European Equity Fund Good Setup On Rising Large Players Volume

The European Equity Fund looks like a good long entry on rising large players volume. The fund is managed by Deutsche Asset Management International GmbH. It invests in the public equity markets of Europe including countries utilizing the euro currency. You can read more about this fund here.

European stocks are trading inversely to the North Korea threat. As the North Korea threat subsides, European stocks are rallying. If tensions flare up again between North Korea and the US, European stocks are likely to sell off. You can read about how North Korea is impacting European stocks here.

European Equity Fund Chart

European Equity Fund chart is a good swing long setup.

The rising large players volume is a thing of beauty. The Twiggs Money Flow confirms that the European Equity Fund is being accumulated.

EEA presents an excellent setup pattern. Prices have been consolidating lately and the volatility has been reduced. There is a resistance zone just above the current price starting at $9.56. Right above this resistance zone may be a good entry point. There is a support zone below the current price at $9.41, a stop order could be placed below this zone.

The GST Positive Divergence stock screener that I created for you is how I found this stock. You can read more about this stock screener here.

Deadly Parasitic Derivative Collapse Spreading Through Global Markets

Deutsche Bank may be on the verge of collapse. Last week Deutsche Bank reported Q2 2016 earnings of 20 million euros which is a 98% drop in earnings year-over-year.

In 2015, Deutsche Bank announced its first full year of loss since the 2008 recession.

Deutsche Bank’s stock is down -60% over the last year meaning that the bank is close to collapse.

Deutsche Bank’s shares now trade for two-thirds less than their tangible book value, a steeper discount than even during the depths of the financial crisis.

Beyond Germany, few stock traders care if Deutsche Bank collapses. The problem with Deutsche Bank collapsing is its enormous derivatives portfolio valued at 42 trillion euros! To put in perspective, the entire EU (all 28 member states) has an estimated GDP value of 14.3 trillion. Deutsche Bank’s 42 trillion euro derivatives portfolio is about three times the size of the entire EU!

One might think that with such a high exposure to the derivatives market, Deutsche Bank would have already collapsed. The reason Deutsche Bank has not collapsed is because of something called netting. For every derivative position Deutsche Bank holds, they hold another position in the opposite direction, so they roughly cancel each other out. At least that’s what Deutsche Bank is reporting that they are doing. Whether that is true or not remains to be seen. Why would anyone hedge their longs with shorts in a 1:1 ratio? You would never make any money from trading, and you would slowly lose on slippage. The OCC tracks netting on U.S. banks and does, in fact, show that even with netting, net current credit exposure (NCCE) has been rising rapidly since 2014.

When Deutsche Bank collapses, it is going to be the explosion heard around the world, and it will be a disaster many times greater than the collapse of Lehman Brothers in 2008.

US Derivatives Exposure

The big U.S. banks have higher exposures to derivatives than Deutsche Bank. As of June 30, 2016, below are U.S. banks with the largest derivative exposures.

Citigroup has amassed the largest stockpile of interest-rate swaps as they bet on central bank rate changes.

Five U.S. banks hold 93% of all derivatives: Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America, and Morgan Stanley. The total value of these derivatives is $247 trillion (notional).

Morgan Stanley has $31 trillion in derivatives with $1.6 trillion (notional) in credit derivatives. What is scary is that Morgan Stanley is back to speculating in the same credit derivatives market that took down AIG in 2008. I don’t think Morgan Stanley necessarily wants to speculate in credit derivatives but with revenue flat the last few years, they may be getting more desperate to prop up their stock price. Morgan Stanley’s stock is down more than -25% over the last year.

Most traders in the U.S. don’t care about Morgan Stanley’s risky credit derivatives portfolio, but they should. Morgan Stanley has more than 15,770 retail brokers managing $404 billion of other people’s money (mom and pop savings, retirees, pensions, retirement accounts, etc.cause). Morgan Stanley’s risky credit derivatives position poses a huge threat to the investing community in my opinion.

Banks and Financial Firms Will Not Disclose Information Until It’s Too Late

If you are waiting for banks and financial firms to disclose risks and even how much they were bailed out from the last time they made risky credit derivative bets, don’t.

Wall Street On Parade writes

To survive the 2007-2009 Wall Street crash, Morgan Stanley received an injection of $9 billion from the Japanese bank, Mitsubishi UFJ Financial Group; a $10 billion injection from the U.S. government and over $2 trillion in secret, cumulative, below-market-rate loans from the Federal Reserve. According to data obtained by Bloomberg News following a multi-year court battle to obtain the information from the Federal Reserve, Morgan Stanley’s one-day secret outstanding loans from the Fed peaked at $107.3 billion on September 29, 2008.

The public would have never known about these secret loans shoring up Wall Street’s reckless conduct and hubris and obscene bonuses except for the court battle of Bloomberg News and legislation secured by Senator Bernie Sanders of Vermont requiring a Fed accounting.

Credit Derivatives Exposure On the Rise In the US

The Office of the Comptroller of the Currency reports some scary facts in their most recent quarterly OCC report.

– Insured U.S. commercial banks and savings associations reported trading revenue of $5.8 billion in the first quarter of 2016… $1.9 billion lower (24.9 percent) than a year earlier. [In my opinion, when trading revenues are down, trading divisions take on more risks in a desperate attempt to meet quotas like buying riskier credit derivatives as the data points below confirm].

– Credit exposure from derivatives increased in the first quarter of 2016. Net current credit exposure (NCCE) increased $65.1 billion, or 16.5 percent, to $460.1 billion.

– Notional derivatives increased $12.0 trillion, or 6.6 percent, to $192.9 trillion.

– Derivative contracts remained concentrated in interest rate products, which represented 76.3 percent of total derivative notional amounts.

Using Derivatives To Bet On Interest Rate Changes

The OCC reports

Measuring credit exposure in derivative contracts involves identifying those contracts where a bank would lose value if the counterparty to a contract defaulted. The total of all contracts with positive value (i.e., derivative receivables) to the bank is the gross positive fair value (GPFV) and represents an initial measurement of credit exposure. The total of all contracts with negative value (i.e., derivative payables) to the bank is the gross negative fair value (GNFV) and represents a measurement of the exposure the bank poses to its counterparties.

GPFV increased by $0.8 trillion (26.6 percent) in the first quarter of 2016 to $3.8 trillion, driven by a 29.9 percent increase in receivables from interest rate and FX contracts. Because interest rate contracts make up 76.2 percent of total notional derivative contracts, changes in interest rates drive credit exposure in derivative portfolios. Declines in interest rates tend to increase exposure. This effect has increased in recent years, as the maturity profile of interest rate derivatives has increased, making credit exposure more sensitive to changes in longer-term rates.

Credit risk exposure increased a whopping 26.6% in Q1 2016. Much of that increased credit risk exposure is coming from bets on Federal Reserve rate hikes. If interest rates go up, credit risk exposure in derivative positions goes down. If interest rates go down, credit risk exposure goes up. In other words, most of the bets in the derivatives market are on interest rates rising. Better hope Janet Yellen doesn’t have to lower interest rates!

Credit Default Swaps Dwarf All Other Forms of Derivatives

Credit default swaps dwarf any other form of credit derivative trading.

The OCC reports

The notional amount for the 54 insured U.S. commercial banks and savings associations that sold credit protection (i.e., assumed credit risk) was $3.6 trillion, up $206.4 billion (6.0 percent) from the fourth quarter of 2015. The notional amount for the 50 banks that purchased credit protection (i.e., hedged credit risk) was $3.8 trillion, $224.9 billion higher (6.3 percent) than in
the fourth quarter of 2015.

It is interesting that many people are reporting having received a letter from their credit card company informing them that their interest rate is going up from 19.9% to 25% in August 2016. Some people have even reported receiving credit limit increase letters too. How kind of these bankers to go long credit default swaps while raising your credit limit and interest rate to insane levels at the same time.

Folks derivatives are dark financial products that cause excessive risk taking that ultimately leads to disaster. I have little doubt that the next global financial crisis will, at its core, once again involve speculative derivatives betting.

US Yield Curve Shocker: 60% Chance of Recession In 12 Months

The yield curve continues to flatten at an alarming rate. The spread between the two years and the 30-year bond is the lowest since 2008.

In a note to clients, Deutsche Bank writes…

Since the UK referendum the US yield curve has flattened to new post-crisis lows… This relentless flattening of the curve is worrisome… the probability of a recession within the next 12 months has jumped to 60 percent, the highest it’s been since August 2008.

U.S. residential construction growth is grinding to a halt.

Even auto sales, which have been a bright spot for the U.S. economy for several years, are rapidly slowing.

Payroll growth has also dropped like a rock, and we await this Friday’s non-farm payrolls report update.

Do not panic folks. Deutsche Bank is saying that the odds of a recession are about the same as a coin-flip, 12 months from now.

The yield curve is still healthy.

Source: StockCharts.com

Once the yield curve goes flat or even inverted, we usually have 3 to 6 months before a recession. The flat or inverted yield curve signal will give us plenty of time to react.

While the stock market could crash at any time between now and the end of October, a stock market crashing from a recession is an entirely different matter. Do not confuse a stock market crash with an economic downturn. A stock market crash could happen at any time and will come like a thief in the night. We will have plenty of time to react to a flat or inverted yield curve before the next economic recession.