NEW YORK ( TheStreet) -- If you've ever made a speculative investment and underestimated the risks, you're in good company. It's somehow comforting to small investors to realize that betting on an economic recovery or the winds of change in the economy can entice even "The King of Wall Street." JPMorgan Chase ( JPM) admitted Thursday they incurred $2 billion in losses when an enormous trading gamble using Credit Default Swaps backfired.
JPMorgan Chase CEO Jamie Dimon
Like many investors, JPM has been buying corporate bonds in a bet that the economic troubles in the U.S. and around the globe would cause those bonds to soar in value. Follow TheStreet on Twitter and become a fan on Facebook. To make matters more dangerous, one of the financial behemoth's London-based traders made bets in the derivatives market by selling the insurance-like CDS products. That meant JPM was taking on the responsibility of covering the risks of those traders who bought the CDS. It's like watching a scene from the Academy Award-winning documentary " Inside Job" or reading a newly revised version of Michael Lewis' book The Big Short. The CDS contracts that the JPM trader was selling were tied to an index of companies. In April, the cost of the CDS derivatives began to soar as that index of companies began to tank, and this apparently contributed to the huge trading losses. CEO Jamie Dimon told the media on Thursday that the approximately $2 billion in losses were partially offset by nearly $1 billion in gains on securities. As is true for all investors and speculators, Dimon admitted that market volatility at the present time may cause more losses. He estimated those additional losses may add up to another $1 billion.
Fresh Look at Banks
So how does this boondoggle present opportunity? Let's look at the one-year chart of the Financial Select Sector SPDR ETF ( XLF). The top 10 holdings comprises a "who's who" of the financial services sector including JPM, Wells Fargo ( WFC), Berkshire Hathaway Class B ( BRK.B) and Citigroup ( C). From late November 2011 until April 2012 the XLF made an epic move higher, outperforming even the most optimistic forecasts. It still trades well above its 200-day moving average. It could correct another 8% and still be above the 200-day average price.