Financial Stocks in a 'Divergent Phugoid'

A phugoid is an aircraft motion where the vehicle pitches up and climbs, and then pitches down and descends, accompanied by speeding up and slowing down as it goes "uphill" and "downhill." A divergent phugoid is an unstable oscillation, typically caused by a large difference between the incidence angles of the wing and tail [1].

United Airlines (UAUA) Flight 232 suffered an engine failure which caused total hydraulic system failure. The crew flew the aircraft with throttle only. Suppressing the phugoid tendency was particularly difficult, and ultimately Flight 232 crashed.

JPMorgan (JPM), a Dow 30 component, and the largest component of the SPX financials, appears to be in a divergent phugoid. Not only is JPM in a divergent phugoid, it also looks like the DJI and SPX are also in a divergent phugoid. Why? JPM is the largest player in the Credit Default Swap [CDS] market, having an approximate $7.8 trillion market share. Citigroup (C) and Bank of America (BAC) are behind JPM, with about $3 trillion and $1.6 trillion respectively in CDS market share. The top 25 banks hold CDSs, both as insurers and insured, worth about $14 trillion [2], which is approximately equivalent to the total market capitalization of the NYSE listed domestic companies [3].

My hypothesis is that JPM CDS risk models, which functioned reasonably well during nominal "flight" conditions are becoming unstable with current economic "wind shears".

click to enlarge images

JPM Phugoid

Chart created using thinkorswim ProphetCharts. Used with permission.

DJI Phugoid

Chart created using thinkorswim ProphetCharts. Used with permission.

SPX Phugoid

Chart created using thinkorswim ProphetCharts. Used with permission.

Comments

[morph366:]

You should patent this new technical indicator
At least aerospace engineers do extensive stress testing before a new aircraft goes into service whereas bankers/quants are quite happy to experiment with trillions of dollars of "securities" based on completely bogus notions of how to quantify risk

2008 Jul 11 06:34 AM

[Smalltownba...:]

Interesting, but I think the wind may be easier to overcome than the current market momentum.

2008 Jul 11 08:26 AM

[stanmen:]

You forgot to include the intenal consequances of outer mongolia to these charts

2008 Jul 11 12:49 PM

[Richard Whitey:]

Does that result in getting phugged?

2008 Jul 11 02:06 PM

[Richard Whitey:]

Does that result in getting phugged?

2008 Jul 11 02:07 PM

[mikemichaelson:]

what the phugoid is this guy smoking? i hope i don't invest in a phugoid...then i'd be phugoided.

2008 Jul 12 03:48 PM