What is the difference:????

Between the following;

“Margin Stock Trading”

“Futures”

“Derivatives”

“Ponzi”

“Promissory Notes”

“Pyramid schemes”

“Mezzazine Finance” and

all types of Gambling.

Common Fact: All are speculative “bubbles”

It is true some derivative contracts can reduce the risk of a single user. BUT, the risk is simply laid off onto someone else.
It is a well known fact that over 90% of people who speculate in the futures markets lose money. This is a daunting statistic for the novice trader, interested in trading futures for the first time.
Futures are a zero sum game. This means that for every winner, there is a loser - quite unlike the equities market where every investor can potentially be a "winner", as on average, prices rise over time due to inflation.

"One is gambling when the odds are against you, one is speculating when the odds are in your favour". ¹

1 Margin Stock Trading By Joe Cross

Stock markets worldwide have been warning investors for years about the risk of trading futures. Yet with the advent of on-line trading allowing greater access to stock markets, stock exchanges appear to be developing derivatives that rival any futures exchange.
Warrants, options, and margin stock trading all fall into the category of leverage trading. Along with this paradigm shift comes a shift in trading techniques, principles and market participants.
Already there are a lot of locals who have a stock portfolio, but they tend not to trade them like futures. Instead they become stock traders, looking at P/E ratios and stock values relative to performance and underlying values. But with on-line access increasing the speed of execution, day trading is the biggest growth section in this market. There have been numerous articles appearing lately praising the virtues of day trading stocks. This is prime territory for locals who will lose their current physical workplace.

Volatility creates opportunity for short-term traders, day traders and scalpers - previously the bread and butter of the local trader. This is all very well and good in theory, but in reality, trading futures requires a lot less capital than trading stocks, due to gearing - the leveraged nature of the futures markets. Enter margin stock trading. Moving further toward the derivatives such as options and warrants, the line between futures trading and stock trading becomes even more blurred.
Technology is rapidly creating the environment where geographic location is becoming less of a restriction to traders. This shift is increasing demand for a wider variety and improved accessibility to products. Up until now this has resulted in exchanges creating similar products and competing for the traders' volume. Further mergers by exchanges in similar time zones will stop product overlaps and allow traders to access more markets with greater ease.
Regional exchanges will begin to form - improving trading products and access, whether they are stocks, futures or other investment products. Software applications will be designed around a single standardised software platform for the entire finance industry allowing for simpler and faster execution for traders.
These transformations in the finance industry may be unfamiliar to many market participants, but will surely prove to be beneficial as traders learn to adapt. The globalisation of financial markets, combined with the level playing field provided by electronic trading, will open up enormous opportunity for all types of traders in the future. ²

Australia is the world's 7th largest derivatives player. The global collapse of derivatives now underway will ensure the bankruptcy of all of Australia's major banks Ù.

2 What is a Derivative?

In a poll taken some years ago, numbers of Fortune 500 corporation ceo's admitted that they themselves did not fully understand the derivatives trades in which their own corporations were involved, so complicated were they.
While the trades can become almost infinitely complex, the principle of derivatives is simple: it is just pure gambling. And gambling, up until a few short decades ago, was outlawed in most civilised countries because it was viewed as a social harm, both in itself, and because of the addiction, bankruptcy, crime, prostitution, alcoholism and other vices which often accompanied it. But, bad as they are, pokies and casinos are nothing compared to derivatives.

The most basic form of derivative is the futures contract, an obligation to buy or sell an asset, commodity, or financial instrument at some point in the future, at an agreed price. If you think of a real transaction, where something is exchanged for immediate payment, a futures contract is one step removed from that, such as when a farmer takes out a contract to sell his crop in one year at a set price.
Even this most basic form of derivative is a gamble: the farmer is gambling that in a year's time, the market price will be less than the price of his futures contract. If that is the case, he will make a profit. The entity that bought the futures contract is gambling that in a year's time, the market price will be greater then the contract price, and then they will make a profit.
A huge amount of futures trading takes place in commodities, like agriculture products, mineral resources, and oil, and is centred in places like the Chicago Board of Trade (CBOT).

These contracts are called Exchange Traded Derivatives, However, the overwhelming bulk of futures contracts don't relate to real commodities, but are based merely on financial instruments and currencies, and most derivatives are not traded on exchanges but "over the counter" (OTC) and are totally unregulated. The single most widely-traded futures contract in the world is the US Treasury's bond future.
But even the "futures" on commodities, stocks, or U. S. Treasury or corporate bonds are tame, compared with most derivative contracts, which can be based on any bet which two counterparties want to make, such as whether or not the mere index of some stock market will go up or down or by how much—a typical derivatives contract—or on the weather or anything else.
And then you have the derivatives on derivatives, which form their own market. Typically, derivatives traders will put down only a small amount ("the margin") of the face value of any contract they buy, which gives them "leverage", often of as much as 50 or 100:1, and they will turn over (sell) huge numbers of contracts very quickly. Though they may only make a small amount on any given trade, by trading frequently, and on leverage, they can show a big profit on their books.
However, reverse leverage can also set in: if they can't sell the contract on to someone else, they are responsible for the full face value of it, which may be far more than they have in liquid funds.
Or maybe they just bet poorly, and what they expected to rise, plummets, and they lose their shirt. That is typical of the process now under way.

"Quadrillions", Anyone?
Annual world derivatives turnover has reached somewhere between SUS2 to $8 quadrillion dollars—no one really knows because most derivatives trading is never reported anywhere. This figure is so staggering that it is difficult to even imagine, but this may help you get some grasp of it: $2,000,000,000,000,000

When the music stops........
Political economist Lyndon LaRouche emphasised, the proverbial 99.9% of derivatives contracts have nothing to do with the physical economy, except in a negative sense, to loot it, since they drain money out of the real, physical economy, even while driving up the price of necessities of that system, as derivatives traders are solely responsible for the soaring price of oil and petrol over me last year or more.
And the world's central banks keep the printing presses rolling almost constantly, to pour in the added cash needed to keep the derivatives bubble liquid, that is, so the derivatives keep turning over.

Because, like a housing or other bubble, when the music stops, someone is left holding the bag.

In this case, however, since the bubble is so huge, and encompasses the entire world, it is not merely one or a series of investors who will lose, but the whole thing will blow and everybody will lose, including you, because the entire world economy will crash.
John J. Reynolds, a member of the Fidelity Investments Advisory Council in the U.S,, in 2002 explained the systemic risk posed by this "daisy chain" of derivatives: "It is true, some derivative contracts can reduce the risk of a single user. But the risk is just laid off onto someone else.
Derivatives have now grown into a daisy chain of contracts, one relying on the next to perform, that circles the globe. The risks are now to the whole financial system. ... The first bank that makes a losing bet on both sides [i.e. on its original bet and its "hedge" against that bet] can bring down the whole system."

All major banks, almost all hedge funds, and almost all of the world's share and bond markets are tied in to this system in one way or another—including almost all of Australia's superannuation funds. Look at the difference between now and 1998, when the LTCM hedge fund almost brought down the world monetary system. LTCM was a relatively small fund by today's standards, with $4.8 billion in capital, which it had leveraged into over $200 billion in debt, and $1.25 trillion in derivatives contracts.
Today, there are 8000 hedge funds, many of them larger and more exposed than LTCM was, who are also operating in a far larger global derivatives market, making the detonation potential far, far greater.
This is the “nuclear daisy chain” which was ignited on May 5th

Globalisation has caused personal debt to skyrocket along with national debt.
A”hidden” part of the collapse in Australian living standards is the Hawke/Keating/Howard savaging of both hard infrastructure (water, railroads, energy etc.) and social infrastructure(health and education, in particular)

3 The Ticking Derivatives Time Bomb.

On May 5, 2005 Standard & Poor's downgraded the debt of the world's largest company, General Motors, to junk bond status, and that of Ford Motor Company soon after.
The combined debt of these companies—the second and third largest in the world is $483 billion, greater than the entire continent of Africa.
Overnight, the volume of junk bonds ("below investment grade") in the U.S.doubled to almost a trillion dollars, and a seismic shock was unleashed in the world financial system.
The tsunami has not yet hit the shore, but the earthquake which triggered it is clearly orders of magnitude greater than that which collapsed the LTCM hedge fund in September 1998, which came within a whisker of bringing down the world monetary system, as Fed Chairman Alan Greenspan admitted some months later.
At the centre of this impending cataclysm are risky, highly-leveraged and almost totally unregulated financial instruments called derivatives, whose usage has soared over recent years and whose annual turnover is now somewhere between US$2-8 quadrillion!
Most of the worlds major banks, including those of Australia, are over their eyeballs in derivatives. Not only are the assets and equity of each and all of the world's major banks dwarfed by their derivatives holdings, but the nominal value of derivatives worldwide far exceeds the Gross Domestic Product (GDP) of the entire world combined!

These major banks have also loaned hundreds of billions of dollars to hedge funds, to allow them to buy or create still more derivatives, which means that the banks' positions are far more precarious than even their own derivatives holdings would indicate.
Additionally, there are some 8000 hedge funds worldwide who control US$1 trillion in investors' money; their managers are under pressure to return huge profits, of the sort which can only be gained through risky derivatives.
Banks and hedge funds had invested heavily in GM bonds, but, in a typical "hedge", had also invested in derivatives that bet the prices of GM's stock would go down; since if a company's bonds go sour, its stocks usually do, as well.
This time, however, for various reasons GM's stocks went up, many derivatives traders lost their shirts, and the world financial system started to teeter. Australia's media, like the Howard government, has covered up this reality, but they are well aware of it. How could they not be, when .some of the world's leading newspapers blared it in headlines? These included Switzerland's Neue Zuercher Zeitung (known as "the Swiss bankers' paper") which proclaimed on 12 May, “GM Earthquake shatters Hedge Fund Industry”

On the 15 May London Sunday Times, which trumpeted: "City Hedge Funds Head for Domino Collapse". The Sunday Times observed, "Bad investments by some of the biggest hedge funds in London have triggered unprecedented losses, record demands" for money back, and talk of a death spiral weighting heavily on stocks and bonds"
By far the greatest portion of the world's derivatives trade (in which Australia ranks 761 worldwide) is centred in the hedge funds of fee City of London, so if they go, the whole shebang goes. [cec]

4 Derivatives….”The truth”

Three of the six largest bankruptcies in American history -- WorldCom, Enron, and Global Crossing -- occurred between December 2001 and July 2002, shattering investor confidence and helping to knock 22 percent off the Dow Jones Industrial Average. The failures had more in common than just timing and size: All to varying extents involved the use of the controversial and poorly understood financial instruments known as derivatives.
In the season of finger pointing that followed, derivatives trading was singled out for abuse. "If you dig deep enough into any financial scandal," BBC business reporter Emma Clark claimed in February 2002, "you can usually find a derivative or two to take the blame." Howard Davies, chairman of the U.K. Financial Services Authority, told a conference the month before that an investment banker described to him one popular type of derivative (collateralized debt obligations) as "the most toxic element of the financial markets today."

Even famed investor Warren Buffett warned that derivatives posed a grave threat to the global financial system. "We view them as time bombs, both for the parties that deal in them and the economic system," Buffett wrote in his 2002 annual report for Berkshire Hathaway. "Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

What are these Wall Street WMDs, and what should be done about them? Technically, derivatives are financial products whose value is "derived" from that of an "underlying" asset. For example, stock options, perhaps the best-known derivatives, are based on the underlying value of the stock that the option enables the purchaser to buy at a later date. Futures contracts -- used extensively by farmers to protect themselves from poor crop yields and fluctuating prices -- are derived from the root value of the good to be bought or sold in the future.

Derivative products are not just a sophisticated way for investors to gamble. They also give producers a crucial tool for hedging against risk and uncertainty. And they have played a central role in the flowering of innovation that the financial markets have enjoyed during the last two decades.
There are derivatives betting on the likelihood of a natural catastrophe; consumer credit card debt has been converted into bonds; futures markets have been established for such things as barge rates; and options allow investors to speculate on the temperature, wind chill, and amount of rainfall in many cities.
The common denominator in all these products is that they allow companies and private investors to trade away risk with which they are ill equipped to deal and focus instead on taking risks in areas in which they specialize.
Many international corporations, for example, use currency derivatives to swap out their exposure to exchange rate fluctuations. This allows them to focus on their core business while allowing professional currency traders to worry about international valuations.

This wave of financial innovation has washed into unlikely places. Glam rock pioneer David Bowie, long famous for his innovative music and embrace of the new, became the first songwriter in history to use derivatives to securitize future royalties from his own song catalog when he created "Bowie Bonds" in 1997. Bowie and his business manager, the Rascoff/Zysblat Organization, sold the royalty rights to his 25 pre-1990 albums to the Prudential Insurance Company. The singer/songwriter was able to pocket $55 million immediately, while Prudential received a 7.9 percent return on bonds that were backed by Bowie's future royalty payments. Bowie's groundbreaking move was quickly emulated by James Brown, the Isley Brothers, Ashford and Simpson, Joan Jett, and other artists, as well as the estate of Marvin Gaye. Bowie Bonds even inspired a thriller novel, Something Wild (2002), by Linda Davies.

But all has not been hunky dory for derivatives. Besides the massive bankruptcies, critics point to a number of other derivatives-related mishaps. In 1995 Nick Leeson used derivatives to establish positions for his employer, the British bank Barings, with exposure of more than $60 billion, compared to the bank's capital of $615 million. When the positions turned against Barings, the 233-year-old institution was forced to fold. The Long-Term Capital Management (LTCM) hedge fund and the government of Orange County, California, were also involved in derivatives-related meltdowns in the 1990s.

5 The Parliaments Powers and Responsibilities.

The CEC has been conducting a campaign to wakeup our federal and state MP's about the severe crisis the world and Australia are now in, with the greatest financial collapse in history roaring down on us. The attitude of most of these MPs has, to put it very, very mildly, left a great deal to be desired.
Many of them try to pass the buck to someone else, refuse to meet to discuss the issue, or otherwise exhibit ostrich-like behaviour which will get us all killed. They have to wake up, and take responsibility such as the Italian Parliament did on April 6, when it passed a LaRouche-sponsored resolution calling for the government of Italy to immediately initiate moves for a new world monetary system—a new Bretton Woods. (See New Citizen Extra, May 2005)
In fact, by our Constitution, it is the Federal Parliament's responsibility to deal with such matters, and State MP's have a responsibility as well, both by virtue of being elected representatives in general, but also because our Constitution specifies their responsibility for "state banking", which is invariably interlinked with "national banking".

Australian Constitution: "Part V, Powers of the Parliament.

Section 51. The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:...

(xii.) Currency, coinage, and legal tender;

(xiii) Banking, other man State banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks, and the issue of paper money...."Ù

Key; References/Sources

¹http://www.afsd.com.au/article/traderspace/trader22a.htm
² http://www.afsd.com.au/article/traderspace/trader22a.htm
³ http://en.wikipedia.org/wiki/LTCM
± http://www.cato.org/pubs/briefs/bp-052es.html
Ù www.cecaust.com.au

Re: LTCM ..(Long-Term Capital Management)

In September 1998 the Federal Reserve organized a rescue of Long-Term Capital Management, a very large and prominent hedge fund on the brink of failure. The Fed intervened because it was concerned about possible dire consequences for world financial markets if it allowed the hedge fund to fail.

The Fed's intervention was misguided and unnecessary because LTCM would not have failed anyway, and the Fed's concerns about the effects of LTCM's failure on financial markets were exaggerated. In the short run the intervention helped the shareholders and managers of LTCM to get a better deal for themselves than they would otherwise have obtained. ±
Long-Term Capital Management was a hedge fund company founded by John Meriwether (a former bond trader at Salomon Brothers bank) in 1994 and with Nobel Prize winners Myron Scholes and Robert Merton on the board. Also joining him as principals were Eric Rosenfeld, Greg Hawkins, Larry Hilibrand, Dick Leahy, Victor Haghani and James McEntee. On 24 February, with $1,011,060,243 of investor capital, LTCM began trading.

Strategy

The company had developed complex mathematical models to take advantage of fixed income arbitrage deals (termed convergence trades) usually with U.S., Japanese, and European sovereign bonds. The basic idea was that over time the value of long-dated bonds issued a short time apart would tend to become identical. However the rate at which these bonds approached this price would be different, and that more heavily traded bonds such as United State Treasury Bonds would approach the long term price more quickly than less heavily traded and more illiquid bonds.
Thus by a series of financial transactions (essentially amounting to buying the cheaper 'off-the-run' bond and short-selling the more expensive, but more liquid, 'on-the-run' bond) it would be possible to make a profit as the difference in the value of the bonds narrowed when a new bond came on the run.
Because these differences in value were minute, the fund needed to take highly-leveraged positions in order to make a significant profit. At the beginning of 1998, the firm had equity of $4.72 billion and had borrowed over $124.5 billion with assets of around $129 billion. It had off-balance sheet derivative positions amounting to $1.25 trillion, most of which were in fixed income derivatives such as interest rate swaps. The fund also invested in other derivative security products such as equity options and mortgage securitisations.

1998 downturn

The downfall of the fund started in May and June 1998 when net returns fell to -6.42 and -10.14 % reducing LTCM's capital by $461 million. This was further aggravated by the exit of Salomon Brothers from the arbitrage business in July 1998.
The scheme finally unraveled in August and September 1998 when the Russian government defaulted on their sovereign debt (GKOs). Panicked investors sold Japanese and European bonds to buy U.S. treasury bonds. The profits that were supposed to occur as the value of these bonds converged became huge losses as the value of the bonds diverged. By the end of August the fund had lost $1.85 billion in capital.
The company, which was providing annual returns of almost 40% up to this point, experienced a "flight to liquidity".
This prompted a bail-out of $3.625 bn by the banks, organized by the Federal Reserve Bank of New York, ostensibly in order to avoid a wider collapse in the financial markets. The fear was that there would be a chain reaction as the company liquidated its securities to cover its debt, leading to a drop in prices which would force other companies to liquidate their own debt creating a vicious cycle.

The total losses were found to be $4.6 billion. The losses in the major investment categories were (ordered by magnitude):

$1.6 bn in swaps
$1.3 bn in equity volatility
$430 mn in Russia and other emerging markets
$371 mn in directional trades in developed countries
$215 mn in yield curve arbitrage
$203 mn in S&P 500 stocks
$100 mn in junk bond arbitrage
no substantial losses in merger arbitrage

In the end the basic idea of LTCM was correct, in that the values of sovereign bonds did eventually converge after the company was wiped out. Nonetheless, the incident confirms an insight often (though perhaps apocryphally) attributed to the economist John Maynard Keynes, who is said to have warned investors that although markets do tend toward rational positions in the long run, "the market can stay irrational longer than you can stay solvent."
On a related point, LTCM's downfall confirmed for the financial community the need to keep in mind liquidity risk while making Value-At-Risk calculations - because illiquidity was one of the primary reasons for the downfall.

A Deeper Understanding of the Risks taken by LTCM

Although it is commonly thought that the trading positions taken by LTCM were predominantly convergence trades, this is in fact not true. As LTCM's capital base grew the need for additional returns on that expanded capital led it to undertake other trading strategies. Although these trading strategies were non-market directional, i.e. they were not dependent on overall interest rates or stock prices going up (or down), they were not convergence trades as such.

By 1998 LTCM had extremely large positions in areas such as merger arbitrage (profitable when the mergers were consummated, unprofitable if they were not) and S&P500 options (net short long term S&P vol). In fact some market participants believed that LTCM had been the primary supplier of S&P500 gamma which had been in demand by US insurance companies selling equity indexed annuities products for the prior two years.
The profits from these trading strategies were generally not correlated with each other and thus normally LTCM's highly leveraged portfolio benefitted from diversification. However the general flight to quality in the late summer of 1998 led to a marketwide repricing of all risk and these positions then did all move in the same direction.
As the correlation of LTCM's positions increased the diversified aspect of LTCM's portfolio vanished and large losses to its equity value occurred. Thus the primary lesson of 1998 and the collapse of LTCM for Value At Risk (VAR) users is not a liquidity one, but more fundamentally that the underlying covariance matrix used in VAR analysis is not static but changes over time.

The fall of LTCM is an important example of the principle that arbitrage is not riskless. This undermines the claim of efficient market theorists that markets must converge instantaneously to efficient prices because of the action of rational investors who will immediately take advantage of pricing anomalies in markets.³

Key; References/Sources
¹ http://www.afsd.com.au/article/traderspace/trader22a.htm
² http://www.afsd.com.au/article/traderspace/trader22a.htm
³ http://en.wikipedia.org/wiki/LTCM
± http://www.cato.org/pubs/briefs/bp-052es.html
Ù www.cecaust.com.au
? www.reason.com/0402/fe.gc.in.shtml

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