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September 13, 2006

Everyone Loves A Parade!
by Rob Kirby

5.5 Trillion's worth of business sure isn't what it used to be. I mean, where I come from people normally celebrate, hold news conferences or a ticker tape parades perhaps - on occasions such as conducting RECORD 5.5 TRILLION new business in one quarter! But no, not the humble guys and gals over at J.P. Morgan; they accomplish this Houdini-esque feat, and their accomplishment get BURIED in what amounts to "minutes" of a two bit obscure publication of the Office of the Comptroller of the Currency? Who would have ever thought such an accomplishment could "come and go" without a congratulatory howdy-doodle and a little face time for those responsible from the Wall Street Journal or CNBC?

Ripley's Believe It or Not?

According to the Office of the Comptroller of the Currency for the U.S.A. in their Quarterly Derivative Fact Sheet claim that J.P. Morgan Chase's derivatives book grew from 48.26 Trillion notional at Q4/05 to 53.76 Trillion at Q1/06. That's RECORD new growth of 5.5 TRILLION notional folks!

Let's first try to quantify just how much a 5.5 TRILLION build in a derivatives trading book over a three month period really is, shall we?

The first quarter of 2006 contained 65 business days [64 excluding Presidents Day]. 5.5 Trillion divided by 65 equals 84.6 Billion per day in NEW BUSINESS - forgetting rollover of existing business which, in itself, must be massive. But earth shattering records like this should leave a little bit bigger footprint than an oblique mention in a seldom read trade journal, ehhh? Records this big, one might expect SOMEONE to do a little bit of chest thumping, ehh? Well low and behold, the New York Mercantile Exchange [NYMEX] - where a good deal of the world's precious metals and energy derivatives are traded - were doing just that, crowing about a parade of trading volume records of their own:

Rising Tides [and Big Parades] Float Many Boats [host many floats]

Funny thing, I'm certain I read somewhere that J.P. Morgan only began trading Natural Gas Derivatives in December of 2005? Not a big worry, either they did or they did not and if it's the former - it lends even more credence to my line of thought.

There's a very strong correlation between J.P. Morgan's explosive derivatives growth and successive volume records at NYMEX - particularly in the electronic NYMEX ClearPort® trading system which is largely used to trade Natural Gas.

We know for a fact, that J.P. Morgan's involvement in these derivatives is not being motivated by "end user demand" because the Comptroller of the Currency's Quartery Derivative Report tells us end user demand for derivatives is all but non existent [on pg. 10 of 33],

Aggregate End User Notionals for all derivatives have gone from 1.4 TRILLION in Q1/95 to an AGGREGATE 2.6 TRILLION as of Q1/06. Meanwhile AGGREGATE DEALER NOTIONALS [of the 5 largest dealers] have spiraled from 15.9 TRILLION to 102 TRILLION over the same time period.

So at very best, they are speculating; but what could their true motivation be? Who would want to risk their own capital to "trade" something, like natural gas, that is difficult to store with well documented reports abounding that all storage facilities are already full - and there's no where left to put the stuff? It's beyond me. But then again, maybe I just underestimate? These guys at ole J.P. Morgan really are good. After all, they can pull 5.5 Trillion rabbits out of their hats, can't they?

We DO KNOW that the derivatives books of both Citibank and Bank of America, while not to compare with J.P. Morgan's, have grown in magnitudes measured in Trillions too. Does this not have all the earmarks of a massive "shell game"?

In case anyone's interested, here's what happened to the price of Natural Gas in the first quarter of 2006;

If anyone is surprised by any of this, you should not be. This type of guffaw goes on constantly with respect to Goldman Sachs and gold futures [and I suspect silver too] - which likely, at least partly explains the headlines above regarding volume records in gold and silver futures and options over the same period of time.

Of course then again, maybe J.P. Morgan's blow out quarter where they conducted 5.5 Trillion new notional in derivatives had nothing to do with the precipitous drop in the price of natural gas at all. Maybe, it's just like authorities say, that storage facilities [that no one can practically see or measure] really are full. Maybe J.P. Morgan conducted all that trade to benefit shareholders. But I've got a sinking feeling that we'd never be told the difference if things didn't work out that way. That became abundantly clear when Dawn Kopecki reported in BusinessWeek Online in a piece titled, Intelligence Czar Can Waive SEC Rules,

"President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye."

So let's just say, if J.P. Morgan were manipulating markets deemed to be "strategic" or in-the-national-interest, they would likely be "excused" from proper or adequate disclosure to shareholders should their "bets" or schemes not work out quite as intended.

At very least, trading growth of 5.5 Trillion at ANY FINANCIAL INSTITUTION in one quarter, one might think, would be more than reason enough for a Royal Commission or a Congressional Investigation. Where I come from anything that grows that quickly is usually cancerous. But somehow, J.P. Morgan pulls this stunt off and cannot even get interviewed about it by the mainstream financial press? Give your head a shake!

Let's just remember, that if the Natural Gas market WERE being manipulated, the regulators that would be charged with investigating then possibly admitting it; and then sorting it out are the same group at the CFTC that have stonewalled Ted Butler and his well documented public assertions that the silver market [COMEX division of NYMEX] is manipulated.

I actually hope and pray my suspicions about natural gas and its price collapse are wrong, winter is coming soon and I heat my house with natural gas. It would be a real bummer to flick the furnace on one crisp evening and find out there's no juice left in the system.

Anyway, it seemed only fitting that there be something to celebrate J.P. Morgan's record quarter - and doesn't everyone love a parade? Now, if it could only pass the smell test.

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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