A Potential Pothole on Rally Road
The stock market rallied big Thursday and was soaring again midday Friday. A continuation of the technical factors that contributed to Thursday's gains, along with a Lehman Brothers upgrade of IBM (IBM) and relief that General Electric's (GE) results weren't worse were fueling big gains for major averages Friday afternoon.
Everything may suddenly appear "okey-dokey" but a large number of market participants remain worried about the potential for some upheaval in the financial system.
"I will venture there is an outside chance that in the very near future, during a momentous market upheaval, a major financial participant will face complete and instant annihilation," Fari Hamzei of Hamzei Analytics in Los Angeles commented recently.
For some time now, J.P. Morgan (JPM) has been the name most often cited as a potential trouble spot. In an interview Thursday, Hamzei said J.P. Morgan is on his short list of financial firms about whose "annihilation" he is concerned. Admittedly, that's a dramatic description for what others contend may be a forced sale or, at the very least, more pain for J.P. Morgan's stock and bondholders.Specifically, concerns remain about the bank's exposure to derivatives, financial instruments that derive their value from other securities and are designed to offset risk -- although history suggests they often have the opposite effect. As reported previously, J.P. Morgan is far and away the largest dealer of derivatives -- involved in $25.9 trillion, or 51%, of the $50.8 trillion notional value of contracts involving U.S. commercial banks and trust companies at the end of the second quarter, according to the Office of the Comptroller of the Currency. Given its dominance, J.P. Morgan is an obvious bogeyman for those concerned about derivatives in general. A midweek downgrade by Moody's put those concerns back on the front burner. A J.P. Morgan spokesman said the bank doesn't comment on rating actions. But in a conference call after its profit warning last month, Dina Dublon, J.P. Morgan's head of finance, said a Standard & Poor's downgrade at the time would have but a "small impact" on J.P. Morgan's derivatives business. In cutting $42 billion of J.P. Morgan's long-term debt to A-1 from Aa3 and its bank subsidiary debt to Aa3 from Aa2, Moody's ratings are now in line with S&P's.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV