Managing Director, Andy Guzzetti breaks down the numbers of JPMorgan’s $2 billion loss

JPMorgan lost $2 billion dollars on its London trading desk when a derivative hedge blew up. CEO Jamie Dimon had to announce the loss before the trade was unwound, this could cause the loss to go as high as $4 billion. The pro “increase regulations” crowd, has jumped on with both feet. Instead of allowing the markets to punish JPM and its poor handling of risk, the political positioning has begun. Congressional investigation, DOJ probe into possible criminal charges and the public outcry for additional regulations all because a publicly traded U.S. company lost money. We must understand that JPM lost money on this trading desk, approx. $2 billion, the company did not lose money for the 1st quarter and will report approx. $15 billion of profit for the year. $2 billion is a lot of money but JPM is a well run company that can handle that loss and still make money for its shareholders. A very important point to make is that JPMorgan will not need a government bailout. It’s just a loss they do not want to take and one that shows they did not handle risk very well.

POLITICS
The index JPMorgan lost money on was the CDX.NA.IG.9 Index. This index is made up of 125 company’s credit default swaps. This is a very intricate investment vehicle that is used to hedge bank positions. CEO, Jamie Dimon has been an advocate of getting rid of regulations and fighting with the administration about the DODD FRANK LAW and its Volcker Rule. The Volcker Rule is a rule that would prohibit banks from using their own capital to make bets on the direction of the market. This proposed rule states that commercial banks cannot proprietary trade (they can’t trade to make money, they can trade to hedge. In other words, to hedge some of the risk in their other investments).

The 2008 financial crisis began with investment banks and insurance companies, not commercial banks. In 2008 there were hundreds of billions of mortgage related securities which were rated AAA by rating agencies that should have rated them as junk. To equate JPM loss to the 2008 crisis is crazy. Proprietary trading in the banking industry did not lead to the 2008 crisis and has never led to any other financial crisis. Let the markets punish banks for poor risk management. Additional regulation is not needed.

What Are Exchange Traded Funds?

Andy Guzzetti, Managing Director of DLG Wealth Management firm near Saratoga Springs, NY, breaks down what you should know about Exchange Traded Funds.

Exchange Traded Funds began in 1993. They are mutual funds that trade on the NYSE or the NASDAQ. They track a specific index in stocks, bonds, commodities, etc. They can also track a sector. If you want to invest in utilities, instead of buying a group of utilities, you can buy an Exchange Traded Fund that indexes that utility.

Exchange Traded Funds are a nice way to make your bet without buying a lot of stocks. They are low cost and have minimal management fees. For more information on Exchange Traded Funds, Asset Allocation, Portfolio Management or other financial advice, contact DLG Wealth Management. Watch the entire WXXA Fox 23 News Money Monday segment about Exchange Traded Funds below:

Managing Director, Andy Guzzetti, discusses what effects the debt crisis could have on the U.S.

All eyes are overseas again as the looming Eurozone meltdown hits some more bumps. What does this all mean to the economy of the United States and the world for that matter?

The voters in Greece and France have sent the word “we don’t want to give up entitlements and we don’t want to cut spending”. These election results turned things upside down and made all World markets nervous. We have talked about “PIIGS” before. “PIIGS” (Portugal, Italy, Ireland, Greece and Spain) are all countries part of this Eurozone debt crisis. We can add F & C to this acronym.

•    France has been thrown into the mix; France’s President, Nicholas Sarkozy, was voted out and replaced by a Socialist who campaigned against austerity. Sarkozy, in an effort to control France’s debt problem, proposed raising the pension age from 60 to 62. Although this proposal was needed, the French electorate said no.

•    Greece, on May 6th, voted in the anti-austerity candidates as well. The top vote getter, when trying to form a new government, asked all participants to sign a document to rescind the EU bailout plan that contained austerity measures. The threat of new elections loom. Greece will run out of money in July.

•    I have added the “C” for California. We all know that California is not part of the Euro Crisis, but it is part of this debt crisis. California has announced this past weekend that they have a $16 billion debt crisis that they can’t cover and are looking for help from the U.S government to cover them. Of course their plan is to raise taxes and cut funding to education and government programs.

So what does this all mean? If Greece cannot get its political house in order and has to forfeit on its debt payments this will put pressure on the EU to let Greece go. Banks that are holding Greek debt will have to take major hits and a weak world economy gets weaker. Besides the banking industry taking a major hit, corporations will see revenues drop. The markets are anticipating a default as the S&P 500 is down 3.2% this month.

Interest rates – The bond vigilantes, those bond investors who watch these developments, will demand countries like Greece pay a higher interest rate to borrow money. Already the 10 Spanish bonds are yielding close to the 6% level. This 6% level usually means disaster for these countries who are struggling.

Gold / Dollar- During this crisis the dollar has strengthened because it is considered a safe haven. This is surprising as some analysts think gold would be the safe haven. As the dollar strengthens, because gold is dollar denominated, gold prices have plummeted. Most Americans are watching to see the outcome because the United States is not far behind. We have refused to address our debt problem, we have refused to cut spending and we have refused to cut back entitlements. Sounds like Greece and France and the “bond vigilantes” are watching.

For more information on managing your finances, or other financial advice, contact us. You can also see Andy Guzzetti every Monday morning on WXXA Fox – Albany.

AS ADVISORS WE ARE SPENDING MORE TIME TALKING TO CLIENTS ABOUT PROTECTING ASSETS RATHER THAN GROWING ASSETS. WE HAVE TO BE PREPARED TO OFFER OUR CLIENTS THE ABILITY TO HANDLE THE POSSIBILITY OF ANOTHER 2007-2008. CLIENTS CAN’T HANDLE ANOTHER 45% MELT DOWN. THEY NEVER HEARD ABOUT “TAIL RISK” OR “BLACK SWAN”. NOW IT IS A PART OF MOST EVERY INVESTOR’S VOCABULARY.

WHAT IS ‘TAIL RISK”, ESPECIALLY   “LEFT TAIL RISK”. IF YOU LOOK AT THE STATISTICAL BELL SHAPED CURVE BELOW WE ALL KNOW FROM OUR STATISTIC CLASSES THAT STATISTICALLY 95% OF ALL RESULTS FALL IN THE CURVE. MONEY MANAGERS , HEDGE FUNDS BASE MOST OF THEIR DECISIONS ON THE CURVE. THEY ARE PREPARED TO HANDLE ANY EVENT WHERE RESULTS ARE INSIDE THE CURVE. WHAT HAPPENS IF RESULTS ARE IN THOSE LITTLE TAILS AT EACH END? IF IT IS ON THE RIGHT SIDE THAT WOULD BE POSITIVE, BUT THE LEFT SIDE TAIL RISK CREATES A NEGATIVE PROBLEM. WHEN THESE EVENTS HAPPEN THE CONTAGIOUS EFFECTS TAKE OVER CAUSING MASSIVE LOSSES IN DIFFERENT AREAS. WHEN THESE OCCURRENCES HAPPEN THEY ARE USUALLY CALLED “BLACK SWAN” EVENTS. EVERYONE THOUGHT ALL SWANS WERE WHITE AND NEVER EXPECTED TO SEE A “BLACK SWAN”.

WHAT ARE SOME SOLUTIONS:

1.    VARIABLE ANNUITIES can be used to protect investors in a number of ways. Two specific ways (there are apprx 1600 versions)that variable annuities can help protect the downside are:
a.    In a deferred variable annuity, negative returns are possible, but the industry has created various options to put investors at ease, such as riders that guarantee certain levels of income upon retirement. This guarantee of a certain income level has become a very key feature, especially for the retired or close to retirement baby boomers. Thus even if there is a “black swan event” you retirement income is guaranteed. In this era of companies getting away from defined benefit plans this guarantee allows an investor to set up their own “defined benefit plan”
b.    Guaranteed minimum death benefits can also protect the downside. Most deferred variable annuities sold include the basic kind: a guarantee that, if the account value has lost value when the investor dies, heirs will get the full amount initially invested. There are many variations of the minimum death benefit, such as “stepups” which are guarantees that heirs get the highest value the account hit on one of its anniversaries. Between 2001 and 2003, variable annuity beneficiaries received $2.8 billion more than the account value when policy holders died earlier than expected, according to the Insured Retirement Institute.

2.    MANAGED FUTURES can be used to protect the downside. Investors who want to be ready for a “Black Swan” event must have something in their portfolio that can make money not only on the upside but when values are falling. The values may be falling in equities, bonds or commodities and a managed futures program can make money in those falling markets, thus protecting some or all of your portfolio. The futures(commodity) markets have been built to hedge, although many investors try to speculate in these markets. The futures market is very complicated that is why we do not recommend a “do it yourself” futures  portfolio. Let the professional with proven track records do it.

3.    DIVERSIFICATION/ASSET ALLOCATION can be used to lessen downside risk. However in the events we are discussing especially in the last melt down nothing was safe. However diversification will protect you from being in one asset class that gets hammered.

4.    FDIC CD’S/ MONEY MARKETS can be used to protect the downside, however with interest rates at record lows the returns may not even keep up with inflation. Having said that, we have all learned that cash is an asset class. Many investors forgot that fact and portfolios did not factor in cash while building diversified portfolios. Nothing wrong with having a portion of your investment assets in cash.

 

MANY ADVISORS HAVE SPECIFIC PROGRAMS THAT CAN HELP WITH PROTECTING THE DOWNSIDE…….COVERED CALL WRITING, MARRIED PUTS, STOP LOSS STRATEGIES TO NAME A FEW. EACH  INVESTOR HAS TO DETERMINE THEIR FINANCIAL GOALS & THEIR RISK TOLERENCE AND THEN WORK WITH AN ADVISOR TO COME UP WITH A PROGRAM TO ‘HELP PROTECT THE DOWNSIDE “.