Reduce Guesswork with Biotech Stock ETFs

The current supply/demand squeeze sets up a perfect scenario for investors because it's likely to drive the price of acquisitions sky-high, according to Money Morning Executive Editor Bill Patalon, who spent years covering the biotech industry.

However, investing in biotech stocks requires not only an understanding of the company's finances, but also knowledge of the company's potential based on its products and technologies.

You can reduce some of the guesswork by using exchange-traded funds (ETFs), which give you exposure without betting the farm on a single company.

ETFs trade on major exchanges and expenses are generally lower than those of actively traded mutual funds.

Here are three biotech ETFs to consider:

• iShares Nasdaq Biotechnology Index ETF (Nasdaq: IBB): The "granddaddy" of biotech ETFs was established in 2001 and carries a market cap of nearly $1.8 billion, making it the largest in the category. IBB tracks the Nasdaq Biotechnology Index and focuses on big players like Amgen Inc.(Nasdaq: AMGN) andCelgene Corp. (Nasdaq CELG). Its expense ratio is 0.48%. One-year return is 28.4% and its year-to-date (YTD) return is nearly 17%.

• SPDR S&P Biotech ETF (NYSEArca: XBI): XBI holds 30 large and small biotech companies in equal weightings. That means smaller components have equal say in its overall performance. Accordingly, the fund got a nice boost after HGSI's stock jumped on the takeover bid. With a market cap of $518 million, its expense ratio is 0.35%. One-year return is over 26% and its YTD return is 18%.

• PowerShares Dynamic Biotechnology & Genome Portfolio ETF: (NYSEArca: PBE). This fund holds the usual large-caps like Amgen and Biogen Idec Inc. (Nasdaq: BIIB), but it also holds promising small companies including BioMarin Pharmaceutical Inc. (Nasdaq: BMRN), and Seattle Genetics Inc. (Nasdaq: SGEN), which have drugs in late-stage testing. Admittedly, it's higher risk, but these companies could be appetizing targets for Big Pharma. With a market cap of $140 million, its expense ratio is 0.63%. It has a one-year return of over 8% and a year-to-date return of 12%.

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5 "Over the Horizon" Investment Stories

1. Facebook amends its S-1 statement...for the sixth time!

An S-1 is a document filed with the SEC in conjunction with an upcoming Initial Public Offering (IPO). It's intended to give prospective investors an understanding of the basic business and financial information needed to consider the merits of an offering.

Facebook has now revised its documents six times since February 1, 2012.

This time around, Team Zuckerberg is admitting that - gasp - it's difficult to monetize users who are migrating to mobile devices and that the company has to spend more money to attract them. The company also commented that the number of average daily users is rising far more rapidly than the number of ad units being displayed to those users - and that average revenue per user will decline.

My Take: No question Facebook has changed the planet, but don't forget that the executives, venture capitalists and underwriters are the ones who make out on IPOs. These comments reinforce all the reasons why I suggest investors pass on the Facebook IPO. Speculators...that's a different matter, but don't confuse the two for three reasons: 1) Revenue growth is slowing; 2) Facebook does not dominate mobile devices and won't likely do so; 3) Startups are already cannibalizing Facebook's user base.

2. The seven largest U.S. phone companies report customers dropping long-term contracts

The seven largest U.S. phone companies reported in Q1 that 52,000 subscribers hung up on their long-term contracts. This is significant considering these companies represent 95% of the US market and account for 220 million devices according to the Associated Press.

My Take: Contract plans are the big earners and the Achilles' heel. As customers shift to cheaper, no-contract plans, watch revenues drop and phone companies shift to non-phone devices like security and data sharing. Apple is particularly at risk because the phone companies have subsidized sales and now face extinction-level events thanks to the very devices - iPads and iPhones - that changed the game. While I'd love to short "em, I am reluctant to play against the Fed and central banks at the moment (for reasons I'll get to next).

3. The Markets remain addicted to QE

Speaking of which...I've written and talked about this for several years in publications and at presentations worldwide but very few people have put two and two (trillion) together.

Here's a chart that might help:



My Take: QE is wrong on so many levels and robs economies of the very vitality they desperately need at the moment. Yet, our markets are addicted to cheap money. Without QE the markets drop, so the government-- which desperately needs growth to shed the toxic assets it has absorbed as part of the bailout process -- will continue to throw everything, including the kitchen sink, into this mess. Sadly, the responsible thing to do right now would be to take a deep breath, hold our noses and let everything reset. Unfortunately, our "leaders" will never allow that to happen.

4. Why we're turning Japanese ... and why Bernanke will hold rates lower even longer

Since 1948, there hasn't been another recession/economic deterioration anywhere close to the scale of what we are dealing with now, either in terms of depth or the length of time it will take to dig out. On an economic scale, that's just pabulum. But in human terms, the cost is very real and very devastating.



My Take: Low job creation and an even lower job participation rate create a Fed that's scared of its own shadow. Every 1% rise in interest rates is an additional $150 billion in interest payments to U.S. bondholders. Total debt including household, corporate and government obligations is already 279% of GDP. This is Japan's problem, only their total indebtedness is 512% of GDP. Today, Japan can't raise rates and avoid financial suicide...and we are rapidly approaching the same point of no return with each new, misguided stimulative effort. We are turning Japanese - a suggestion that I initially voiced in late 1999 to open scorn, derision and outright ridicule. Nobody's laughing now--including me.

5. What it takes to grow through a downturn

I hear it all the time...investors are desperately trying to convince themselves that there's no growth to be had and, therefore, there are no investments worth making.

My Take: This is a total copout. If you look at earnings, many of the world's best companies have not only pulled farther ahead during the financial crisis, but many continue to grow despite the fact that the world appears ready to go off a cliff.

I know the bar is low and I understand that CEOs are managing expectations, growth is slowing, etc.

But would you rather place your bet with a bunch of politicians who have no clue how real money works or a bunch of CEOs who have navigated international waters for decades?

Excluding the banks, I'm with the CEOs any day.

There are obviously a lot of variables when you look under the hood but generally speaking the kinds of companies that interest me have four things in common:

1. They operate in highly localized markets like China and Brazil where their globally recognized brands can be brought to bear on a new generation of consumers hungry for them.
2. They create products in industries they can dominate.
3. Most are growing at 5% or more a year and are repositioning their operations in places like Oman, Vietnam, Bangladesh, Panama, Brazil and more. Never mind the BRICS of the past...the new markets...some call them frontier markets...have the potential to be even more profitable in the next 10 years than the formerly emerging markets were from 2000-2010 - no small change considering the latter turned 250% over that time frame, more according to CSS Zurich.
4. All are involved in "needs" based industries at the moment like water, food and tech, for example. Until this crisis transitions, these are going to be the best places to protect wealth while also preemptively positioning for growth that will come on the other side eventually.

Anyway, that's today's missive in terms of what I see when I look over the horizon.

Now where did I put my French dictionary?

I am pretty sure I heard Germany's Chancellor Merkel say "merde" when Francois Hollande got elected...

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I'll use PayPal as the example of where things are now and where they're going.

Already, PayPal, the online payments juggernaut that eBay cleverly bought for a mere $1.3 billion in stock back in 2002, is giving banks nightmares.

It's not that PayPal doesn't incorporate banks in its business model, it does. But it does more than facilitate credit card transactions for buyers and sellers on eBay.

The threat to banks, and the direction bank disintermediators are taking, is transparent in what PayPal offers once there is a balance in your PayPal account.

Your balance can be electronically transferred to your checking account, you can request a check, you can withdraw cash from an ATM with a PayPal debit card, you can use your PayPal debit card (debits your PayPal account) for purchases where it's accepted, and you can buy anything on eBay with what's in your PayPal account.

Buying and selling through PayPal without a bank in the middle, which is possible because people trust PayPal to hold their money and transfer payments effectively, is the quintessential example of how new technologies are disintermediating banks.

Seeing how Facebook, with its almost 900 million users, can directly facilitate transactions between its "members" by doing what PayPal does, opens up the window to new commerce possibilities that can be facilitated digitally through a trusted mobile device directly connecting business buyers and sellers and facilitating person-to-person money transfers.

There will always be giant killers sharpening their tech offerings to stake their claims in the mobile wallet world.

Some companies will change the face of commerce and shape the future. We'll want to keep an eye on these agitator upstarts.

Some will be bought by larger concerns and some will go public.

What's important right now is knowing who some of them are and what they're doing to shape the mobile wallet future.

In Part Three next week I'll name these "giant killers."



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Target (NYSE: TGT) Earnings Expectations

Target estimates earnings per share of $1.01 compared to 90 cents a year ago. The increase is due to expanding into food and other merchandising areas that deviate from its original discount offerings.

This expectation has increased over the past three months from 96 cents a share.

Even if earnings beat expectations, the results might not be enough to comfort investors who see a fragile economy and a consumer who is unwilling to spend even with lower gas prices.

Over the past three years Target stock has risen from below $40 per share to a high of $60 and currently trades at $55 per share. Less-than-stellar earnings reports will only add to the concern for Target and the overall retail industry.

Investors will be paying close attention to the remarks made by Target's executives in order to gather information on how consumers are spending and if those habits have changed.

According to data from the Commerce Department, consumer spending - which accounts for 70% of the U.S. economy - grew at a 2.9% annual rate last quarter, its highest level since the fourth quarter of 2010.

That kind of spending growth will be hard to sustain given the recent slowdown in job growth. Just 115,000 jobs were added last month, the lowest number since October.

What makes matters worse is that unemployment fell due to more people giving up their search for a job rather than finding one.

This data does not bode well for Target, which is desperately trying to remain a leading discount retailer. When Target first introduced trendy clothes and chic décor to its discount offerings the strategy proved successful. But since the Great Recession sales have been tepid at Target as consumers look elsewhere for discounts.

Target is taking some bold steps to compete with its rivals including offering dog biscuits and other items not found at rival stores.

Another daring move is the decision to phase out Amazon's Kindle e-reader from its more than 1,700 stores and Website in order to set up an Apple section in certain Targets. Currently only 25 stores plan to open up a mini Apple-product section this year.

Target investors will also want to know how other initiatives have worked, including their 5 percent discount to customers who use Target credit and debit cards.

Overall, Target's earnings should give a good indication on the health of consumer spending and a glimpse at the state of the U.S. economy.

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CEO Jamie Dimon Addresses Loss

The $2 billion loss stemmed from trades that were originally designed to hedge against risk. But those hedged trades ballooned in size and complexity, raising questions about whether the bank's dicey exploits violated the Volcker Rule.

Passed in response to the financial crisis, the rule aims to ensure that banks don't engage in risky trades for their own profit, often referred to as proprietary or in-house trading.

Even as Dimon acted contrite about the enormous losses, he let shareholders know that he believes it is important for the bank to continue to be able to hedge against risk. He added that he recognizes the need for rules that ensure hedging doesn't transform into something different.

"What this hedge morphed into violated our own principles in terms of complexities and risk," Dimon said.

Shareholders also cast votes on a series of proposals regarding political contributions, controversial investments in Sudan, and the contentious appointment of an independent chairman, which would take some control away from Dimon.

Shareholders split on this idea, with early results showing only 40% support the proposal.

Final votes will be filed with the U.S. Securities and Exchange Commission, but the discussions and probes will continue.

The biggest U.S. bank by assets also awarded former Chief Investment Officer Ina Drew, who resigned Monday amid the trading fallout, a very generous $14 million in salary and bonus-not a bad parting gift.

Dimon commented Monday, "Despite our recent losses in the CIO, Ina's vast contributions to our company should not be overshadowed by these events."

But the company is considering reclaiming some of her stock awards.

JPMorgan (NYSE: JPM) Stock: A "Buy"?

Money Morning Capital Waves Strategist Shah Gilani wrote that the trades that caused the losses were not done carelessly even though they were "chances."

"The whole thing, the whole "chance" thing doesn't have anything to do with chance. Things happen for a reason," said Gilani.

Gilani notes that before all is said and done, these hedged trades will probably cost JPMorgan another $1 billion-$3 billion to wind down.

But, Gilani wrote, "As far as JPM losing a few billion, it's nickel and dime in the big picture of their earnings clout. Actually, I think the stock is close to a "buy" here. I'm thinking about taking on some JPM stock and adding to it, as it might drop another 10% to 20%."

JPMorgan's share price has dropped more than 14% over the previous five trading sessions. Tuesday afternoon shares gained some back, rising about 3% to $36.88, not too far from its 52-week high. JPM closed up 1.29% to $36.25.

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Facebook's Mobile Strategy a Concern

Despite the investor fervor surrounding the Facebook IPO, some critics have questioned the company's future growth - specifically its mobile strategy, or lack thereof.

Facebook said that more than half of its 900 million users now access the site through a mobile device. In fact, it stated in its IPO filings that user growth - especially mobile users - has outpaced revenue growth.

But the problem is that mobile ads are smaller and harder to read making it less likely that a user will make a purchase, and therefore making Facebook less appealing to advertisers.

However, there is the "If you build it, they will come" attitude that Facebook will find a way to monetize the increasing trend toward mobile. Even if Facebook user growth continues to outpace revenue there is still a growing user base from which to profit.

Facebook is trying to adjust. The company increased its efforts to bring in revenue from mobile devices with the introduction of their App store. The Facebook App Store should roll out shortly, increasing revenue by allowing software developers a chance to sell their products on the site.

How Will Facebook Do?

Amid all the commotion and hype regarding Facebook's IPO -and despite Wozniak's endorsement - some investors and analysts believe Facebook is overvalued.

Barron's even downgraded the stock, which has yet to go public.

If Facebook debuts at $35 per share that would value the company at 70 times its projected earnings of 50 cents a share for 2012. Compare that with Google Inc. (Nasdaq: GOOG), which trades at over $600 a share but less than 15 times its 2012 earnings estimate.

Yet, to some investors a price of $35 per share compared with $600 looks very reasonable and some would say cheap.

There's no reliable precedent for how Facebook will do. Recent tech IPO's from Linkedin Corp. (NYSE: LNKD), Zynga Inc. (Nasdaq: ZNGA), Groupon Inc. (Nasdaq: GRPN), and Pandora Media Inc. (NYSE: P) have met mixed results.

Linkedin's share price doubled on its first day of trading and currently trades well above the IPO price. However, Groupon saw a similar spike on the first day with shares jumping 50%, yet the company currently trades around half the IPO price, even with an almost 30% jump in share price this week. .

Facebook's long-term outlook is shaky. It needs to continue to deliver growth in earnings and find out consistent ways to make money off of mobile users or else the Facebook IPO could be the beginning of the end for Facebook.

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Groupon Stock: "Foolish" to Buy?

Groupon's infamous accounting issues have tarnished its reputation - possibly irreparably.

Lou Pizzileo of accounting and consulting firm J.H. Cohn LLP in New York told Bloomberg News, "The SEC ran them through the mud on their accounting practices, revenue recognition and the model. All that happened in public purview. That certainly doesn't help post-IPO stock performance."

The negative outlook came on the heels of the Securities and Exchange Commission's mandate that the company revise its financial statements and accounting practices twice before the company's IPO. Then the company got into trouble again after its amended filing on March 30th, when its auditor unearthed issues with how the company handles refunds.

That move prompted the auditor to post a "material weakness" warning on the company's redone books, spurring numerous downgrades on Groupon stock.

In April, Money Morning Chief Investment Strategist Keith Fitz-Gerald tackled the idea that Groupon could be broken enough to be the next Enron. He answered with a resounding no-it's actually much worse.

Fitz-Gerald said Groupon's accounting missteps have helped turn some investors into "fools."

"Don't confuse the promise of real companies with real products, dividends and cash flow with the greater fool theory - as in some greater fool is going to come along and pay you more than you paid at an undetermined point in the future," said Fitz-Gerald. "The vast majority of social media companies have terribly flawed business models."

In addition, Fitz-Gerald cited a MarketWatch article published one day before Groupon's IPO that revealed insiders and early investors cashed out of about $943 million of a total $1.12 billion total raised in venture funding, a red flag that should not be overlooked.

In the past year, among the 10 U.S. consumer Internet companies to go public, Groupon has fared the worst.

As Fitz-Gerald cautions, the only people so far getting rich off Groupon stock are insiders and underwriters.

"Social media stocks are not investments; they are speculation in its purest form," said Fitz-Gerald. "If you've got the stomach for it and want to risk the money, fine. That's your decision. But invest in any social media company at your own risk."

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How to Buy Silver

For the smaller investor, this typically means one-ounce silver bars or half-ounce or one-ounce silver bullion coins - examples of the latter being the American Silver Eagle, the Canadian Silver Maple Leaf, the Chinese Silver Panda and the Australian Silver Koala.

These are produced by private mints and governments around the globe. The prices typically track the spot price of silver, plus a premium of 8% to 10% for bullion bars and up to 16% for coins, which covers the cost of minting and fabrication. The actual mark-up varies from coin to coin depending on the purity of the silver used, with Canada's Silver Maple Leaf being highest at 99.99% pure.

Larger investors can reduce the premiums to as little as 4% or 5% by purchasing the five-ounce, 10-ounce or one-kilogram coins offered by some mints, or buying 10-ounce or 100-ounce silver bars.

Be aware, however, that the premiums for all sizes will be considerably higher if you buy in small quantities or want to pay by credit card rather than with a bank draft or funds transfer.

For example, late last week, one leading U.S. dealer quoted 10 one-ounce Morgan silver bars at $31.16 each if purchased with a credit card, but priced 100 bars bought with a wire transfer at just $30.08 each. The premium on the two purchases over the spot price at the time was thus 7.98% versus just 4.23%.

Choosing a Silver Dealer

However you choose to buy physical silver, gold or other precious metals, the most important rule is to deal only with reputable dealers who have proven experience in the business and clearly stated policies and warranties - especially if you're purchasing by phone or online.

Several long-standing firms in the United States with solid reputations include:

• American Precious Metals Exchange (apmex.com) - This Oklahoma City-based firm offers both bullion and collectible metals products, as well as storage facilities. Quotes are updated every 15 minutes during trading hours. Purchase online or call 1-800-375-9006.
• Asset Strategies International (ASI) (assetstrategies.com) - This Rockville, MD firm has a large inventory of silver bullion products, and also offers regular metals markets commentary and analysis on its website. Sales representatives are available at 1-800-831-0007.
• Gainesville Coins (gainesvillecoins.com) - Based in Lutz, FL, they provide an extensive selection of silver coins and bars that can be reviewed online or purchased via phone at 1-813-482-9300.
• Kitco (kitco.com) - One of the world's largest metals dealers with offices in New York, Montreal, Hong Kong and elsewhere, Kitco provides a wide range of products and services, including real-time quotes and news updates. Purchases can be made online or by calling 1-877-775-4826.
• SilverTowne (silvertowne.com) - Founded in 1949, this Indiana-based firm specializes in all types of investment silver, from collectible coins to silver bars in varied weights. Phone: 1-877-477-2646.
• The Tulving Co. (tulving.com) - Based in Newport Beach, CA, Tulving provides 24-hour sales and service, tracking trading and price quotes in markets around the globe. U.S. and Canadian investors can call 1-800-995-1708.

Physical silver provides a long-term store of value, but it does carry some added risks - one of them being the potential for confiscation.

That possibility, similar to what happened with gold in 1933, is quite real. As such, if you're seriously considering silver as a hedge against future U.S. problems, you might consider choosing Canada or elsewhere offshore as a storage site for your metal.

Also, while it's easy to both buy and sell bars and coins with any of the above dealers, they're still a bit cumbersome for trading purposes, what with price mark-ups, storage, shipping and insurance costs.

How to Trade Silver

The ultimate trading vehicle is the silver futures contract - the most popular are listed on the COMEX Division of the Chicago's CME Group.

However, that's a high-dollar/high-risk instrument. A silver contract represents 5,000 ounces of silver, meaning a single contract is worth $144,300 or more at current prices. It also means a move like the $2.221 drop we saw on April 4 could cost you $11,105 in a single day - and that wasn't even the biggest one-day decline this year. Plus, you have to put up a margin deposit of $18,900 just to buy (or sell) one in the first place.

There are smaller U.S.-traded silver futures, but at 2,500 and 1,000 ounces, they still carry a high risk, amplified by lower liquidity, and require proportionately high purchase margins. Costs and risks, though limited, are also quite high for options on silver futures.

As such, a better vehicle for smaller investors wishing to play silver's next rally - or merely to hold as a longer-term proxy for the metal itself - is one of the exchange-traded funds (ETFs) or notes (ETNs) with shares backed by actual bullion.

The largest and most popular of these funds is the iShares Silver Trust ETF (NYSEArca: SLV), recent price $28.08. Its share price closely tracks the price of a single ounce of silver, usually trading at just a slight discount. As of the end of March, SLV held roughly 312 million ounces of actual silver, and it has a market cap of around $9.1 billion. It's also highly liquid with a daily trading volume approaching 2 million shares.

SLV's only real problem at the moment is that it uses JPMorgan Chase & Co. (NYSE: JPM) as its London custodian. Its share price plunged more than 50 cents at the opening last Friday on the news of JPM's $2.3 billion "hedging" loss. However, it recovered the entire loss later in the day and closed at its normal level relative to silver's price.

As such, you might want to consider one of the other silver ETFs, such as the ETFS Silver Trust (NYSEArca: SIVR), recent price $28.67 - or, if you're really bullish, the ProShares Ultra Silver ETF (NYSEArca: AGQ), recent price $43.08, which seeks to provide returns double those of silver itself.

Whichever method you choose, silver's recent pullback has provided a whole new opportunity to grab some profits from the next move higher, so don't miss your chance.

News and Related Story Links:

• Money Morning:
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• Money Morning:
  The Who, How and Why Behind Silver Price Manipulation
  
• Money Morning:
  Buy on the Lows as Silver Prices Will Rally in 2012
  
• The Silver Institute:
  Official Website
  
• CME Group (CME):
  Metals Products - Silver Futures and Options
  
• Wikipedia:
  Encyclopedia Entry: Silver as an investment

I hadn't planned to walk by their office building; I didn't even know where it was.

But there I was, rounding 48th Street on Park Avenue, when I saw the JPM sign. I thought, how ironic, I'm in New York, appearing on FOX News to talk about the debacle at JPM, and here I am serendipitously walking by their office building.

But it gets even better.

There was no one on the street, which is pretty unusual for New York. I was looking at the barricades in front of the building and imagining that they must have needed them on Friday, when the press and public must have been surrounding the building on news that the bank had just admitted losing $2 billion (actually it's $2.3 billion and counting) on a hedge position.

I was thinking, poor CEO Jamie Dimon.

And how ironic; he's been publically deriding the Volcker Rule as being stupid and unnecessary, and now he's the tempest in the teapot (which is what he called rumors about his London office's rumored losses)...

When who else should get out of a shiny GMC chauffeured "black car" but Jamie Dimon.


Caption: Amazing freaky impossible as it was, I as just standing outside JPMorgan on Park yesterday, when out of his chauffeured black GMC ride steps Jamie Dimon in an untucked polo shirt and tennis shoes. I smiled at him and thought, "What are the chances of that happening?"

He was wearing a maroon-and-blue stripped polo shirt (untucked), blue jeans, white tennis shoes, and a long face.

We were the only two people on the sidewalk, so needless to say, we made eye contact. I smiled at him and was so tempted to ask him sarcastically, "Jamie, why the long face?" But, of course, I didn't. I simply smiled at him, and he looked through me, as if I wasn't there, or was someone from the press who he wanted to make disappear.

I was really struck by this chance encounter. And I thought, what are the chances of that happening?

Then it hit me. Chances were pretty good. After all, where else would he be on this Saturday but going into the office to deal with the mess his bank was in?

And that's when it really hit me. What were the chances that his bank would have lost more than $2 billion (and counting, did I say that earlier?) on a "hedge" position?

Oh, the irony of it all. Chances aren't always just chances. Sometimes they are meant to be... because some things aren't by chance; some things actually are what they are.

So, am I surprised that Jamie's little bank lost $2.3 billion (and counting, did I say that?) on a hedge position? NO. It's hubris come home to roost. Pride before the fall... and all that.

Here's what you don't know.

(And am I guessing here? Yes, but, not really guessing guessing. I kind of know, because I've kind of been there and done that. No, I've never lost $2 billion, or even $1 billion. But I did run the hedging operations for one of Britain's largest banks... many moons ago. So, I know a little about what goes on at big banks.)

Trust me - that's probably what the head trader told the risk department at JPM when he put on the Big Trade - the hedge position that the bank put on wasn't a hedge at all.

It was a bet designed to make money that was designed to look like a hedge. Which only was ever going to be called a "hedge" if they lost money on it.

Otherwise, no one would have noticed that they made a ton of money on the position. It would have been buried in their financials as some income thing from something that was what they do that makes them oh so good at what they do. Did I say hubris?

Oh, I keep digressing. I'm sorry.

Here's the deal...

Here's What Happened at JPMorgan (NYSE: JPM)

The idiots at the bank wanted to hedge against European credit exposure that they had.

They are idiots because the money that's shepherded by the Chief Investment Office (some $379 billion, yeah, that number is right) is money that the bank has and hasn't lent out, or technically is "available" to play with.

And instead of parking it in U.S. government bonds (Citi has $293 billion of the same float and has 87% of it parked in "governments"), they parked a lot of it in Europe's crappy credit markets.

Something about looking to pick up some yield, they'll eventually come out and say. No, never mind, they'll never admit that.

So, they get nervous and tell the CIO to hedge their European credit exposure.

That's not stupid. What is stupid is that they put on a giant trade in an illiquid part of the markets (derivative spreads... it will come out, I'm sure. They were playing the spread between junkie credits and good credits) with, guess who? Hedge funds and a few banks.

Why is that stupid? Because here's how trading really works.

If I know your position, and you have a huge position on, and I'm on the other side of it along with a bunch of my friends (after all, we're all friends trying to make money on Muppets, and this time the bank itself was the Muppet puppet), I'm going to do what I have to do to get you to cry "uncle."

I'm going to mess with your position.

I know what it is. I know it's illiquid. I know I'm not going to let you out of it, because I'm on the other side of it and no one else wants to take your stupid, illiquid position off your hands.

Are you starting to get it?

The London Whale, Bruno Iksil, the head trader on this beauty of a trade, got into a position that he couldn't get out of, and the boys on the other end played him like a patsy.

I've done that before. It's fun... and very profitable.

JPM ain't done losing money on this trade. I'm guessing that it's going to cost them another billion or two to unwind this gem, maybe three. I am so laughing and so jealous that I'm not on the other side of their stupid trade.

This whole thing, the whole "chance" thing doesn't have anything to do with chance. Things happen for a reason.

As far as JPM losing a few billion, it's nickel and dime in the big picture of their earnings clout. Actually, I think the stock is close to a "buy" here. I'm thinking about taking on some JPM stock and adding to it, as it might drop another 10% to 20%.

But that's just me. I like my chances.

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