it is an event that no one saw coming (except maybe the bank’s auditors).  Too be sure, I read a lot of everything and I have not seen any Oracle of Blogosphere previously mention this situation:  Espirito Santo Creditors Doubt Containment on Missed Payment (Bloomberg News).

But this is the reason the U.S. stock market is tanking hard today AND why gold, silver and mining shares are spiking higher.

The Bloomberg story above references the fact that there are credit default swaps – aka OTC derivatives – on Banco Espirito Santo.  But what’s missing from the analysis is, “what happens if one of the counterparties who has made the bet that this bank will never go bankrupt can not pay off the bet it has made?”

What happens?  A defaulted bank will now be bailed out creditors –  depositors and debt holders, in that order.  But what about the entities that have to make the payments associated with the credit default swaps?

We don’t know who the counterparties are and we don’t know who will be on the hook – until after the fact, which by then it’s too late.   We don’t know this because the Too Big To Fail Banks made sure they paid your elected Congressmen to pass laws that enabled the TBTF’s to keep this information hidden away.  I bet even Jamie Dimon, pre-chemo, has no clue whatsoever if JP Morgan is on the hook or if JP Morgan is exposed to someone who is on the hook.

THIS is what could potentially trigger a bigger run on the bond market and THIS is exactly the dynamic of which regulators in the U.S. are terrified.   And THIS dynamic is why the Fed was discussing putting capital controls on bond mutual funds.  And THIS is why the Vice Chairman of Black Rock, Barbara Novick, is going around like the Sicilian Mob Boss promoting the concept of the need to have a bailout mechanism for the derivatives clearing mechanism.  Clearly Black Rock is highly exposed to credit default swaps.

It’s coming.  It’s just a matter of time.  You have been warned:  Get money OUT of bond mutual funds.   Get your money out of your IRA and 401k plans TO THE EXTENT YOU CAN. Pay the penalty and taxes.  Do you want to pay 30% of something or get 0% of zero, because there will come a time when your retirement fund is reset to zero.

On another note, three of the four junior miners I have published research on are up well over 10% in the short time since I’ve published my reports:  Junior Mining Stock Research Reports.   “Huge Upside Idea” is up 22% since June 25th.   It’s just getting started.  Almaden (AAU), spiked higher yesterday on great drilling results and is pulling back today for no reason.  This is an entry opportunity, in my opinion.  The other two ideas have plenty of room to run and good reasons why they should run.