At Craven Capital, we love days like yesterday.  Stocks down.  Volatility up.  We wake up. We pay attention.   Maybe there is an opportunity to buy the stock we like at the price we want?  Or maybe there’s an opportunity to buy back a covered call at a tidy profit…or sell a fearful investor a put on a stock that we would like to own but which is not quite at the price we’d like to own it…yet.

Dear reader…by now we should all realize that the only certainty is more uncertainty.  Accept that and you’ll rest easier.  Prepare for it and you’ll rest easier still.  Take advantage of it and you’ll be sleeping like a baby.

So…we were thinking…why would Moody’s take the hatchet to all those nice banks?

What could possibly be wrong?  Maybe we could understand the Euro banks being taken out to the woodshed because the Eurocrats have not thrown enough money at them yet.  But the US banks…my God…they must be flush with cash.  After all, Ben and the boys and girls at the Fed have thrown 4 trillion their way over the past 30 months or so.  What are they so worried about?

How about a hint….maybe it has something to do with the dirty “D” word.  Maybe the Moodys have the blues about the derivatives exposure of these banks.  So, let’s look at some big, big numbers…(these are approximations but you’ll get the message)

US GDP – 15 Trill.
Stock Market – 15 Trill.
Bond Market – 51 Trill.
Global GDP – 68 Trill.
Derivatives Market – 228 Trill. (that’s $228,000,000,000,000…a lot of zeros)

If you want to see an excellent visual representation of what all those zeros look like go to:

http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html

My friends, there is not enough money in the world to cover the notional value of all these transactions. And the way they are set up…if one topples, they all topple.  Think of two drunks leaning against each other.  While they are both supporting each other, they will not fall over…but that does mean that they are now sober.  When one falls, the other will inevitably topple over too…probably on top of the first one.  Think of the global banks..as a conga line of drunks…with Ben Benanke, the ever willing barman, ready to pour some more vodka into the punch bowl.  This party will not end well.

And speaking of Ben…is the Fed’s love affair with Goldie over?  Why…it was only a few days ago that Jan Hatzius, Goldman’s chief economist was sprouting about the imminent inevitability of QE3 in June…usually a pretty good indicator for the markets.  But Ben was buying none of this pillow talk and decided that the only fun from this FOMC meeting would be to keep playing Chubby Checker’s twist music for another six months.  Goldie was not amused and countered yesterday with a call to short the S&P.  Forget women…apparently hell hath no fury as a banker scorned.  The market responded accordingly with its precipitous drop…to our unbridled glee.

But I suspect that the Fed and Goldie will make up.  They have to.  They are so mutually dependent.  They need each other.  Where would the Fed and Treasury get all their staff from if not from Goldie.  So they will make up.  And when Jan says to expect QE3 before or at the next FOMC meeting in August, you might want to take notice.  We will.