Excessive Leverage: How they destroy

Lazard CEO says Wall St leverage fueled bubble
Lazard Ltd Chairman and Chief Executive Bruce Wasserstein said on Wednesday many of the financial market’s current woes stem from years of too much risk-taking and not enough common sense among Wall Street executives. The famed deal maker told a Wall Street Journal-sponsored gathering of reporters and industry executives that, in recent years, broker-dealers had increased their leverage, or total assets relative to equity, to excessive levels.

In India, Stock Futures offer a 1:10 leverage, sometimes even more. Worse, many brokers trade in these instruments (proprietary trading).
Excessive leverage is financial suicide. This mesage has come clearly from all corners of the world in the year 2008 financial meltdown. Yet, stock futures with their killing leverage are offered to an unsuspecting middle class to ‘gamble’ with.
As a trader, understanding leverage is the most important part of your trading plan. If you have Rs 100, and you are trading in Rs 150 worth of securities, then your leverage is 1.5. With this kind of leverage, and just a little bit of common sense, you can make a profitable career in trading.
On the other hand, you have Rs 100/- . Now you can trade in financial weapons of mass destruction called stock futures which are offered to all middle class Indians with a leverage that can extend to 10 times your investment. So, you trade in Rs 1000/- worth of stock futures. This is financial suicide with a guarantee – meaning you will get exterminated, financially.
Stock Futures as 25% of all trading volume, are not used in any country except India. Why ? Are all other countries fools ? The answer is: Every other country protects its citizens from the evils of gambling. Since stock futures are just gambling and not much else, these are not allowed / encouraged, except in India.

A look at the charts for Crude

I am joining thousands of better informed traders who trade and analyze crude price movements. Crude oil futures have a congestion zone between $120 and $124. This zone devloped in May. Any decline should find support in this zone. If Crude futures close below 120, then the support is broken, with a target of 108.
On CNBC-TV18, I have been asked to give my views on crude. I have said that crude could easily dip to 120 without changing its uptrend. After all, even the strongest of bull markets will see corrections in between.
One principle of technical analysis is that the trend is assumed to continue unless proved otherwise. Crude started an up move in year 2002 when it was trading at $20. Since then, crude prices have consistently moved up, with a number of sharp corrections in between. The recent run up to 147 probably required some kind of corrective counter move. This is what we should be seeing now.
Why should the up trend continue? A big trend such as the one in crude should end after a prolonged period of distribution. The current down move started quite suddenly. The end of the crude bull market is likely to be accompanied by months of top formation. Of course, this does not have to work out, but this is what my best guess is.