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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: Killswitch who wrote (14765)	10/10/2002 12:00:06 AM
From: Killswitch	Read Replies (1) \| Respond to of 19219

If this info is correct, all the JPM uberbears may be disappointed. ----- Original Message ----- From: hhill51 To: lwside1@yahoogroups.com Sent: Wednesday, October 09, 2002 11:18 PM Subject: [lwside1] Re: Why J.P. Morgan Chase has the market panicked --- In lwside1@y..., "Sharefin" <sharefin@c...> wrote: > The complex instruments known as derivatives are meant to hedge risk. But they may raise the odds of a collapse at the storied bank -- and, say many, for the market as a whole. > > Could a failure at J.P. Morgan Chase crash the entire financial system? That's a scenario with credibility on Wall Street, which helps explain the recent trouncing of financial stocks. > > If you own stocks, you probably don't even want to consider this question. Who wants to hear about the chance that complex financial instruments -- derivatives -- could cause an implosion that could send the stock market reeling? After the pain of the last 30 months, who wants to hear about the possibility that the worst isn't over? > > moneycentral.msn.com Nick - I agree that a JPM, Dresner, HSBC or other major bank failure would create the situation that was so close to happening in '98 with LTCM. If it were imminent, or more than remotely possible, the swap spread should be telling us so. Right now, ten-year swap spreads are near their 10-yr average at ~+70 or so. Prior to LTCM, they widened out to +150. Six months before the swoon of the stock market averages began in 2001, the swap spread had widened to +125. Right now, even 3-month LIBOR is almost spot on 3-month T-bills. If the people making those inter-bank loans had even a 10% probability that they would face a defaulting obligor, don't you think they would demand a significantly higher yield than they take from the US Treasury? I am not saying there won't be a derivatives-related bank collapse at some point in this entire LW winter -- there probably will. However, we will see the inevitable "pre-tremors" of an earthquake like that in the interbank market in the form of higher spreads, first. History can help us out here. In the US in the 1930's, the two years with the highest number of bank failures were 1937 and 1938, not 1929, 30, 32, or any of the other years that climactic stock market and economic events were occuring. Just to add to this, the peak year of mortgage foreclosures in the 30's was also 1937. If we're on the same schedule, that would put these events still 6-8 years ahead of us. [I do allow that it may happen more quickly because the system is inherently more levered this time around, but I still think we'll see at least one to six months' warning in wider swap spreads.] hh